Chapter # 4

Data Analysis and Discussion

4.1 Introduction

This chapter presents and discusses the empirical results on the impact of corporate governance on

working capital management. The chapter started by presenting the main diagnostic test of OLS model

before adopting various model for analysis. After the diagnostic test the study presents two types of data

analysis; namely descriptive statistics and inferential statistic. First the descriptive statistic shows the

relevant characteristic of variable such as maximization, minimization, mean and stander deviation of

variables used in the study. Second, inferential results highlight an in -depth examination of the

relationship between corporate governance and working capital management.

4.2 Ordinary least Square:

Ordinary least square (OLS) is the most common method use to fit a line to the data. According to

Brooks (2008, p. 31) ordinary least square is the most comment method use to fit a line to the data and

to estimate slope and intercept in linear regression model. This study used ordinary least square (OLS)

regression to estimate the equation.

4.2.1 OLS Diagnostics Test:

The diagnostic tests carried out to verify the main assumption underlying the ordinary least square

regression and to remove possible problem associated to panel data. The detail of diagnostic test of the

study explains below.

4.2.2 Multicollinearity:

Multicollinearity is the main assumption of ordinary least square model. It is occur when there is linear

relationship between two or more than two independent variables. According to Brooks (2008, p 171)

the multicollinearity problem occurs when the explanatory variables are highly correlated with each

other. In this study the researcher used VIF and tolerance to measure the multicollinearity problem.

According to rule of thumb if the VIF value is greater than 10, highly multicollinearity problem exist in

data.

Table: 1st

Model Tolerance VIF

1 BS .903 1.107

BM .993 1.007

BC .897 1.115

Dependent Variable: Receivable

 Collinearity Statistics

Model Tolerance VIF

2 BS .903 1.107

BM .993 1.007

BC .897 1.115

Dependent Variable: Inventory

Table : 3rd

Table: 2nd
 Collinearity Statistics

Model Tolerance VIF

3 BS .903 1.107

BM .993 1.007

BC .897 1.115
Table 1: Collinearity Statistic

Tolerance VIF
Model BS .903 1.107
1 BM .993 1.007
BC .897 1.115

Dependent Variable: Receivable

Model
2 BS .903 1.107
BM .993 1.007
BC .897 1.115

Dependent Variable: Inventory

Model
1 BS .903 1.107
BM .993 1.007
BC .897 1.115

Dependent Variable: Payable

Note: BS stand for board size, BM stand for board meeting and BC stand for board board
committee
4.2.3 Heteroscedasticity:
Heteroscedasticity problem exist when the error terms do not have a constant variance (Brooks, 2008, p.

132). If the heteroscedasticity occur in the OLS model then the result of hypothesis become invalid and

will no longer reliable.The heteroscedasticity can be deducted by transferring variables into log. There

are several test to check and deduct heteroscedasticity in model, such as Harvay test, ARCH test, white

test and Bruesh Pagan Godfrey test . In this study Bruesh Pagan Godfrey test is used to test whether or

not heteroscedasticity is present in the models. The null hypothesis is that the variance of the residual is

homogenous and an alternative is the variance of residuals is heterogeneous. Thus, if the P- value

significant less than 5 % or 0.05, then null hypothesis should be rejected and accept alternative

hypothesis that the variance is heteroscedastic and vice versa.

H0: The model is Homoscedastic

H1: The model is heteroscedastic

The below result show that there is no problem of heteroscedasticity in all model and show that the

variance of residual is homogenous.

Equation 1 : ARD = Bo + B1 (BS) + B2 (BM) +b3 (BC) +r

Table 2: Breusch-Pagan Godfrey Test for Heterockedasticity

F-statistic 2.358527 Prob. F(3,231) 0.0724

Obs*R-squared 6.984176 Prob. Chi-Square(3) 0.0724

Scaled explained SS 16.59758 Prob. Chi-Square(3) 0.0009

The p – value of R- square is 0.074 which reveals that the model is homoscedastic.

Note:

Equation 2 : AID = Bo + B1 (BS) + B2 (BM) +B3 (BC) +r

Table 3: Breusch-Pagan Godfrey Test for Heteroscedasticity

F-statistic 0.338495 Prob. F(3,231) 0.7975

Obs*R-squared 1.028548 Prob. Chi-Square(3) 0.7943

Scaled explained SS 3.428684 Prob. Chi-Square(3) 0.3301

The p – value of R- square is 0.7943 which reveals that the there is no problem of heteroscedasticity.

