The Relationship between Working Capital Management and Profitability of Bumiputera-Controlled Companies in Malaysia

  • Fairuz Sofia Kaharuddin UUM Kuala Lumpur, Universiti Utara Malaysia
  • Ahmad Rizal Mazlan UUM Kuala Lumpur, Universiti Utara Malaysia
Keywords: Working capital management, trade-off theory, profitability, Bumiputera-controlled companies, Malaysia

Abstract

This study investigated the relationship between working capital management and profitability of 94 listed Bumiputera-controlled companies in Malaysia for 2006 until 2012. The underlying theory is the trade-off theory of working capital and cash conversion cycle, and its components are used as measures for working capital management. Findings of the panel data regression reveal that inventory conversion period and receivable collection period are significantly negatively correlated to profitability. This suggests that the shorter the period, the higher the profitability of Bumiputera-controlled companies tends to be. However, the cash conversion cycle is significantly and positively correlated to profitability, suggesting that the longer the cash conversion period, the higher the profitability. The payable collection period is not significantly correlated to profitability. The findings of this study assert that in general, Bumiputera-controlled companies are relatively less efficient in its working capital management, as far as the comparison to previous related studies is concerned.

References

Abuzayed, B. (2012). Working capital management and firms’ performance in emerging markets: the case of Jordan. International Journal of Managerial Finance, 8(2), 155–179.

Ademola, O. J. (2014). Working Capital Management and Profitability of Selected quoted food and beverages manufacturing firms in Nigeria. European Journal of Accounting Auditing and Finance Research, 2(3), 10–21.

Akinlo, O., & Olufisayo, O. (2011). The Effect of Working Capital on Profitability of Firms in Nigeria: Evidence from General Method of Moments (GMM). Asian Journal of Business and Management Sciences, 1(2), 130–135. Retrieved from http://www.ajbms.org

Albdwy, F., Shah, M., & Salman, S. (2014). Impact of working capital management on the profitability of Shariah-Compliant and non-Shariah firms: The Case of Malaysia. Capital Market Review, 22, 41–58.

Ali, S. (2011). Working Capital Management and the Profitability of the Manufacturing Sector: A Case Study of Pakistan’s Textile Industry. The Lahore Journal of Economics, 16(2), 141–178.

Aminudin, N. A. (2000). Corporate Performance and Ownership Structure: A Comparative Analysis Between Bumiputera and Non-Bumiputera Controlled Companies (Master thesis). Retrieved from University of Malaya Students Repository

Anojan, V., Arulalan, N., & Nimalathasan, B. (2013). Working Capital Management and Its Impact on Profitability: A Study of Selected Listed Beverage, Food and Tobacco Companies in Colombo Stock Exchange, Sri Lanka Abstract : The International Journal of Business & Management, 1(2), 10–17.

Baveld, M. (2012). Impact of Working Capital Management on the Profitability of Public Listed Firms in the Netherlands during the Financial Crisis. Retrieved from University of Twente Student Thesis.

Bottazzi, G., Dosi, G., Lippi, M., Pammolli, F., & Riccaboni, M. (2001). Innovation and corporate growth in the evolution of the drug industry. International Journal of Industrial Organization, 19(7), 1161–1187. Retrieved from https://pdfs.semanticscholar.org

Bulin, S., Basit, A., & Muhammad Hamza, S. (2016). Impact of Working Capital Management on Firm ’ S Profitability. International Journal of Accounting and Business Management, 4(2). Retrieved from http://www.ftms.edu.my

Charitou, M. S., Elfani, M., & Lois, P. (2010). The relationship between working capital efficiency and profitability. Journal of Business & Economics Research, 8(12). doi: https://doi.org/10.19030/jber.v8i12.782

Ching, H. Y., Gerab, F., & Novazzi, A. (2011). Relationship Between Working Capital Management and Profitability in Brazilian Listed Companies. Journal of Global Business & Economics, 3(1), 74–86. Retrieved from https://www.researchgate.net

Dong, H. P., & Su, J. (2010). The Relationship between Working Capital Management and Profitability: A Vietnam Case. International Research Journal of Finance and Economics, (49). doi: https://doi.org/10.1017/CBO9781107415324.004

Deloof, M. (2003). Does working capital management affects the profitability of Belgian firms? Journal of Business Finance and Accounting, 30(3), 573–587. doi: https://doi.org/10.1111/1468-5957.00008

Dev, P., George, S. V., & Ariff, M. (2006). Government Public Policy, Regulatory Intervention, and Their Impact on IPO Underpricing: The Case of Malaysian IPOs. Journal of Small Business Management, 44(1), 81–98.

