Working capital is the most essential component of capital structure of business firms. The ability of the firm to manage the current assets and current liabilities of the firm in order to generate higher returns can be referred as working capital management. Firms can increase their profitability if they manage to find and keep an optimum level of balance between current assets and current liabilities. Balanced working capital management also results in continual cash flows
Purpose: The study investigated the impact of working capital management practices on the stock performance of the non-financial firms listed on Karachi Stock Exchange (KSE) during the years 2005-2013. In addition, the study also explored the impact of firm size or industry of the firms on the working capital management practices and if the theory of risk/return tradeoff indicating that an aggressive policy should generate a higher risk premium holds.
Methodology: Data was collected from the annual reports of companies listed on the Pakistan stock exchange and number of companies will be at least 50 through their respective websites and stock prices from website of (Karachi Stock Exchange) KSE data stream. Data was analyzed through correlation and regression analysis using statistical package e.g. SPSS for studying the relationships among variables.
Results: Results of the study provided grounds for establishing relationship between working capital management practices of Pakistani firms listed on KSE and their stock returns for the years 2005-2013.
Implication: The study will contribute towards establishing relationships between working capital management practices and stock performance with some empirical findings for both investors and managers. It may also contribute to confirm or deny whether working capital policies are related to the risk-return trade-off of stock performance, which could be helpful for financial and portfolio managers.