Abstract:
Corporate financial officers identify the Working Capital Management (WCM) as being
important determinant to their firms‘ value. WCM is defined as the ability of the organization
to fund the short term assets and short term liabilities. In practice, WCM has become one of
the most important issues in the organizations. The issue is vital in the manufacturing sector
organizations due to employment of high amount of short term assets in day to day
operations.
The study investigates the impact of firms‘ WCM Investment Policy (IP) on firm value in Sri
Lankan companies. The sample of the study was 36 manufacturing companies listed in the
Colombo Stock Exchange for the period of 2008/09 to 2012/13 which comprises 180 firm
year observations.
Correlation and panel regression analysis were employed as measures of analysis. Firms‘ IP
was used as an independent variable. Firm value was measured in terms of Economic Value
Addition (EVA) as dependent variable of the study.
IP explains the way in which a firm invests their funds in short term or long term assets.
Where a minimal level of investment is in current assets in comparison with fixed assets, it
closes to the more aggressive IP and percentage of current assets on total asset was used as a
measurement of IP. EVA indicates economic profitability and it assesses the managerial
effectiveness in a given year by measuring profits, after subtracting the expected return to
shareholders. Creating sustainable improvements in EVA is synonymous with increasing
shareholder wealth (Stewart, 1991).
Both correlation and regression analysis results proved that there is a statistically insignificant
but negative relationship between IP and EVA providing evidence that manufacturing
companies having more current assets as a percentage of total assets will decrease its EVA of
manufacturing sector companies in Sri Lanka.
