The impact of exchange rate exposure and working capital on return on equity

Abstract

This research analyses the various components of working capital of selected manufacturing companies in Pakistan. In this study, a static panel analysis technique is used to examine the effect of exchange rate movements on different components of working capital. Breusch and Pagan LM test used to compare the pooled and random effects. The Hausman test gives the appropriate results for choosing the analysis method. Exchange rate is negatively correlated with return on equity. It has been found that exchange rate correlates positively with receivable days, inventory turnover days, payable days, as well as cash conversion cycles. Depending on the exchange rate volatility conditions, firms may adopt aggressive working capital policy or conservative policy by executives.