Working Capital Efficiency and Firm Value: Evidence form Pakistani Firms

Purpose: We examined the association between the efficiency of working capital and firm value for a sample of 49 firms registered on Karachi Stock Exchange for a period of 2004-2016. Additionally, the effect of financing constraints on this association is also examined. Design: Linear and Fixed Effect regression analysis is used to capture the effect of working capital management on firm value. We follow the model which was developed by the Fama and French and use by Pinkowitz et al. and Wasiuzzaman. Findings: We find that working capital efficiency is important for the firms as it affects the firm value and it improves firm efficiency by reducing the investment in working capital. Further, better management of working capital and firm value association is true for financially constrained firms. While, in case of unconstrained firms it the relationship insignificant. Originality: To the best authors’ knowledge, this is very first study on working capital and firm value in context of Pakistan. Hence this work adds valuable contribution in the scarce literature on working capital management and firm valuation relationship. Citation: Shah B, Arif M (2018) Working Capital Efficiency and Firm Value: Evidence form Pakistani Firms. J Bus Fin Aff 7: 320. doi: 10.4172/21670234.1000320


Introduction
The significance of management of working capital is not new in the literature of the finance field. The financial officers of corporate finance identify working capital management1 as being important to their firm value 2 [1][2][3]. Liabilities and short-term asset management required a careful concentration since working capital management takes an important part in the determination of risk, profitability and liquidity as well as the ultimate objective of the firm value. Rehman and Nasr [4] stated that WCM is an important issue for every firm. It directly influences on profitability and liquidity of companies. Working Capital Management holds day to day transactions of financial managers of the firms. Charitou et al. [5] suggest that companies' resources used efficiently, increases the profitability of the company which also cause to reduce the default risk and increases the value of the company. In the same line, Afza and Nazir [6] also believe that implementing bad management policies for WCM negatively influence the profitability. Lots of research carried out on the issue of WCM and the profitability in different countries, some of them are Lazaridis and Tryfonidis [7], Rehman and Nasr [4], Falope and Ajilore [8], Mathuva [9], Mansoori and Muhammad [10], these all studies analyzed the effects of WCM on the profitability of the firms. Most recent studies such as Ponsian et al. Adebowale et al. Ismail, Singh and Kumar, the results of these meta-studies proved that working capital is negatively associated with the profitability, hence these all previous studies is not sufficient to evaluate the working capital effects because these all studies consider the effects of WCM on profitability, but the effects of working capital is still needed to consider examining other aspects such as dividend policies, shareholder wealth, level of taxes and the firm value.
As stated by available literature, a small number of studies have been done in the area of working capital management in Pakistan and with the very best knowledge of the author, there is no research done describe the effects of working capital and the firm value especially in Pakistan. Additionally, no research has found which have used Fama and French Working Capital Efficiency and Firm Value: Evidence form Pakistani Firms

Literature Review
In this section, we discuss on previous studies of the association between the working capital and the firm value. The importance of the working capital management is not new in the corporate finance literature review.

Concept of working capital
The current assets minus from the current liabilities the remainder is called the working capital [11]. The working capital term means an investment of a firm in short-term assets like cash, inventories, account receivables and short securities [12]. Working capital is interval among the expenses of purchases of the material and collections made for the sale of the final products [13]. Further, Pandey [14] management of working capital describes as managing all the working capital components such as cash, account receivables, and debtors, etc. The significance of function of management of working capital is essential to firms because of it involves investment, time as well as the growth prospects of the firm. A number studies were carried out on the association of working capital management with the profitability of the firms. For understanding this concept of working capital, it is necessary to understand its two concepts.
Gross working capital: According to this concept, gross working capital means an outlay of firm's current assets. Current assets describe as those assets that can be easily transformed into the cash or near cash in a year. According to Paramasivan and Subramanian [15] in hand total cash, cash equivalent that a business used to run its daily operations is called gross working capital. Cash equivalent includes short-term investments, inventories, account receivables, marketable securities which liquidated during a year. The total current liabilities are not minus from total current assets. This concept views the working capital and sum of the current assets as two similar terms. This is also called circulating capital or current capital. Further, another aspect of gross working capital is that it used to arrange the finances for funding the current assets. So, the financial executives are supposed to have knowledge about the source and origins, of funds for working capital as well as other outlay where the redundant source may be, for the time being, are invested.
Net working capital: Net working capital defines as current assets minus from current liabilities. The current liabilities are obligations which paid during or within a year and involves account payable, loan payable, notes payable, outstanding expense and bill payable. The mathematical expression is as follows: Net working capital=Current assets-Current liabilities Net working capital may be positive or the negative. Brigham and Houston [16], according to them (NWC positive and negative) both have equal significance for the management. Thus, positive working capital focus on the optimal investments and funding the current assets, while negative working capital indicates the position of liquidity and proposed that how much amount of working capital required to finance from the permanent resources of the funds. It is supposed that current assets are in surplus as compared to current liabilities as it provides them an edge for fulfilling the firm's short-term debt within an operating cycle of the firm operations. Net working capital also comprises the question regarding the well-organized combination of the short-term and the long-term resources for financing the current assets.

