Literature review of the study

Introduction:

The purpose of this chapter is to reviews literature related to the corporate governance and

working capital management. The literature review has been the organized in the following

section. First section of this chapter is cover the theories relating to the corporate governance and

working capital management .the second section consist on empirical study on the subject area

and conceptual framework of the study.

Theoretical framework:

Nadiri (1969) was the first person, who study the working capital management, since

1969 Nadiri’s model used by several researcher to establish new theories about

holding optimal level of cash balance. Context to this, several studies have

evidence that the objective of working capital mangemt is to maintain working

capital at optimal level. According to Filbeck and Krueger (2005) Nazir and Afza (2009), and Gill
(2011) the main purpose and objective of working capital management is to maintain working capital at

most favorable level.the frim value will be maximized if the optimallevel of working capital is

held( Deloof 2003).In the short term objective of the companies the working capital is viewed as one of

the key machanisiim .and also working capital is consider to be a vital issue in financial management

decision and its effect on liquidity as well as on profitability. Moreover, an optimal working capital

management positive contributes in creating firm value. (Bagchi & Khamrui 2012)
Similary the key component of working capital mangemnt is current assts and current liabilities .

According to Arnold (2008) current assts include inventory ,account reeivable and cash. And current

liabilities include account payable and short term borrowing.

Current assets :

The current assets normaly said to be account that over the course of the business or oprating cycle are

going to be turn into cash (Brooks, 2013 p.58). Current assets are considered very vital for a company

because company pay their obligation when that become due. According to Harris (2005,p.52)if the

current assets are are ubderstand and managed in the correct way the optimal level of each assets is

more likely to be reached.This will lead to minimize risk,a preparation for uncertainty and increased

overall perpormance for th firm.The increased performance will show through both increased profits

and higher stock return.

Account recievable :

Account receivable or trade receivable which it sometime called are the ammoinut a company has

outstanding or the customer owe them where the company has delived a good and service and given

the customers an extending credit (Horngren et al,2012 p.62).Most sale of the company trohg credit and

this trend is growing.It is big challenges for a company to measure revenue and mange assts due to

credit sale. It is very important for a company thast collect account receivable well in order to pay the

obligation when become due.the main benefit for companies to offer trade credit is that it can boost the

sale of the company (Horngren et al,2012) .

Inventory:

Inventory and the magement of this component in the current assets are important for companies since

this generate revenue .the inventory include raw material,work in progress of products and finished
goods (Brooks 2013).the mangemnt of the invemtory is also challenge for the companies,because too

much inventory cause of additional cost and damage chances while too low level of inventory cause of

lost sale and stock out. According to the Brooks (2013) too much inventory creates additional cost in

form of storage costs and potential spoilage.

Cash:

One of the important decision that the firms have to make is regarding their allocation of total assets to

cash and securities.This decisoion is highly related to working capital investment decision within the

frim and also regarded to the link ed towards the company risk posture (Maness and Zietlow ).The

reason for cash holding isto that firm can easy pay bill that come to due.the mangemnt of cahs is

something that the the financial manger have to manage similar to the management of the

inventory .According to the Abuzar (2004) That unnecessary costs and losses of companies can be

attributable by the firms excessive liquidity.

Current liabilities:

Current liabilities are liabilities that come due within the next year or within the normal operating

cycle if it would be longer than one year. Current liabilities are closely related to current assets since

current assets are supposed to raise the cash that is needed to pay the current liabilities. (Horngren

et al, 2012, p. 166).

Account payables:

Account payables are generated from the day-to-day activities of firms. When firms purchase

supplies or services that will be used in their production but do not pay for them immediately it

goes in under the category of account payables. These supplies and services are bought on credit
and are then used to generate income before the invoice has been paid. Using account payables as

financing can be called a spontaneous source of financing. (Maness & Zietlow, 2005, p. 236).

Short-term borrowings:

If a company has cash shortages then the company may have only good option to making the

short term borrowing to meet need of operating activities. Banks and financial institutes are the

major supplier of short term loan for the companies. The firm get short term loan mostly from

banks by using short-term commercial paper or medium-term.

