Liquidity, Level of Working Capital Investment, and Performance in an Emerging Economy

Th research investigates the relationship between current ratio, the level of investment in working capital, and profitability of firms in Bangladesh for the years 1998-2014, employing non-financial firms listed on the Dhaka Stock Exchange (DSE) for analysis. Results show that the more profitable companies tend to be able to better maintain their level of investments in current assets. Quantile regression points to a non-linear relationship between profit performance and working capital. We conclude that firms with better profitability maintain a healthier level of investment in working capital assets, wheres firms with inadequate investment in current assets have no meaningful relationship with performance. If the latter firms get an injection of working capital, then they may be able to move to a state where they can generate reasonable profits. The paper presents a general argument against tweaking working capital levels and recommends focusing on other functions of the business to increase profitability and value.