Working capital and profitability
Most of the studies analyzed relationship and impact of management of working capital and profitability in different countries and used with different data analysis procedures such as Eljelly [17], Charitou et al. [5], Gill et al. [18], Mathuva [9], Viba et al. [19], Alipour [20], Al-Debi' e [21], Rahman [22], Usama [23], Akbar and Arani [24], Onwumere et al. [25], Pouraghajan and Emamgholipourarchi [26], Ali and Ali [27], Sarbapriya Ray [28], Uremadu et al. [29], Ding and Guariglia [30], Zubair and Muhammad [31], Oladipupo and Okafor [32] all these arrived at the similar conclusion that profitability and different measures of management of working capital had a negative relationship. In contrast with these studies, Lazaridis and Tryfonidis [7], Reddy [33], Ngwenya [34], Barine [35], Owolabi and Alu [36], Mansoori and Muhammad [10], Mousavi and Jari [37], Okwo et al. [38], Ghaziani and Zadeh [39], Mehra [40], Hamid and Waqar [41], Alavinasab and Davoudi [42] found that working capital is positively related to the profitability. Concluding the results of these studies, some authors' proofs that significantly positive association exist between WCM and the profitability, on the other hand, some authors disagree about this relationship. These results indicate that if firms managed their working capital efficiently it may be lead to the profitability. However, this area is still open to the future research. However, previous studies on profitability are still insufficient as ''these financial numbers may have little to do with what is good or bad for the firm'' plus the value of firms' goal is to optimize the profit and safety. Therefore, it is also essential to identify the effects and to know the association between the WC and the firm value. Unfortunately, there is still a lack of studies focuses on the valuation of WC but there is a significant and rising number of works analyses the management of cash and the firm value.

Working capital and firm value
Most of the studies construct the relationship between the cash holdings and the firm value such as by Dittmar and Mahrt-Smith [43], Pinkowitz et al. [2], Kalcheva and Lins [44] found significant positive results that Shareholder protection increases, the value of cash holdings are also increasing at the country level. Luo and Hachiya [45], Dittmar and Marht-Smith [43] and Lee and Lee [46] they found governance/ agency problem is a key factor of negative associated with the value of a firm and its cash holdings, this negativity more seen in the firms with, (I) the lower number of directors from outside, (II) large number of boards and (III) the higher supposed managerial buffer. The firms which hold cash in excess, firm value is discounted by the investors when the mechanism of corporate governance imposed not strong control to hold on managerial uses of the excess cash. Faulkender and Wang analyzed the marginal cash value and found that decline in cash value is due to holding too much cash, better access to capital markets, higher leverage, and higher for those firms distributes cash through dividends relatively to repurchases. Harford [47], Opler et al. [48] study a crosssectional difference in the degree of cash holdings, they had found that companies with more high risky cashflows, not the better accessibility of the capital markets, and stronger growth opportunities to hold a greater amount of cash balances. However, for the first time using Faulkender and Wang model by Kieschnick et al. [49], study the association of working capital management, firm value and agency costs that how it affects this association and find the evidence that investment of an additional dollar in the net operating capital, these investments reached some level may decrease the firm value and in addition, exclusion of the agency costs is important in previous models of in fluence of working capital management on the value of the company. Luo [50] analyzed the efficiency of the working capital affects firm value and the profitability. The study finds that improvement in efficiency of the working capital leads to the increases in the future earnings. The decrease in the cash conversion is the increases in firm value. Further, the firm with the limited the debt capacity may be significantly increasing the firm value. Mohamad and Saad [51] examined the influence of working capital management to profitability and firms' market valuation. The results of their study reveal a considerable negative relation exists between the market value of a firm and profitability. Further, they highlighted the significance of requirement of managing the working capital efficiently to ensure the betterment in the market value of the firm and profitability. Parvaneh and Chashmi [52] analyses the impact of financing methods and the working capital management of the value of listed firms at Tehran Stock Exchange. Find that working capital is significantly related to firm value. Wasiuzzaman [3] examined the association between the efficiency of working capital and firm value, moreover, examined effects of the financial constraint on this relationship. Her study finds that improvement in efficiency of working capital through making the decline in the investment of working capital leads to the greater firm value. Further found that this relationship is affected by the financing constraint faced by the firm.

