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Submitted in partial fulfillment of the requirements
For the degree of Master of Business Administration
To Research Facilitation Unit (RFU)
At Iqra University
Main campus, Karachi
Acknowledgement
Abstract
The purpose of this research is to study the effect of Corporate Diversification which
has moderator effect between Cash Conversion Cycle (CCC) and Firms Profitability. CCC is
been divided into Inventory Turnover Days (ITO), Account Receivable Turnover Days
(ART), and Accounts Payable Turnover Days (APT). Firm’s profitability is divided into its
growth strategy and is measured by Focus firms and Diversified Firms. This research is
Explanatory research and study is based on secondary data which is published in the
company's annual report. This research is based on the Panel Data and data of 10 years will
be extracted from 30 companies listed on the website of PSX. After descriptive statistics,
Fixed and Random Effects Regression Model, and Hierarchical Moderated Regression
Analysis are used for Inferential Statistics analysis. The findings support the study which
describes that ART has a significant effect on ROA and ROE whereas result explains that
ITO does not have any relation with ROA and ROE. The APT also had a negative relation
with ROA and ROE. The moderation finding states that the interaction between the ITO with
the Corporate Diversification is significant with ROA and ROE both. APT after interacting
with moderation have a significant effect on ROA as well as on ROE. ART, when interacted
with Moderation, is not effecting ROA and ROE as the finding explains.
Key words: Cash conversion cycle, Firm profitability and Moderation analysis
Table of Contents
Acknowledgement................................................................................................................................2
Abstract................................................................................................................................................3
Table of Contents.................................................................................................................................4
Chapter 1: Introduction......................................................................................................................4
1.1 Background of The Study:...........................................................................................................5
1.2 Problem Statement.......................................................................................................................5
1.3 Purpose of Study..........................................................................................................................6
1.4 Significance of the Study.............................................................................................................6
1.5 Outline of the Study.....................................................................................................................7
1.6 Definition of Terms.....................................................................................................................7
Chapter 2: Literature Review.............................................................................................................8
2.1 Underpinning and Supporting Theories / Models........................................................................8
2.2 Empirical Reviews:....................................................................................................................12
2.3 Research Framework.................................................................................................................13
2.4 Hypothesis:................................................................................................................................14
Chapter 3: Research Methodology...................................................................................................15
3.1 Research Approach....................................................................................................................15
3.2 Research Design........................................................................................................................15
3.3 Sampling Design:......................................................................................................................15
3.4 Procedure of Data Collection:....................................................................................................16
3.5 Statistical Technique:.................................................................................................................17
Chapter 4: Findings and Results......................................................................................................19
4.1 Findings and interpretation of results:........................................................................................19
4.2 Hypothesis Assessment:............................................................................................................23
Chapter 5: Discussions & Conclusion..............................................................................................28
5.1 Conclusion:................................................................................................................................28
5.2 Discussion:................................................................................................................................28
5.3 Limitations:...............................................................................................................................28
5.4 Policy Implementation:..............................................................................................................29
5.5 Future Research:........................................................................................................................29
References:.........................................................................................................................................30
Chapter 1: Introduction
This study is based on the variables which are used mostly in finance. Many
researchers (Kaushik & Chauhan, 2019; Prasad, Sivasankaran, & Shukla, 2019; Singhania &
Mehta, 2017; Tripathi & Ahamed, 2016) have research on this topic and try to find out that
how cash conversion cycle reacts with firms performance. These researches were conducted
in India and the data collected of non-financial firms from multiple countries such as
Pakistan, India, Srilanka, Bangladesh, Malaysia, Thailand, Singapore and many others.
(Zhang, 2018) try to identify the relationship that how the cash conversion cycle is necessary
for those firms which focuses on diversification as compare to focus firms. This research was
conducted in the USA. In this study, data has been extracted from US public listed firms from
1980 to 2016. His result interpreted that diversified firms require larger cash. (Bhatia &
Thakur, 2018) in his study discussed that firm’s horizontal growth strategy affects the
It has been observed from the article (Kaushik & Chauhan, 2019) that the firms which
focus on diversification strategy for growth will require a different amount of cash which is
affecting the performance of the firms as compared with the firm which uses focus strategy
for growth. (For example, Newly entrepreneurs which have started their new business their
cash requirement and growth strategy will be different as compared to the businesses which
are existing and have captured the market from long ago).
Research Question:
Q1: What is the moderating effect of Corporate Diversification that is impacting ITO, ART
Q2: What is the moderating effect of Corporate Diversification that is impacting ITO, ART
Q3: What is the relationship of ITO, ART and APT on ROA of the Pakistani public listed
firms?
Q4: What is the relationship of ITO, ART and APT on ROE of the Pakistani public listed
firms?
