Working Capital Management And The Profitability Of Local And Foreign Non-Financial Firms Listed On The Gse.

ABSTRACT There is ongoing conversation among researchers and practitioners on the role working capital variables play in determining the profitability of firms. The findings of previous research works have proven to be far from conclusive, having shown that the role of working capital management can, at best, be context specific. This means that there is the need to examine the relationship between working capital management and profitability in different contexts. While extant literature has shown research on this relationship, studies in Ghana have not considered what the differences will be for/in this relationship for local and foreign firms. The purpose of this study was, thus, to determine the relationship between working capital management and firm profitability in Ghana using data on the Ghana Stock Exchange (GSE) listed non-financial firms and compare the results for local and foreign firms. The study used the fixed effects technique to estimate a model on a panel of eighteen (18) firms from the period 2003 to 2016. The study found a positive relationship between Account Payables Period (APP) and Return on Assets (ROA) for all samples, that is, the full sample and the local and foreign sub-samples. This relationship was however only significant for the foreign sample. The relationship between the Inventory Conversion Period (ICP) and ROA was found to be negative for all samples. These relationships were not statistically significant. The results for Receivable Collection Period (RCP) differed from one sample to another. Whilst it was positive in the foreign and local samples, it was negative in the full sample. It was, however, statistically significant only in the local sample. Finally, the results also show that Cash Conversion Cycle (CCC) has a negative relationship with ROA for all samples. xiii These results led to the following conclusions: First, working capital management has limited effects in determining the profitability of the listed firms that were sampled for this study. Secondly, good working capital management has a more beneficial effect on the profitability of foreign firms than on local firms. Thirdly, the only working capital variable that can be said to be able to improve profitability of local firms is the receivables collection period. Finally, the study concludes that the working capital management practices that work for local firms listed on the GSE do not yield the same results as for their foreign counterparts. It is recommended that foreign firms should negotiate for more lenient and flexible trade credit periods with their creditors. Local firms, on the other hand, should restrict the trade credit period allowed to their customers. Foreign firms should also aim at achieving overall shorter operating cycles in order to achieve the optimum level of profitability. Local firms should pursue firm growth in order to enhance their profitability.