The effects of financial constraint and unconstrained on association of working capital and firm value
Almeida et al.
[53] examined the cash flow sensitivity and influence of financial constraints on the firm's policies and realized that the constrained firms demonstrate significant positive cash flow sensitivities for the constrained firms whereas, unconstrained firms do not. Moyen [54] analysis influence of financing constraints and unconstrained and have on sensitivities of the investment of firms in their cash flow. Found that constrained firm exhibits higher cash flow sensitivity as unconstrained does not. Faulkender and Wang too, analyzed the hypothesis that cash holdings' extra dollar is more important to shareholders in firms which are financially constrained, examined through different proxies for classified dividend payout ratio, commercial paper rating, firm size and long-term bond rating. They find a negative median for financial constraint and a positive median for the unconstrained firms under all four measures. They recommend that constrained firm's face more difficulties in accessing the capital; firms have to lower their cash holding as compared to the unconstrained firms. In addition, constrained have greater cash holding than the unconstrained firms. Plus shareholders invest more of that cash of the constrained firms rather than on the unconstrained firms for the reason that of the costs related to the cash holdings, including the agency costs. de Almedia and William [55] examined impacts of financial leverage on the relation of working capital management and the company value as well as how this relationship is affected by financial constraint. In addition, they also analyzed the relationship between working capital and the company value. They find evidence an extra dollar investment in the working capital is not more significant, on average, rather than an extra dollar invested in the cash and on average, firm value declines if increasing the amount of the working capital at the beginning of the accounting year. Nakamura and Palombini examined the determinants of working capital and proposed the results that amount of debt, the growth rate can influence the working capital of the firms as well as find working capital is significantly negatively related to company size. Denis and Sibilkov [56] also suggest that level of investment is higher for the constrained firms as well as hold more cash and are increasing the value response to the costly the external financing than unconstrained firms.  [3] also found that efficiency of working capital, notably increases the firm value of the financial constraint firm but it is found that for financially unconstrained firms, the efficiency of working capital is not significant. Baños-Caballero et al. analysis the relationship between the investment in the working capital and the firm value, their results signified that, although a concave relation between the investment in the working capital and the performance of firm always holds, firms with the best possible level of the working capital is finding lesser for the financially constrained than unconstrained firms. Kieschnick et al. analysis the effects working capital management on the wealth of shareholders and find that cash is much valued than working capital. In addition, their analysis exhibits the influence of financing constraints on working capital valuation. Fazzari et al. proposed that the investment of the firm may rely on the financial aspect, such as capital market access, financing cost and accessibility of the internal finance. Fazzari and Petersen proposed that the investment in the working capital is possibly more unstable to the financially constrained as compare to the investment in the fixed capital.
All these previous studies on the value of the working capital verified two things. First, the significant influence of working capital on the value of the firm and second, financing constraints have significantly influenced this relation. On the other hand, these studies are not sufficient and more empirical evidence is required for support of all these results, especially, in the context of Pakistan. In this study, we intend to measure the association between working capital and firm value of listed firms of Pakistan, an emerging market and find whether these all findings all validate for the firms of Pakistan or otherwise. On the basis of these studies conducted in the different countries, we have developed our methodology used Fama and French [1], Pinkowitz et al. [2], Wasiuzzaman [3] model as the baseline for our study.

