Liquidity in Financial Market in Pakistan
Background of the Study
Contemporary economies of developing countries are changing due to rapid changes in the world economy. The emergence of international financial industry for worldwide network of transactions altered the role of international economy. Increased financial flows have altered the role of private capital and subsequently effect resource allocation. The economies of developing countries are witnessing changes in the composition of capital flows because world equity market is expanding rapidly. Foreign direct investment (FDIs) and stock market boom are the indicators of the changing world economic order. Earlier, most of the developing nations were facing serious liquidity problems thus compromising economic growth. Now, it is important to study how the changes in financial sector contributed in the overall growth of the economy, particularly in Pakistan (Shahbaz, Ahmed, & Ali, 2008).
Statement of the Problems
Based on assessing the facts presented in the background, the study identified two problems:
· What is the essence of working capital management in the financial market?
· How important the liquidity in a firm?
Research Aim and Objectives
The main aim of the study is to investigate the impact of working capital of the companies and its importance in the idea of liquidity. In order to facilitate the investigation, there are three objectives that should be considered. First is to describe the companies and their nature of working capital. Second is to determine the management of working capital in the organizations’ success. And third is to discover the other intervention or working capital policies the firms created that can play an important role in their profitability and liquidity.
Research Questions
There are three questions that can help the researchers to align their investigation.
1. What is nature of working capital within the Pakistani companies?
2. What is the impact of managing the working capital in the organizations’ success?
3. What are the other intervention or working capital policies the firms created that can play an important role in their profitability and liquidity?
Literature Review
Working capital management (WCM) is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. It deals with current assets and current liabilities. Working capital management is important due to many reasons. For one thing, the current assets of a typical manufacturing firm accounts for over half of its total assets. For a distribution company, they account for even more. Excessive levels of current assets can easily result in a firm’s realizing a substandard return on investment. However firms with too few current assets may incur shortages and difficulties in maintaining smooth operations. Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand (Raheman & Nasr, 2007). Even the small businesses are using the idea of WCM because of their characteristics with limited access in long-term capital markets but with needs on the continuous financial investment. Also, failure among the firms in terms of financing is foreseeable due to the weak financial management – particularly poor working capital management and inadequate long-term financing. Although there are internal and external factors that might contribute to the success or failure of a firm, still the efficient working capital management plays a significant role (Padachi, 2006). In understanding the WCM, the requirements should include the maintenance of the optimum balance of working capital components. Optimization of working capital balance means minimizing the working capital requirements and realizing maximum possible revenues. If there is an efficient WCM, it will definitely increase the growth of the opportunities and return to the shareholders (Ganesan, 2007; Afza & Nazir, 2007).
Methodology
The suggested method in the study is the use of secondary information. The materials that can be used are the information coming from the Pakistani companies and will give the study the idea on how well the firms use the opportunity on working capital as a good foundation in their success and increase their profitability. In addition, the study can also use the previous studies to expand the knowledge over the liquidity and its importance in the organization.
References:
Afza, T., & Nazir, M.S., (2007) Is it Better to be Aggressive or Conservative in Managing Working Capital? [Online] Available at: https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=SERC2007&paper_id=107 [Accessed 26 October 2010].
Ganesan, V., (2007) An Analysis of Working Capital Management Efficiency in Telecommunication Equipment Industry, Rivier Academic Journal, 3(2) [Online] Available at: http://www.rivier.edu/journal/ROAJ-Fall-2007/J119-Ganesan.pdf [Accessed 26 October 2010].
Padachi, K., (2006) Trends in Working Capital Management and its Impact on Firms’ Performance: An Analysis of Mauritian Small Manufacturing Firms, International Review of Business Research Papers, 2 (2) [Online] Available at: http://www.bizresearchpapers.com/Kesseven.pdf [Accessed 26 October 2010].
Raheman, A., & Nasr, M., (2007) Working Capital Management and Profitability – Case Of Pakistani Firms, International Review of Business Research Papers, 3(1) [Online] Available at: http://www.bizresearchpapers.com/Paper%2019.pdf [Accessed 26 October 2010].
Shahbaz, M., Ahmed, N., & Ali, L., (2008) Stock Market Development and Economic Growth: Ardl Causality in Pakistan, International Research Journal of Finance and Economics, 14 [Online] Available at: http://www.eurojournals.com/irjfe%2014%20shahbaz.pdf [Accessed 26 October 2010]
Credit:ivythesis.typepad.com
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