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 organized in the following section.

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

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

and conceptual framework of the study.

Theoretical framework:

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

since 1969 Nadiri’s model used several researchers to establish new theories

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

evidence that the objective of working capital management 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 firm

value will be maximized if the optimal level of working capital is held (Deloof

2003). In the short termlku objective of the companies the working capital is

viewed as one of the key mechanism. And also working capital is considered 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)

liabilities. According to Arnold (2008) current assets include inventory, account receivables and

cash. And current liabilities include account payable and short term borrowing.

Current assets:

The current assets normally said to be an account that over the course of the business or

operating 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 becomes due.

According to Harris (2005,p.52) if the current assets are understand 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 performance for the firm. The increased

performance will show through both increased profits and higher stock return.

Account receivable:

Account receivable or trade receivable which it sometime called an amount a company has

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

given the customers an extending credit (Horngren et al,2012 p.62). Most sales of the company

through credit and this trend are growing. It is big challenges for a company to measure revenue

and manage assets due to credit sale. It is very important for a company that collects 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 management of the component in the current assets are important for

companies since this generate revenue. The inventory includes raw material, work in progress of

products and finished goods (Brooks 2013). The management of the inventory 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 decisions that the firms have to make is regarding their allocation of total

assets to cash and securities. This decision is highly related to working capital investment

decision within the firm and also regarded to the linked towards the company risk posture

(Maness and Zietlow ).The reason for cash holding is to that firm can easy pay bill that come to

due. The management of cash is something similar to the management of the inventory that the

financial manager has to manage. According to the Abuzar (2004) that unnecessary costs and

losses of companies can be attributable by the firm’s 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 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. However, the manner by which corporate governance is organized defers between

jurisdiction, depending on political, economic and social mechanism. For instance, firm in

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

regulatory framework and effective corporate practices, while firms 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 stagnant and

collapse. if business enterprise do not prosper ,there will be no economic growth ,no taxes paid

and invariability 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). Therefore good corporate governance becomes

prerequisite 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 governance practices as board

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

According to Karan (2013) adoption of corporate governance practices plays vital role in

efficiency of working capital management.

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

cash management, account receivable, inventory, account payable and cash conversion.

On the flip side According to Achchuthan and Kajanthan (2013) there is no significant influence

of corporate governance on working capital management . similarly according to Kamau and

management .

Therefore due to this context, the study focuses on corporate governance and its influence on

working capital management.

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

management by collecting data of 1181 U.S firm over the period 1960 to 1979, and they

conclude that there is substantial 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 proportion of outside

directors on a board size, executive compensation and CEO share ownership significantly

influence the efficiency of a company’s working capital management.

Similarly another study of corporate governance and firm cash holding in Malaysia was

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 practices on

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

gather via questionnaire and survey and sample size of the study was 111 manufacturing firms,

further 46 firm selected as sample from the large category ,54 firm were used as sample from

medium category and 11 firm from small category. The SPSS was used to measure the influence
 of corporate governance on working capital efficiency of manufacturing firms in Nairobi

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

working capital efficiency of manufacturing firms. further concluded that board

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

management.

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: Working capital management

BM: Board meeting

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 a board, board

meeting refer to number of meeting in a year and board committee refer to number or committee

held during the year.

NOTE:

Start methodology and after methodology u can write literature review .study methodology of at

least 10 papers and dig out what variables of corporate governance is used and what not and why

? also study what methodology is used by researcher and why they used that methodology, also

study developed and developing country with respect to your variables of study that how these

studied in developed country and how studied developing country. Study your variables with all

aspect that is used in developed and developing country.