Objective and Hypothesis Formulation
We used standard free cash flow model of valuation which shows an investment of the firms in their net operating capital. Previous studies proposed that association between working capital and firm value is complicated. Kieschnick et al. [49] and Luo [50] and Wasiuzzaman [3] discussed in their studies that a negative association is generally supposed since decreasing in working capital investments means greater the profitability and therefore, have to higher the firm value. To see this, we used following valuation expression is given by Brigham and Daves [16] and Eharhardt and Brigham for the firm valuation: Where FCF t =NOPAT t −NOWC t −∆Fixed Assets. NOWC t is the change in NWC at time t or the investment in working capital at time t, Fixed Assets t is the change in the value of the firm's fixed assets or its investment the long-term assets, FCF t is the free cash flow at time t and NOPAT t is the net operating profits after taxes at time t. From abovementioned expression it is understood that make an investment in the NWC is an essential determinant of the value of the firm, but from it is not understandable that what is the association is due to the investment in the net working capital is similar to the investment makes in longterm assets in that decrease FCF at the same time as affecting the future cash flow. Kieschnick et al. [49] argue that in fact, this association is more complex the reason behind this is the influence of the WC on the future sales. For example, Brigham and Houston [16] explain that too much stock of inventory is not to be good for today as it will diminish the future cash flow today, but at the as time it helps in any complicated situation seen due to stock-outs which may reasons affect profitability and goodwill and makes troubles in future production.
Similarly, Salek argued that the strict credit policy may decrease receivables and the bad debt losses for today, however, it also decreases the future sales. So, the first object of our study, to find out the association between the working capital and firm value of the firms. Kieschnick et al. [49] point out that each component of working capital has affected future sales and the firm value, especially linked to credit policy and inventory policy of the firm, affecting the firm value; these are a few reasons behind a complicated association. Hence, to test the first objective of our study, we formulate the first hypothesis is: • H 1a -There is a positive association of WC with firm value.
• H 1b -There is a no association of WC with firm value.
Furthermore, larger firms have better access to the capital as compared to the smaller firms. Evidence found in the studies of Almeida et al.
[53] and Pinkowitz et al. [2] that cash holding is more important for the constrained firms than for the unconstrained firms and a source for the increases the value, respectively.
Denis and Sibilkov [56] illustrate that the cash holdings are linked to the high investment for the constrained firms and this is linked to a higher value than that of unconstrained firms and also added that greater the cash holdings are the reasons for increasing the value to the financing fractions. The second objective of this study is to understand that either working capital is influence the firm value in a different way in the constrained firms than in the unconstrained firms. Kieschnick et al. verified that the NWC value is then influenced by the financial constraints. There are different proxies for sorting the firms into financing constrained and unconstrained, however, it is seen that there is no general agreement on the proxies that which one is the best measure for the financial constraint. In our study, we used size as a proxy of categorizing the firms into a financially constrained and unconstrained. On the basis of these previous studies, we develop our second objective of our study; determine the influence of the working capital investment on the valuation of financial constrained and unconstrained firms. Therefore, it is expected that decreasing the investment in working capital may lead to higher value for the financially constrained firms as liken for the unconstrained firms: • H 2a -The negative influence of WC on firm value is greater for the financially constrained firms.
• H 2b -The negative influence of WC on firm value is greater for the financially unconstrained firms.