Equation 3 : APD = Bo + B1 (BS) + B2 (BM) +B3 (BC) +r

Table 4: Breusch-Pagan Godfrey Test for Heteroscedasticity

F-statistic 0.868778 Prob. F(3,231) 0.4580

Obs*R-squared 2.621884 Prob. Chi-Square(3) 0.4537

Scaled explained SS 15.17679 Prob. Chi-Square(3) 0.0017

The p - value of R- square is 0.4537 which reveals that the model is homoscedastic.

4.2.4 Autocorrelation:

In the presence of autocorrelation phenomenon, ordinary least square are no longer blue (best linear

unbiased). Therefore there is need to test autocorrelation in the residuals.

According to Brooks (2008, p. 139) if the errors terms are correlated with one another, it would be stated

that autocorrelation or serial correlation problem exist in the model. Bruesh Godfrey test was used to test

and deduct autocorrelation problem of models. The null hypothesis is that there is no autocorrelation

problem and alternative hypothesis is that there is autocorrelation problem. Thus , if the P- value

significant less than 5 % or 0.05 ,then null hypothesis should be rejected and accept alternative

hypothesis that lead to presence of autocorrelation problem and vice versa.

H0: No autocorrelation

H1: Presence of autocorrelation

After Bruesh Godfrey test all model were the problem of autocorrelation and removed by one period lag

on dependent variable (Y) of each model. According to Brooks (2008, p. 140) to remove the

autocorrelation problem take one period lag of Y t, by shifting all of the observation one period forward

in the spreadsheet, written Yt – 1.

Equation 4 : AID = Bo + B1 (BS) + B2 (BM) +b3 (BC) +r

Table 5 : Breusch-Godfrey Test for Autocorrelation

F-statistic 0.537373 Prob. F(2,227) 0.5850

Obs*R-squared 1.102667 Prob. Chi-Square(2) 0.5762

Since the P value of R- square is 0.5762 which reveals that there is no serial correlation problem.

Equation 5: AID = Bo + B1 (BS) + B2 (BM) +b3 (BC) +r

Table 6 : Breusch-Godfrey Test for Autocorrelation

F-statistic 0.546920 Prob. F(2,227) 0.5795

Obs*R-squared 1.122164 Prob. Chi-Square(2) 0.5706

Since the P value of R- square value is 0.5706 which reveals that there is no serial correlation problem.

Equation 6: APD = Bo + B1 (BS) + B2 (BM) +b3 (BC) +r

Table 7: Breusch-Godfrey Test for Autocorrelation

F-statistic 8.694215 Prob. F(2,227) 0.0002

Obs*R-squared 16.64929 Prob. Chi-Square(2) 0.0002

Above table reveals that model 1t and 2 now have no correlation problem but model 3 still have the

problem of autocorrelation.

4.3 Model selection criteria (Random or Fixed effect model):

In this research Hausman test used to select either fixed or random effect. According to Brooks (2008,p )

the easy method to select either fixed effect or random effect is Huasman test .The null hypothesis is that

that the random is an appropriate model and the alternative is that the fixed effect is an appropriate.

Thus, if the P- value significant less than 5 % or 0.05, then null hypothesis should be rejected and accept

alternative hypothesis and vice versa. Further according to Brooks (2008, p. 506) that pooled regression

assumes that the intercept are the same for each firms (cross section) and for each year (time series),

which is inappropriate assumption, recommended that we could instead estimate a model with fixed

effect.
Table 8: Correlated Random Effects - Hausman Test

Test Summary ChiSq.Static Chi-Sq. d.f. Prob

Cross-section random 21.896067 4 0.0002

Note : this is for model 1 where dep and inde……

Table 9 : Correlated Random Effects - Hausman Test

Test Summary Chi-Sq.Statistic Chi-Sq. d.f. Prob.

Cross-section random 79.085408 4 0.0000

Note:

Table 10: Correlated Random Effects - Hausman Test

Test Summary Chi-Sq.Statistic Chi-Sq. d.f. Prob.