In the study of (Igwenagu, 2016) he has mentioned that the purpose of study includes
one of the two things whether a theory is being generated or testing and it is mentioned in the
research to creates the interest of the reader. This study purpose is to test the effect of the
CCC and its component on a firm's profitability which is impacting by the moderating effect
This research will help long term investors to identify that in which type of firm they
can invest and maximize their investment value as firms which focus on diversification also
have more risk. This research can also help the suppliers to identify that from where they
have low default risk and in the last, this research can also help the financial institutions such
as banks to identify the type of firms which have high liquidity and which firms have low
liquidity.
This report has five sections. The first section describes the introduction of the study
which states that what previous authors have considered regarding this topic, the gap
identification in the existing literature, the purpose of the study, and to whom it will be
benefited. The second section identifies the existing literature, the testing hypothesis of this
study and the different types of models relevant to this study. The third section defines the
methodology of research, samples and the measurement of those variables. The fourth section
defines the descriptive and inferential statistics and its interpretation. The fifth section
Profitability:
Corporate Diversification:
The growth strategy that the company used for expansion in their business usually is
The low availability of liquidity is one of the major issues of corporations now a day's
which the company take care of (Prasad, Sivasankaran, & Shukla, 2019). Companies to grow
to take care of the investment opportunity that arises which requires the availability of
working capital (Gama & Pais, 2015). Their decision making involves financing those funds
which require the optimal decision making of the sources of generating the capital, allocation
of your funds in investing different types of assets, efficiently managing the assets to generate
revenues which are the source of generating the profitability of a company and in the last the
amount to pay as a dividend to shareholders and amount retained for the future growth of a
The working capital of a company indicates the net current assets worth of an
organization which is used as an important tool for any investor when valuing a company
(Gama & Pais, 2015). When the working capital is converted into day's conversion it is
known as the Cash Conversion Cycle. CCC includes day's conversion of three components:
inventory turnover days which mean that in how many day’s inventories in selling from
shelves, collection form customers in day’s and last the payable turnover in day’s which
means days in which payment is made to the supplier. Lesser the day's conversion of
inventory turnover and receivable turnover it is a benefit for a company and more the payable
turnover it is a benefit for a company because it seems that company investment is converting
into cash quickly and can avail the investment opportunity that arises (Singhania & Mehta,
2017). Management of Working capital is quite critical because not more working capital is
good nor less working capital it means that if you are having less working capital it states that
you don’t have much credit to pay to your suppliers and can face liquidity problem and if you
are having excess working capital it means that much cash is been held not reinvested which
can be a problem for the future growth of a company and can be a negative signal to an
investor which can also decrease firms value. (Kaushik & Chauhan, 2019)
The core objective of the diversified firms is sustainable growth (long term growth) in
future. Some diversified firms believe that they can grow by expanding their business into
multiple markets by the same product line, some believe that expanding their product line
into the similar market, and some believe that expanding geographically will help their
business to grow. All of these strategies are used by diversified firms while some are focus
oriented firms (Bhatia & Thakur, 2018). According to the (Bhatia & Thakur, 2018), the
relationship between Corporate diversification and Firms performance doesn't show any clear
picture yet means whether positive value or negative value for a firm. The firms which are
focus oriented have a high value compare to the firms which are more diversified (Chang &
Lee, 2016). The firms which focus on diversification have high sales as high market segment
With respect to the (Zhang, 2018) firms which are more diversified they don't keep
more cash with them they invest in their business their purpose of doing that is that more
According to the (Jouida, 2018) when companies reach a limit where they can see that
they are not growing they focus on growth strategy. Some firms apply focus strategies which
means that they are willing to grow either with similar products or with new products but in
the existing markets. Some firms focus on diversification strategy which includes adding in
new markets or expanding geographically. (Ramaswamy, Purkayastha, & Petitt, 2017) states
that when firms expand in their product line it is called related diversification and when firms
expand with some new or different products that are known as unrelated diversification. In
the study (Filatotchev, Su, & Bruton, 2017) it is mentioned that firms which properly utilize
its internal resources efficiently and effectively have a full chance of growth and can create
its value only by managing the resources properly. The study published by (Doruk & Ergün,
2019) which states that instability in the economy is also effecting CCC of the firm such as if
the inflation rises consumer prefer more saving then spending which means the demand of
the goods are becoming less which can cause sales to drop and affect firm's inventory
turnover. Secondly, if the GDP of an economy increases it seems that manufacturing sector in
earning more and have increased their spending due to which demand for the goods increases
The concept of “Capital Budgeting” that greater the cash collection quicker the
investment is recovered which shows lower Payback period or Discounted Payback Period
and the positive sign to the investors that cash is not stuck in rolling, investment for future
The concept of “Corporate valuation” that greater the cash flows of an organization
more the value of a firm when discounted to an appropriate Weighted Average Cost of
Capital (Bhatia & Thakur, 2018). The "Indirect Relationship Between the Interest Expense
and Net Profit" which means that the company which is facing an issue of low liquidity will
be focusing on external financing which requires debt and when company debt increases,
interest expense also rises which decrease the profitability of a company. When profitability
decreases, EPS also decreases which decreases the market price of the share and the value of
Resource-Based Theory:
Cash is one of the major resources that a company take cares of. Proper management
of cash is essential for any corporation. If the company fails in managing the cash effectively
and effectively it can face many issues (Aminu & Zainudin, 2015). One of the major issues is
of liquidity risk which states that a firm is short of funds to pay its suppliers (Gill,
Amiraslany, Obradovich, & Mathur, 2019). Secondly, lack of working capital which states
that the company won't have enough cash to meet its operating requirements such as
operating expenses (Konak & Güner, 2016). Thirdly, the requirement for external financing
which states that some value of the firm will be given out in interest payment (Nylund, 2019;
Park, 2019). Proper follow up of receivables from customers is necessary for a firm and this
is because some customers reinvest the cash into their business for growth. By following up
the inventory you get to know how quickly your product is being sold out from the shelves
which tell demand and customer preferences of your product (Hofmann & Kotzab, 2010). It
is only benefitted for a firm if payment to suppliers is lately then collection from customers
because it means that your cash is not involved in rolling instead some portion of recovery is
Agency Theory:
As discussed by (Kabuye, Kato, Akugizibwe, & Bugambiro, 2019) this theory states
that company management is only an agent which means that they are managing the finance
of other people which are known as principles or shareholders of the company. This theory
also explains that there is a huge difference between personal interest and company interest.
