Cash conversion cycle sensitivity by moderating role of exchange rates volatility on firm’s financial performance
Abstract
The cycle of cash conversion relates to the time spread between the value of cash paid for purchases and the cash receipt from turnover. Using the State Bank of Pakistan data, this study introduces the direct and moderating role of the exchange rate, effective through the efficient execution of the cash conversion cycle between Pakistani 302 manufacturing companies from 1999–2015. Using the fixed effect as the static panel model and system GMM as a dynamic panel, it is observed that the exchange rate plays an authoritative moderating role between the cash conversion cycle and the financial performance. Results of the investigation have shown that in static panel analysis with the cash conversion period, the exchange rate has a positive and substantial moderating effect on return on assets and return on equity whereas that ER has a major negative impact on return on assets and return on equity using dynamic panel data analysis GMM. The issue of endogeneity in the static panel is addressed using the advanced approach of the standard error of the panel correction standard error method that changed the position of the significance of the moderator variable. Observers, therefore, intend to evaluate the fluctuations in the exchange rate as one of the variables of the financial output moderator in the context of current metrics such as asset’s returns, equity’s returns and gain more practical expression within their investigated results.
Keyword : return on assets, exchange rate, return on equity, cash conversion cycle, profitability
How to Cite
Hussain, S., Ali Golam Hassan, A., Quddus, A., Rafiq, M., & Chien Nguyen, V. (2021). Cash conversion cycle sensitivity by moderating role of exchange rates volatility on firm’s financial performance. Business: Theory and Practice, 22(2), 277-289. https://doi.org/10.3846/btp.2021.13147
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277−297. https://doi.org/10.2307/2297968
Aron, A. Q., & Maneja, J. M. (2020). Student’s perception towards the appropriateness of phrase-picture-match-analysis as instructional material in teaching sampling techniques. PEOPLE. International Journal of Social Sciences, 6(1). https://doi.org/10.20319/pijss.2020.61.349365
Aytac, B., Hoang, T. H. V., Lahiani, A., & Michel, L. (2020). Working capital management and profitability of wine firms in France: an empirical analysis. International Journal of Entrepreneurship and Small Business, 41(3), 368−396. https://doi.org/10.1504/IJESB.2020.110803
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115−143. https://doi.org/10.1016/S0304-4076(98)00009-8
Boisjoly, R. P., Conine, T. E., & McDonald, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108(November 2018), 1–8. https://doi.org/10.1016/j.jbusres.2019.09.025
Chang, C. C. (2018). Cash conversion cycle and corporate performance: Global evidence. International Review of Economics and Finance, 56(December 2017), 568–581. https://doi.org/10.1016/j.iref.2017.12.014
Cheng, F., Chiao, C., Fang, Z., Wang, C., & Yao, S. (2019). Raising short-term debt for long-term investment and stock price crash risk: Evidence from China. Finance Research Letters, 33, 101200. https://doi.org/10.1016/j.frl.2019.05.018
Dalci, I., & Ozyapici, H. (2018). Working capital management policy in health care: The effect of leverage. Health Policy, 122(11), 1266–1272. https://doi.org/10.1016/j.healthpol.2018.09.012
Doan, T., & Bui, T. (2020). Nonlinear impact of supply chain finance on the performance of seafood firms: A case study from Vietnam. Uncertain Supply Chain Management, 8(2), 267−272. https://doi.org/10.5267/j.uscm.2020.1.001
Ha, D. T. T., & Hoang, N. T. (2020). Exchange rate regime and economic growth in Asia: Convergence or divergence. Journal of Risk and Financial Management, 13(1), 9. https://doi.org/10.3390/jrfm13010009
Högerle, B., Charifzadeh, M., Ferencz, M., & Kostin, K. B. (2020). The development of working capital management and its impact on profitability and shareholder value: evidence from Germany. Strategic Management, 25(2), 27−39. https://doi.org/10.5937/StraMan2002027H
Hong, J. (2020). The financing of alliance entrepreneurship. Journal of Business Venturing, 35(1), 105916. https://doi.org/10.1016/j.jbusvent.2018.12.002
Hossain, T. (2020). The effect of working capital management on profitability. International Journal of Research in Business and Social Science (2147−4478), 9(6), 114−122. https://doi.org/10.20525/ijrbs.v9i6.872
Iqbal, U., Gan, C., & Nadeem, M. (2020). Economic policy uncertainty and firm performance. Applied Economics Letters, 27(10), 765–770. https://doi.org/10.1080/13504851.2019.1645272
Khan, M. M., Shagor, M. I. H., Kalam, A., & Ahmed, M. S. (2020). Working capital management and firm profitability in the textile industry of Bangladesh. International Journal of Science and Business, 4(7), 118−127.
