NAVIGATING MACROECONOMIC INSTABILITY: THE MODERATING ROLE OF INFLATION ON THE RELATIONSHIP BETWEEN WORKING CAPITAL MANAGEMENT AND FINANCIAL PERFORMANCE IN MAJOR PAKISTANI NON-FINANCIAL INDUSTRIES

Abstract

The objective of this study was to explore the moderating role of prevailing inflation rates in the relationship of short term liquidity management and financial performance of the major non-financial firms listed at Pakistan Stock Exchange (PSX). The study was quantitative, deductive and retrospective research design and the number of companies in the study were 30 companies in six selected industries (oil and gas exploration, fertilizer, pharmaceutical, cement, textile and engineering). The balanced panel data set was collected by using purposive sampling technique from the audited annual accounts of 300 firm-year observations for a ten-year period (2016-2025). Descriptive statistics, bivariate correlation matrices and panel regression techniques were used in the empirical analysis, which was carried out by the use of EViews Software. The Fixed Effects Model (FEM) was chosen as it was tested using Hausman specification test and confirmed the moderating effect of inflation between working capital management (WCM) and financial performance (Return on Assets (ROA) and Tobin's Q (TBQ) with working capital management predictors (Inventory Conversion Period (ICP), Average Collection Period (ACP), Average Payment Period (APP) and Cash Conversion Cycle (CCC)), and control variables (Debt-to-Equity Ratio (DER), Current Ratio (CR) and Firm Size (FS)). Based on the regression result, it can be seen that ICP, ACP, APP, DER, FS, CCC and interaction term of CCC×INFR are significant factors affecting ROA while Current Ratio is not. The TBQ had statistically significant results for all the variables except Firm Size. The result indicates that there is a relationship between WCM and financial performance and that improvement of WCM would be useful to improve the shareholder value and firm profitability particularly during the period of inflation. The findings are pertinent to the financial managers, policy makers, investors and lenders of non-financial firms in Pakistan, who are interested in maximizing their working capital management in the background of macroeconomic uncertainty.