Model Specification and Variables
For the analysis of this study, we used a valuation model of Fama and French's [1], which associated with characteristics of firm value, utilizes a set of different variables consist of investments, R&D expenditure and earnings to the proxy for the net cash flows. This model modifies by Pinkowitz et al. [2] to study the valuation of cash. In Equation (1) of the free cash flow comprise all characteristics determine by Fama and French in addition to the NWC. Thus, we are making further changes in the model according to the need of this study to include the NWC as a result that finds out the importance and efficiency of net working capital concerning with firm value of the firms. To test the two hypotheses, the mathematical expression of the model is as follows: Value it =α 0 +β 1 Earnings+β 2 ∆Earnings it +β 3 ∆Earnings it+1 +β 4 NetAsset it +β 5 ∆NetAssets it+1 +β 6 Interest it +β 7 ∆Interest it +β 8 ∆Interest it+1 +β 9 RnD it +β 10 ∆ RnD it +β 11 ∆RnD it+1 +β 12 Dividend it +β 13 ∆Dividend it +β 14 ∆Dividend it+1 +β 15 Cash it +β 16 NWC it +β 17 ∆Value it+1 +e it Where X it is the level of the variable X in the year t ; ∆X it shows change in X over year t-1 to the year t ; ∆X it+1 shows change for X over the year t+1 ; e is the error term.
Whereas, Value represents the firm value (dependent variable) calculated as the firm's total market value. It is computed as the common stock price of firm time share outstanding at the end of the year (or its capitalization) plus preferred stock (taken, if available, par value, liquidity value or redemption value) plus total book liabilities minus investment credit, deferred taxes, if available. We used common stock price shares outstanding plus total liabilities minus deferred taxes.
The independent variable of this study, we used to measure Earnings as before extraordinary items plus interest expenses as in the scenario of Pakistani firms remaining two items investment tax credit and income statement deferred tax credit is not found in financial statements. Net Asset is computed as total assets minus marketable securities and cash and minus the portion of the net working capital (i.e., Inventories plus account receivable). As a measure of leverage Fama and French used interest expenses, according to them it expresses the leverage policy of the firm, so we used interest expense (interest) in our variable set. Fama and French [1] and Pinkowitz et al. [2], research and development expenditure include in their variable set because it is necessary for the USA. In Pakistani firm's cases, it is not compulsory, but it is included in the model for the robustness as shown in Pinkowitz et al. [2] and Wasiuzzaman [3]. R&D expenditure (RnD) is computed as the R&D expenses of the firm (assumed 0 if missing) for all firms analyzed in this study. Hence this variable, in this study expected insignificant. We measure dividend policy (dividend) as a common dividend paid out by firms, similar to the study of Pinkowitz et al. [2]. We measure cash holdings using cash and marketable securities to the net assets compute as total net assets minus from marketable securities and cash, similar to Fama and French [1], Opler et al. [48]. All the variable set on the book value of the assets in the year t to solve the problem of the heteroscedasticity.
Next, for the examining the effects of financing constraints on net working capital valuation; we divided firms into two groups on the basis of size. There are various proxies' presents by Fama and French [1] longterm board rating, dividend policy, size and commercial paper rating. But, again in Pakistani firm's cases, it is difficult to find these proxies due to the not active participation of Pakistani firms in issuing these two securities. For the proper categorizing firm's dividend payout is also not much effective as the proxy of the financing constraints. Therefore, size has its own limitation as a measure for the financing constraint, for this study it is considered most appropriate for classification. First, we compute the size of all firms included those which are excluded from the sample as calculate median for the entire population firms. Size calculates by the means of natural logarithm of total assets, and then the median is computed for every year over the period of 2004-2016. Then, the firms with an under the value of median consider "constrained" and with a higher value than median place "unconstrained" group. Previous studies mostly used decile for categorizing firms but we used the median because of sample size limitation. Generally, it is seen that some of the firms are found under the category of constrained but also found in another year under the unconstrained category. It is expected from the studies of Fazzari and Petersen, Faulkender and Wang and Denis and Sibilkov [56] gives evidence, smaller firms tend to have higher financial constraints and therefore these firms a higher value will be allocated to NWC investment.