Cross-section random 92.971524 4 0.0000

Note:
Conclusion: Since the p-value of all model are significant that is 0.000, so here fixed effect is more

appropriate to run.

4.4 Descriptive statistic:

In this section the descriptive statistic of the dependent and independents variables was discussed. It

shows the standard deviation and mean of the study. In addition, descriptive statistic shows the

minimum and maximum values of each variable which indicates the wide range of each variable.

Table 11: Descriptive Statistics

N Minimm Maximum Mean Std. Deviation

BS 235 5.00 13.00 8.5830 1.72603

BM 235 3.00 35.00 5.6213 2.95934

BC 235 1.00 5.00 2.1957 1.04390

Receivabe 235 .00 140.00 19.5361 26.12731

Inventory 235 3.00 417.00 79.5191 65.64078

Payable 235 12.00 355.00 70.7191 44.44258

Valid N 235

(listwise)

Note:
The table presents the descriptive statistic for 47 manufacturing firms of Pakistan period range 2010 –

2014.

As it reveal in table, the minimum value of board size (BS) 5 and maximum value is 13, which reflect

minimum and maximum numbers of board of director of Pakistani manufacturing firms. The mean and

standard deviation of BS 8.583 and 1.720 respectively, which show that on average firms, contain

almost 9 directors on aboard and there are fewer variation on the boar size.

Similarly the minimum and maximum values of BM are 3 and 25 respectively, which indicate minimum

and maximum number of board meeting held by board of directors in manufacturing companies. The

mean of BM is almost 6 which show on average meeting held by board of directors in firms.

The minimum and maximum score of BC is 1 and 5 respectively, which show the minimum and

maximum range of board committee maintain by board of director in firms. The mean value is almost 2

which reveal on average BC maintain in firms.

The account receivable minimum and maximum range is 0.00 to 140, which show period range of

collection from debtors’ . On average manufacturing firm lend credit to debtors for 20 days.

The inventory period range 3 and 140 show period range in which firms sell their inventory .And on

average firms sell their inventory within 80 days.

The descriptive statistic of account payable show that minimum period range of firms to pay to suppliers

is 12 days and maximum 355 days. On average, Pakistani manufacturing pay their dues to suppliers

within 71 days.

4.5 Regression Results:

After describing the diagnostics test and descriptive statistic respectively, the regression analysis is used

to dig out more about impact of corporate governance on working capital management. This study

estimate determinants of working capital management using ordinary least square in which 3 regression

model have been run in order to investigate the impact of corporate governance on working capital

management.

4.5.1 Regression results: model 1st

ARD = Bo + B1 (BS) + B2 (BM) +b3 (BC) +r

Dependent Variable: LOG RECIEVABLE

Method: Panel Least Squares

Variable Coefficient Std. Error t-Statistic Prob.

LOGBS -0.846052 1.082513 0.781563 0.4358

LOGBM -0.251339 0.359452 -0.699227 0.4856

LOGBC 0.153647 0.223571 0.687240 0.4931

LAGRECIEVABLE 0.001430 0.007175 0.199258 0.8424

C 0.513787 2.355125 0.218157 0.8276

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.839756 Mean dependent var 2.044761

Adjusted R-squared 0.781272 S.D. dependent var 1.777206

S.E. of regression 0.831170 Akaike info criterion 2.694128

Sum squared resid 94.64558 Schwarz criterion 3.572098

Log likelihood -202.2480 Hannan-Quinn criter. 3.049848

F-statistic 14.35888 Durbin-Watson stat 2.656929

Prob(F-statistic) 0.000000
The table revealed the summary statistic of regression model 1 st. The coefficient of determination (r 2) is

83 %, which indicate that 83 % variation is explained by model and the rest of 17 % attribute to

errors .Further in other words the r 2 indicate that the sufficient enough data points are very close to fitted

regression line. The f- statistics indicate that model is fit with F- statistic14.35 at p- value of 0.00000.

The study found that there is no significant effect of BS on account receivable in days (ARD). Further

indicate that 1 percent increase in BS can lead to decrease in ARD by .846 percent. This negative

relationship reveals that increase in BS can fast the receivable collection from debtors. The finding is in

line of with finding of …..