Dittmar, A., Mahrt-Smith, J., & Servaes, H. (2002). Corporate Liquidity. London: Centre for Economic Policy Research.

Falope, O. I., & Ajilore, O. T. (2009). Working Capital Management and Corporate Profitability: Evidence from Panel Data Analysis of Selected Quoted Companies in Nigeria. Research Journal of Business Management, 3(3), 73–84. doi: https://doi.org/10.3923/rjbm.2009.73.84

Garcia, P. J., & Martinez, P. (2007). Effects of working capital management on SME profitability International Journal of Managerial Finance, 3(2), 164–177. doi: https://doi.org/10.1108/17439130710738718

Gill, A., Biger, N., Mathur, N., Palmer, S., Street, W. H., & Vb-k, B. C. (2010). The Relationship Between Working Capital Management And Profitability : Evidence From The United States. Business and Economics Journal, 2010(1), 1–9.

Gul, S., Khan, M. B., Rehman, S. U., Khan, M. T., Khan, M., & Khan, W. (2013). Working Capital Management and Performance of SME Sector. European Journal of Business and Management, 5(1), 60–69. doi: https://doi.org/10.5897/AJBM2013.6899

Halim, M. S., Haniff, M. S., Junoh, M. Z., & Osman, A. (2014). Financial performance and the management issues of Bumiputera construction firms in the Malaysian construction industry. Journal of Scientific Research & Reports, 3(9), 1190–1202. Retrieved from http://www.journalrepository.org

Jang, S. C., & Park, K. M. (2011). Inter-relationship between firm growth and profitability. International Journal of Hospitality Management, 30(4), 1027–1035.

Karadagli, E. C. (2012). The Effect of Working Capital Management on the Profitability of Turkish SMEs. British Journal of Economics, Finance and Management Science, 5(2), 36–44. doi: https://doi.org/10.1007/s13398-014-0173-7.2

Lazaridis, I., & Tryfonidis, D. (2006). The relationship between working capital management and profitability of listed companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, 30(76), 1–12.

Mansoori, E., & Muhammad, J. (2012). Effect of Working capital management on the firm ’s profitability: Evidence from Singapore. Interdisciplinary Journal of Contemporary Research in Business, 4(5), 472–486.

Marimuthu, M. (2010). Bumiputera-Controlled Companies: Performance Evaluation Using A Non-Parametric Approach. International Journal of Economics and Finance, 2(2), 178–185. doi: https://doi.org/10.5539/ijef.v2n2p178

Mathuva, D. M. (2010). The Influence of Working Capital Management Components on Corporate Profitability: A Survey on Kenyan Listed Firms. Research Journal of Business Management. doi: https://doi.org/10.3923/rjbm.2010.1.11

Mohamad, N. & Saad, N. (2010). Working Capital Management : The Effect of Market Valuation and Profitability in Malaysia. International Journal of Business and Management, 5(11), 140–147. doi: https://doi.org/10.5539/ijbm.v5n11p140

Misbah, S., Anjum, M. J., Aqdas, M. I., Marwat, N. K., & Khan, M. A. R. (2015). The Relationship between Working Capital Management and Profitability: Evidence from Listed Companies in Kuala Lumpur Stock Exchange (KSE) Malaysia. International Journal of Information Processing & Management, 6(1), 104. Retrieved from http://search.ebscohost.com

Nobanee, H., & Alhajjar, M. (2014). An Optimal Cash Conversion Cycle. International Research Journal of Finance and Economics, (120). Retrieved from http://www.internationalresearchjournaloffinanceandeconomics.com

Nimalathasan, B. (2010). Working capital management and its impact on profitability : A study of selected listed manufacturing companies in Sri Lanka. Information Management, 12, 76–83.

Raheman, A., & Nasr, M. (2007). Working capital management and profitability- case of Pakistani Firms. International Review of Business Research Papers, 3(1), 279–300. Retrieved from https://www.researchgate.net/publication/228727444

Raheman, A., Afza, T., Qayyum, A., & Bodla, M. A. (2010). Working capital management and corporate performance of the manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47(1), 156–169.

Ray, S. (2012). Evaluating the Impact of Working Capital Management Components on Corporate Profitability : Evidence from Indian Manufacturing Firms. International Journal of Economic Practices and Theories, 2(3), 127–136.