Corporate Governance:

Corporate governance has become popular discussion in developed as well as in developing

countries.Hoever.the manner by wich corporate governance is organized deffers between

jurisdiction,depending on pooliticsl,economical and social mechanisim.For instance,firm in

developed countries have operate within stable political and financial system,well developed

regulary framework and effective corporate pratices,while fimes that operate in developing country

may effected by political and economic instability.Pakistan is one of those emerging country where

political and economic instability cause of low business growth and development. According to

Gomez (2005) “ if business enterprise do not prosper ,they will stanent and collapse .if busness

enterprise do not prosper ,there will be no economic roeth ,no taxes paid and inviaribilty the

country will not develop” so the country need well governed business enterprise that can attract

investment ,create jobs and wealth ,sustainability and competitive in the globe market place

(Meshak 2015).Therfore good corporate governance beocmes prerequest for national economic

development.
Relationship between corporate governance and working capital management:

Corporate governance play vital role in controlling the management of working capital by

formulating sound policies. The role of CEO duality, board size, and audit committee in working

capital management cannot be ignored since the CEO duality and board size help in maintaining an

appropriate level of working capital in the organization (Gill & shah).

ACCording to Achchuthan and Kajanthan (2013) that there is no significant mean difference

between the level of working capital efficiency and corporate governace pratices as board

committees,board meeting and proporation of non- executive directors.

According to Karan (2013) adoption of coporate governace practices plays vital role in efficiency of

working capital mangemnt.

According to Harford et al (2008), weak corporate governace might adverse consequences for cahs

mangemnt ,account receivable ,inventory,account payable and cash conversion. Therefore due to

this context ,the study focus on corporate governance and its influence on workinng capital

management.

Empirical study:

Hawawini,Viallet and Vora (1986) examine the influence of firm’s industry on working capital

management .usinf data on 1181 U.S fimr over the period 1960 to 1979,and they conclude that

there is substabcial effect of industry on firm working capital management. In this context,

Moussawi ,Laplante,Kieschnick and Baranchuk (2006) have studied working capital

management and its determinant and consequences.they get sample of US public corporation
from 1990 to 2004 and concluded that working capital management is influenced by corporate

governance practices ,firm size ,future firm sale growth,the peoportion of outside directors on a

board size, executive compensation and CEO share ownership significantly influence the

efficiency of a company’s working capital mangemnt .

Similary another study of corporate governance and frim cash holding in Malaysia ws

conducted by Rahman and Muhamad .They get data of 512 public listed companies in Malaysia

via data stream and annual report for the year of 2009.By using Eview software study founded

that there is significant positive relationship between board independence and the level of cash

holding of the firms. on the other hand ,this study expose that there is no significant

relationship between board size ,CEO duality and cash holding. Mean that there is no clear

evidence to prove that cash holding are associated with board size and CEO duality.

Similarly,Meshack (2015) conducted a study on influence of corporate governance pratices on

working capital efficiency of manufacturing firm in Nairobi country.IN this study data was

gather via questionnniars and survey and sample size of the study was 111 manufacturing

firms,further 46 firm selected as sample from the larg category ,54 firm wer used as sample

from medium category and 11 frim from small category.the SPSS was used to measyre the

influence of corporate gevernce on working capital effiviency of manufacturing firms in Nairobi

country. Hence the study found that there is significant effect of corporate governace on

working capital efficiency of manufacturing firms.further concluded that board

structure ,internal audit and shareholder interest have an influence on working capital

mangement.
 Conceptual framework:

The following figure present conceptual framework the study of corporate governance and

working capital management.

BM

CGP BC
WCM

BS

Where:

CGP: corporate governance practice

WCM:Workiing cpital management

BM:board meeting

BC:board committee

BS: Board size

The conceptual framework consist on internal corporate governance variables ,board size ,board

meeting and board committee ,which are considered the important factors that affect working capital
management .In the study board size refer to number of directors in aboard,boeard meetibg refer to

number of meeting in a year and board committee refer to number or committee held during the year.