Kumaraswamy, S. (2016). Impact of working capital on financial performance of gulf cooperation council firms. International Journal of Economics and Financial Issues, 6(3), 1136−1143.
Le, B. (2019). Working capital management and firm’s valuation, profitability and risk: Evidence from a developing market. International Journal of Managerial Finance, 15(2), 191–204. https://doi.org/10.1108/IJMF-01-2018-0012
Lin, Q., & Lin, X. (2020). Cash conversion cycle and aggregate stock returns. Journal of Financial Markets, 52, 100560. https://doi.org/10.1016/j.finmar.2020.100560
Mohd, A. S., & Siddiqui, D. A. (2020). Effect of macroeconomic factors on firms ROA: A comparative sectorial analysis from Pakistan. International Journal of Publication and Social Studies, 5(1), 1−17. https://doi.org/10.18488/journal.135.2020.51.1.17
Moussa, A. A. (2019). Determinants of working capital behavior: evidence from Egypt. International Journal of Managerial Finance, 15(1), 39–61. https://doi.org/10.1108/IJMF-09-2017-0219
Onchangwa, G. A. (2019). Effects of working capital management on financial distress of non-financial firms listed at the Nairobi securities exchange market [Doctoral dissertation, JKUATCOHRED].
Oseifuah, E. (2016). Determinants of working capital requirements: evidence from selected non-financial firms listed on the Johannesburg securities exchange. The Journal of Accounting and Management, 6(1).
Ren, T., Liu, N., Yang, H., Xiao, Y., & Hu, Y. (2019). Working capital management and firm performance in China. Asian Review of Accounting, 27(4), 546–562. https://doi.org/10.1108/ARA-04-2018-0099
Sawarni, K. S., Narayanasamy, S., & Ayyalusamy, K. (2020). Working capital management, firm performance, and nature of business. International Journal of Productivity and Performance Management, 70(1). https://doi.org/10.1108/IJPPM-10-2019-0468
Seth, H., Chadha, S., Ruparel, N., Arora, P. K., & Sharma, S. K. (2020). Assessing working capital management efficiency of Indian manufacturing exporters. Managerial Finance, 46(8). https://doi.org/10.1108/MF-02-2019-0076
Shah, S. T. H. (2019). Impact of working capital management on profitability of pharmaceutical and chemical companies: a comparative study of Pakistan and India. Journal of Managerial Sciences, 13(1).
Smaoui, H., & Ghouma, H. (2020). Sukuk market development and Islamic banks’ capital ratios. Research in International Business and Finance, 51, 101064. https://doi.org/10.1016/j.ribaf.2019.101064
Tsagem, M. M. (2020). Cash conversion cycle and profitability of Nigerian small and medium-sized entities: An empirical analysis. International Journal of Banking and Finance, 13(1), 49−69.
Ujah, N. U., Tarkom, A., & Okafor, C. E. (2020). Working capital management and managerial talent. International Journal of Managerial Finance, 17(3). https://doi.org/10.1108/IJMF-12-2019-0481
Widyastuti, M., Oetomo, H. W., & Riduwan, A. (2017). Working capital and macroeconomic variables as value creation in Indonesian textile companies. International Journal of Business and Finance Management Research, 5, 7–16.
Williams, H. T. (2018). An empirical investigation of the impact of exchange rate fluctuations on the performance of selected listed firms in Nigeria. Journal of Business Management and Economic Research, 2(3), 1–10. https://doi.org/10.29226/TR1001.2018.22
Zeidan, R., & Shapir, O. M. (2017). Cash conversion cycle and value-enhancing operations: Theory and evidence for a free lunch. Journal of Corporate Finance, 45, 203–219. https://doi.org/10.1016/j.jcorpfin.2017.04.014