The Impact of Capital Expenditure on Working Capital Management of Listed Firms in Pakistan

IntroductionThe three major decisions of corporate finance are related to capital structure, capital budgeting and working capital management decisions. Working capital management means the administration of current assets; namely, cash, marketable securities, receivables and inventories, and current and short term liabilities, and fixed assets. Since it is responsible for the profitability and liquidity of the firm, it has become an important component of corporate finance that needs to be managed efficiently to ensure capital adequacy (Appuhami, 2008; Valipour, Javed & Kobra, 2012; Rahman, et al. 2012). Working capital management of firms is important for the managers: if the working capital should decrease, managers will face problems in their daily operations. For the purpose of a smooth operation of firms, they need to plan and control current assets and liabilities to avoid the problem of paying current liabilities and unnecessary investment in the working capital that may lead to bankruptcy (Largay & Stickney, 1980). However, the amount of working capital which is adequate and desirable cannot be determined easily since it varies from business to business and industry to industry; hence, the focus should be on how efficiently a firm manages its working capital. In this paper, we attempt to examine how capital expenditure affects the management of working capital of some listed firms on the Karachi Stock Exchange (KSE).Literature ReviewThe relationship of capital expenditure to working capital management is well discussed in international literature which is briefly presented here. First, we present an overview of studies that focus on capital expenditure, followed by a brief review of literature on working capital management.Appuhami (2008) examined the impact of firms' capital structure on the working capital management of firms listed on Thailand Stock Market. The study found that the firms' capital expenditure had significant impact on the working capital management. In yet another study, Appuhami (2009) investigated the relationship between corporate investment and working capital management. It was concluded that whereas the net liquidity balance had positive relationship with corporate investment, it had negative relationship with working capital requirement. The results further concluded that these Thai firms managed their working capital requirements efficiently which lead to high net liquidity balance of these firms in high growth time.Valipour, Javed & Kobra (2012) investigated the impact of capital expenditure on working capital management of firms listed on Tehran Stock Exchange. For this purpose, they used the net liquidity balance and working capital requirement as proxies of working capital management. The study was conducted in two phases; the first phase examined the impact of capital expenditure on net liquidity balance and the second phase considered the impact of expenditure on working capital requirement. The study found a positive impact of capital expenditure on working capital requirement.Rahman, et al. (2012) examined the impact of capital expenditure on working capital management of Pakistani cement, sugar, and energy sector industries during the period 2004 to 2010. They used the net liquidity balance and working capital requirement of these firms as proxies to measure their working capital management. The study found a negative but significant relationship of the net liquidity balance and working capital requirement with capital expenditure. The reason for negative relationship of the aforementioned variables was that the firms could not increase their most liquid assets while making their capital expenditures. These firms did not have internally generated funds for fixed investment processes and did not manage the non-financial components efficiently to increase their cash balance.Smith (1973) argued that chief financial officers of firms usually give more time and attention to daily working capital management processes than to properly manage current assets and liabilities which leads to the failure of good working capital management. …