The regression results of BM with ARD implies that 1 percent increase in BM can decrease ARD by

value of 0.251, but statistically insignificant. This negative relationship indicates that increase in BS can

increase receivables collection from debtors. The finding is in line of with finding of…

Similarly, the result of BC indicate that 1 percent increase in BC can bring increase in ARD by value of

0.251, but statistically insignificant. This positive relationship indicates that increase in BC can slow the

collection efficiency.

The last, the coefficient of C indicate that an absence of independent variables (BS, BM, BC) can

increase ARD by 0.514 unit with significant of 0.00000. Further it reveals that an absence of these

variables the collection efficiency from debtors can slow of manufacturing firms.

Thus the overall estimated model can mathematically express as follow.

ARD = 0.514 + 0.846 (BS) – 0.251(BM) +0.154 (BC) 4.5.2Regression model: 2nd
AID = Bo + B1 (BS) + B2 (BM) +B3 (BC) +r

Dependent Variable: INVENTORY

Method: Panel Least Squares

Variable Coefficient Std. Error t-Statistic Prob.

BS 2.032888 4.548549 0.446931 0.6556

BM -0.437587 1.213176 -0.360696 0.7189

BC -0.994753 4.617018 -0.215454 0.8297

Inventory (lag) 0.102406 0.089622 1.142648 0.2552

C 58.90555 41.52455 1.418572 0.1583

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.847311 Mean dependent var 79.82447

Adjusted R-squared 0.791584 S.D. dependent var 64.68158

S.E. of regression 29.52879 Akaike info criterion 9.834701

Sum squared resid 119457.1 Schwarz criterion 10.71267

Log likelihood -873.4619 Hannan-Quinn criter. 10.19042

F-statistic 15.20492 Durbin-Watson stat 1.653491

Prob(F-statistic) 0.000000

The table revealed the summary statistic of regression model 2. The coefficient of determination (r 2) is

84 %, which indicate that 84 % variation is explained by model and the rest of just 16 % attribute to

errors .Further in other words the r 2 indicate that the sufficient enough data points are very close to fitted
regression line. The f- statistics indicate that model is fit with F- statistic 15.20492at p- value of

0.00000.

The study found that there is no significant effect of BS on AID (account inventory in days). Further

indicate that 1 unit increase in BS can lead to increase the AID by 2.032888 units. This positive

relationship reveals that increase in BS can lead to slow the inventory turnover efficiency of

manufacturing firms.

The regression results of BM with AID implies that 1 unit increase in BM can decrease AID by value of

0.437587, but statistically insignificant This negative relationship reveals that increase in BM can lead to

fast the inventory turnover efficiency of manufacturing firms.

Similarly, the result of BC indicate that 1 unit increase in BC can bring decrease in AID by value of

0.994753, but statistically insignificant. This negative relationship indicates that increase in BC can fast

the inventory turnover efficiency.

The last, the coefficient of C indicate that an absence of independent variables (BS, BM, BC) can

increase AID by 58.90555units with significant of 0.00000. Further it reveals that an absence of these

variables the inventory turnover can slow of manufacturing firms. Thus the overall estimated model can

mathematically express as follow.

AID = 58.90555+ 2.032888 (BS) - 0.437587 (BM) - 0.994753 (BC)

4.5.3 Regression model: 3rd
Dependent Variable: PAYABLE

Method: Panel Least Squares

Variable Coefficient Std. Error t-Statistic Prob.

BS -3.857466 3.668242 -1.051584 0.2948

BM -1.439870 0.977839 -1.472502 0.1432

BC 0.751273 3.734526 0.201170 0.8409

LAGPAYABLE 0.007398 0.089714 0.082459 0.9344

C 109.4926 33.93173 3.226848 0.0016

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.798741 Mean dependent var 70.65957

Adjusted R-squared 0.725289 S.D. dependent var 45.40597

S.E. of regression 23.79856 Akaike info criterion 9.403220

Sum squared resid 77592.91 Schwarz criterion 10.28119

Log likelihood -832.9026 Hannan-Quinn criter. 9.758940

F-statistic 10.87432 Durbin-Watson stat 1.950001

Prob(F-statistic) 0.000000

The table revealed the summary statistic of regression model 3 rd. The coefficient of determination (r2) is

almost 80 %, which indicate that 80 % variation is explained by model and the rest of just 20 % attribute

to errors .Further in other words the r2 indicate that the sufficient enough data points are very close to
fitted regression line. The f- statistics indicate that model is fit with F- statistic 10.87432at p- value of

0.00000.

