CHAPTER 1 INTRODUCTION
In this chapter, background of the study, research problem, objectives and hypothesis which were encountered in the research have been explained. 1.1. Background of the Study Working capital is firm’s investment in short term assets such as cash, inventory, account receivable etc. In the present context of raising cost of capital and scarce of funds, the importance of managing working capital needs special emphasis in firm financial management decision (Chowghury and Admin 2007). Working capital management is planning and controlling current assets and current liability to eliminate the risk of inability to meet short term obligation on the one hand and avoid excessive investment in current assets on the other hand. (Eljelly, 2004). Profitability is critical to businesses since it can be identified as an indicator of success and long term survival of a firm. When organizations are implementing any projects or doing expansion activities, to attract investors such as venture capitalists, angel investors, the profitability is very important. Since both working capital and profitability are critical aspects of a success of a firm, identifying the relationship between above two variables will contribute to get accurate financial decisions by managers and enhance the value of the firm
Working capital efficiency should affect market value through both denominator and numerator. On one hand, faster turnover rate in working capital should lead to higher expected cash flows. Kargar and Blumenthal (1994) demonstrate that many firms, despite healthy operations and profits, go bankrupt owing to liquidity problems. Efficient Working Capital Management (WCM) can reduce a firm’s likelihood of running into financial distress or bankruptcy. Therefore it causes lowering expected bankruptcy/distress costs. A decrease in those costs amounts to an increase in expected cash flows. Better working capital management can also increase equity value via...