Management must make decisions that are benefited for shareholders as the core purpose is to
maximize the shareholder's wealth not to maximize their wealth. This theory is linked with
CCC in such a way that collection from customers, payment to suppliers, credit policy and
follow up from customers is done by the management (agents) of the company and the issue
or conflict may arise that it might be possible due to the personal interest or link with the
suppliers of the procurement manager decision of credit giving can be beyond the corporate
ethics and some additional facility is been given to that individual supplier just because he
has some relation with the procurement manager or the customer collection follow up is not
according to the process just because to maintain the relationship with the customer and these
In the study of (Prasad, Sivasankaran, & Shukla, 2019) he concluded from the
observations that the firms must focus on their targeted working capital to maximize their
profitability hence if they over or undervalued their working capital requirement firms
profitability might be affected. He has used the fixed-effect regression analysis to test his
variables. According to (Gama & Pais, 2015) he studies the causal effect and concluded that
after controlling the firm size and firm debt WCM have a negative correlation with the
profitability of a firm. His result is based on above 6000 observations of small to medium
companies covering 2000 till 2009. The study of (Padachi, 2014) is conducted from fifty-
eight manufacturing firms in Mauritius and have used correlation matrix to gets a conclusion
that huge investment in inventory and receivables can delay your profitability and his result
interpreted that ROA has a positive correlation with capital turnover whereas have negative
Corporate Diversification
Inv Turnover
ROA
A/R Turnover
multiples researches. (Tripathi & Ahamed, 2016) in his study explained by connecting
collection from customers, inventory turnover and payment to suppliers, in short, the whole
operating cycle form ROA. In the study (Akoto, 2013) he was interested to see the operating
cycle impact on ROE. According to the study of (Zhang, 2018), it seems that the operating
cycle is also impacting the Corporate diversification. (Bhatia & Thakur, 2018) in his study
firm.
By going through all the literature in the existing theories, this study is constructed to
see the corporate diversification moderating effect on the impact of CCC on ROE and ROA.
2.4 Hypothesis:
H4: Corporate Diversification has a moderating effect between ITO and ROA
H5: Corporate Diversification has a moderating effect between ART and ROA
H6: Corporate Diversification has a moderating effect between APT and ROA
H10: Corporate Diversification has a moderating effect between ITO and ROE
H11: Corporate Diversification has a moderating effect between ART and ROE
H12: Corporate Diversification has a moderating effect between APT and ROE
Chapter 3: Research Methodology
Deductive. This research focuses on “Deductive Approach” which clarify that the data is
been tested by the theory. The theory is been tested in this study so the objective of the
research is "Explanatory”.
This study is based on the Longitudinal time horizon and in this time horizon, the type
of data is Panel Data. There are four quantitative research designs: experimental, quasi-
researcher, no causal effect and none of the variables are controlled by the researcher in this
In the book (Lohr, 2010) it defines that sampling design is the methodology that how
According to the (Acharya, Prakash, Saxena, & Nigam, 2013) all the individual in the
research after identifying all the characteristics (For example this study characteristics are the
This research is based on the panel data and data of 10 years will be extracted from 30
companies which will be based on focused firms and diversified firms listed on the website of
PSX.
The method used in the research in “Secondary” because all the data is available in
company's annual report and data will be collected of the items or elements of all the
There are two techniques which are proposed for this study data analysis according to
the (Namazi & Namazi, 2016). The proposed technique for this study is “Fixed and Random
variables and “Hierarchical Moderated Regression Analysis” is proposed for the moderating
Statistical Equation:
CORPDIV) + e
CORPDIV) + e
Ethical Considerations:
It states that none of the work is been done by unfair means and proper and valuable
credit is been given to those who had published the literature (Akaranga & Makau, 2016).
When collecting the data also no material is extracted by unfair means and none of the
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