The study found that there is no significant effect of BS on account payable (days). Further indicate that

1 unit increase in BS can lead to decrease in the APD by 3.857466 units. This negative relationship

reveals that increase in BS can lead to fast the efficiency of payment to suppliers of manufacturing

firms.

The regression results of BM with APD implies that 1 unit increase in BM can decrease APD by value

of 1.439870, but statistically insignificant. This negative relationship reveals that increase in BM can

lead to fast payment to suppliers of manufacturing firms.

Similarly, the result of BC indicate that 1 unit increase in BC can bring increase in APD by value of

0.751273, but statistically insignificant. This positive relationship indicate that increase in BC can slow

payments to suppliers.

The last, the coefficient of C indicate that an absence of independent variables (BS, BM, and BC) can

increase APD by 109.4926 units with p value is 0.0016. Further this indicates that an absence of these

variables can slow payment to suppliers of manufacturing firms.

Thus the overall estimated model can mathematically express as follow.

APD = 109.4926 - 3.857466 (BS) - 1.439870 (BM) + 0.751273 (BC)

In contact , Study found from above empirical results that corporate governance have not significant

impact on working capital management .The study consist with Kamau & Basweti (2013) CG does not

improve WCM and also study by Kajananthan, R. Achchuthan, (2013) CG have not significant

influence on working capital management.

On against side Gil and Biger (2013) argue that corporate governance improve working capital

management. Similarly Chaudhry and Ahmad (2015) also reveals that corporate governance have

significant influence on working capital management

Chapter # 5 Conclusion and recommendation

5.1: Conclusion

This research studied the impact of corporate governance on working capital management of

manufacturing firms in Pakistan. The study used quantitative research approach.

In this research the data of 47 manufacturing firms of Pakistan was analyzed using descriptive statistics

and regression analysis for period of 2010 – 2014. The OLS regression model has been used to analyzed

the impact of corporate governance on working capital management .The study used account receivable

in days (ARD) ,account inventory in days (AID) and account payable in days (APD) as a dependent

working capital management variables. And board size (BS) ,board meeting ( BM) and board committee

(BC) used as an independent corporate governance variables .

Descriptive statistics were used to examine the characteristics of the chosen variables. The mean value

of account receivable was 20 which reveal that on average firms collected receivable from debtors for 20

days. Average firms sell their inventory within 80 days. The average account payable period reveals that

firms pay their dues to suppliers within 71 days .Similarly on average 9 board of directors, 6 board

meeting and 2 board committee maintain by firms.

The regression analysis of the account receivable in days (ARD) indicate that there is no significant

influence of board size ( BS) ,board meeting (BM) and board committee (BC) on account receivable .

Further BS and BM have negative relationship which reveals that increase in BS and BC can lead to fast
receivable collection of firms .Similarly BC have positive relationship which reveals that increase in BC

can lead slow receivable of firms .

The regression analysis of the account inventory in days (AID) indicates that there is no significant

influence of BS ,BM, BC on account inventory in days (AID). Further BS have positive relationship

which reveals that increase in BS can lead to slow inventory turnover efficiency. Similarly BM and BC

have negative relationship which reveals that increase in BC can lead to fast the inventory turnover

efficiency.

The regression analysis of account payable in days (APD) indicates that there is no significant influence

of BS, BM and BC on account payable in days (APD). Further BS and BM have negative relationship

which reveals that increase in BS and BM can lead to fast payment efficiency to suppliers. Similarly BC

have positive relationship which reveals that increase in BC can lead to slow the payment efficiency of

suppliers.

Final in all models the BS and BM have negative relationship with dependent variables ARD, AID and

APD which lead to increase the efficiency of working capital management that is seem to good sign for

firm. And on flip side the BC seem not good exercise for working capital management because BC has

positive relationship in all models which lead to slow working capital efficiency. So above result reveals

that increase in BS and BM can be bit well for Pakistani firms to improve working capital.

5.2: Recommendation for future research

There is need for further study to carry out the impact of corporate governance on working capital

management of firms by incorporating more corporate governance variables that effect working capital
management. Further study can be conducted to investigate impact of corporate governance on working

capital management of homogenous firms of Pakistan.