Rimo, A., & Panbunyuen, P. (2010). The Effect Of Company Characteristics on working Capital Management (Master thesis). Retrieved from http://www.diva-portal.org

Saghir, A., Hashmi, F. M., & Hussain, M. N. (2011). Working Capital Management and Profitability: Evidence from Pakistan Firms. Interdisciplinary Journal of Contemporary Research In Business, 3(8), 1092–1105. doi: https://doi.org/10.1007/s40622-014-0043-3

Salim, M., & Yadav, R. (2012). Capital Structure and Firm Performance: Evidence from Malaysian Listed Companies. Procedia - Social and Behavioral Sciences, 65(ICIBSoS), 156–166. doi: https://doi.org/10.1016/j.sbspro.2012.11.105

Sharma, A. K., & Kumar, S. (2011). Effect of Working Capital Management on Firm Profitability. Global Business Review, 12(1), 159–173. doi: https://doi.org/10.1177/097215091001200110

Sin, H. N., Chen, Y., Tze, S. O., & Boon, H. T. (2017). The Impact of Working Capital Management on Firm ’ s Profitability : Evidence from Malaysian Listed Manufacturing Firms. International Journal of Economics and Financial Issues, 7(3), 662–670.

Smith, K. 1980. Profitability versus Liquidity Tradeoffs in Working Capital Management, Readings on the Management of Working Capital. New York, NY: West Publishing Company.

Soekhoe, S. (2012). The effects of working capital management on the profitability of Dutch listed firms (Master thesis). Retrieved from doi: https://doi.org/10.3846/16111699.2011.651626

Uremadu, S. O., Egbide, B.-C., & Enyi, P. E. (2012). Working Capital Management, Liquidity and Corporate Profitability Among Quoted Firms in Nigeria Evidence from the Productive Sector. International Journal of Academic Research in Accounting, Finance and Management Sciences, 2(1), 80–97. Retrieved from http://ideas.repec.org/a/hur/ijaraf/v2y2012i1p80-97.html

Usama, M. (2012). Working Capital Management and its Affect on the firm’s Profitability and Liquidity : in other Food Sector of ( KSE ) Karachi Stock Exchange. Oman Chapter of Arabian Journal of Business and Management Review, 1(12), 62–73. Retrieved from doi: https://doi.org/10.12816/0002232

Wasiuzzaman, S. (2015). Working capital and firm value in an emerging market. International Journal of Managerial Finance, 11(1), 60–79. doi: https://doi.org/10.1108/IJMF-01-2013-0016

Wasiuzzaman, S., & Arumugam, V. C. (2013). Determinants of Working Capital Investment: A Study of Malaysian public listed Firms. Australasian Accounting, Business and Finance Journal, 7(2), 63–83. doi: https://doi.org/10.14453/aabfj.v7i2.5

Yatim, P., Kent, P., & Clarkson, P. (2006). Governance structures, ethnicity, and audit fees of Malaysian listed firms. Managerial Auditing Journal, 21(7), 757–782. doi: https://doi.org/10.1108/02686900610680530

Yunos, R. M., Nazaruddin, N., Ghapar, F. A., Ahmad, S. A., & Zakaria, N. B. (2015). Working Capital Management in Malaysian Government-linked Companies. Procedia Economics and Finance, 31(15), 573–580. doi: https://doi.org/10.1016/S2212-5671(15)01203-4

Zariyawati, M. A., Annuar, M. N., & Pui-San, N. (2016). Working Capital Management Determinants of Small and Large Firms In Malaysia. Int. Journal of Economics and Management, 10(November), 365–377. Retrieved from http://www.ijem.upm.edu.my

Zariyawati, M. A., Taufiq, H., Annuar, M. N., & Sazali, A. (2010). Determinants of Working Capital Management: Evidence from Malaysia. Financial Theory and Engineering ICFTE 2010 International Conference on, 190–194. doi: https://doi.org/10.1109/ICFTE.2010.5499399

Zariyawati, M. A., Annuar, M. N., & Taufiq, H. (2009). Working Capital Management and Corporate Performance: Case of Malaysia. Journal of Modern Accounting and Auditing, 5(November 2009). Retrieved from https://www.researchgate.net/publication/259704839

Published
2018-07-01
How to Cite
Kaharuddin, F. S., & Mazlan, A. R. (2018). The Relationship between Working Capital Management and Profitability of Bumiputera-Controlled Companies in Malaysia. Indian-Pacific Journal of Accounting and Finance, 2(3), 24-34. https://doi.org/10.32890/ipjaf.2018.2.3.58
Section
Main Section