Data and Summary Statistics
In order to test the hypothesis formulated in this paper, we used the model developed by Fama and French [1]. The study used data from Karachi Stock Exchange (KSE) for the period of thirteen years from 2004 to 2016. Starting with an initial sample of 194 firms and data collected from the website of KSE and Opendoor.pk database, all firms in financial services were excluded from the sample as these firms working capital is different in nature as compared to financial firms. Then, firms for which not all required data variables were available were eliminated. After the elimination of all these firms, the final sample of 49 firms of twenty-three different industrial sectors of the Pakistani economy. Classification of the data on the basis of financial constrained, 33 firms were a financial constrained group and 13 were from unconstrained. This paper is used based on quantitative secondary data in nature using annual published reports of firms mentioned in Table 1. Summary Statistics. , Malaysian firms, some differences can be highlighted. The average level of Cash holding (cash t ) is (0.043); this value is much higher compared to the average level of NWC (0.168), this finding found to be consistent with previous studies. The maximum value for cash holding is (0.573) and for NWC (1.375). While the average level of dividend is higher (0.050), than it is in Malaysia (0.013), Brazil (0.0094) and then in French (0.001) but the minimum and maximum values (0, 1.105, respectively) is in line with the result of Malaysia (0, 1.106, respectively). Further, on average, investment in net assets (NetAsset t ) is much higher in Pakistan (0.672), is a little bit closer to one of Brazilian firms (0.3976) but very far from that Malaysian and French firms (0.013 and 0.038). Again, change in earning (Earning t ) is much higher in Pakistan (0.098) than that of previous studies Malaysian firms (0.036777), Brazilian firms (0.0694) and French firms (-0.005) are negative in Us firms (0.011). Table 2 reports the calculation summary of descriptive statistics significance in the difference of the mean values for each variable for the constrained and unconstrained firms.
The variables, except Earning t , Earning t+1 , Dividend t , and Dividend t+1 ; the mean is higher for constrained firms. Constrained firms have a higher level of NWC t (0.155933379 compared to 0.195327154). Constrained firms are found to be higher Earning t (0.119142837 as compared 0.055248985) despite the financing constraints faced. On the other hand, Net Assets t and Net Asset t+1 are found to be higher (59.19699461 as compared to 0.034537306 and 0.019338863 against 0.015381063, respectively). Net Assets t+1 variable shows a significant difference in the mean at the level of 10 percent. Moreover, interestingly found, the constrained firms pay higher dividends on average while difference is insignificant for payout. Also cash holding, the mean is higher for the constrained firms (0.048885697) as compared to the unconstrained firms (0.032138709), these statistics results are similar with the findings of Faulkender and Wang. Since access to the external funds is a problem for the constrained firms, mostly they rely on internal funds and so hold the higher level of cash balances.

Analysis of Result
In this section, we analyze the result of regressions for the panel of the firms that try to analyze the effects of working capital on firm value for the period of 2004 to 2016. The data comprises natures of time series because the study used thirteen year time period and crosssectional in nature because it has 49 firms. Therefore, the researchers used OLS regression technique for analysis with dummy variables for measuring the effects of WC and firm value. First, we analyze the results of different regression shown in Tables 3-5 for the entire sample of the firms, in order to capture the effects of working capital on firm value. Next, we, divide the sample into two groups financial constrained and unconstrained and sought to separately analysis the effects of financially constrained on the relationship of working capital and firm value and the result of regression shown in Tables 6 and 7.

Effects of working capital on firm value
Panel (I) of Table 3 presents the result of linear regression analysis for entire sample to seek the effects of WCM on firm value for the period of 2004-2016. NWC t is highly significant (p=0.006) at the level of 1 percent and negatively effects the firm value. Earnings t and ∆Earnings t both are found to be highly significant (p=0.000) at the level of 1 percent and positively related. ∆Earnings t+1 are found to be insignificant. Interest t is found to be highly significant (p=0.001) at the level of 1 percent and has positively related. ∆Interest t+1 are found to be significant (p=0.083) at the level of 10 percent and negatively related to the firms and ∆Interest t is found negatively insignificant. Dividend t is significant (p=0.020) at the level of 5 percent and positively affect the firm value. ∆Dividend t and ∆Dividend t+1 are found to be negatively insignificant. ∆Net Assets t , ∆Net Assets t+1 , and Cash t are found negatively insignificant related to the value. Table 4 reports the result of linear regression for the entire sample, for constrained and unconstrained firms, the analysis examines the effects WCM on firm valuation. The finding of this table indicates that net working capital (NWC t ) is a significant variable (p=0.011) at the level of 10 percent and the coefficient (-3.308), what the result suggests that the decreased valuation of the investment on net working capital is primarily driven by its financing effects. Earning t is found highly significant (p=0.000) at the level of 1 percent. We note that ∆Earning t and ∆Earning t+1 are found to be positive insignificant. Interest t and ∆Interest t+1 are positive and negative highly significant (p=0.000 and 0006, respectively) at the level of 1 percent. But ∆Interest t is negative insignificant. Dividend t is positive significant (p=0.032) at the level of 10 percent while ∆Dividend t and ∆Dividend t+1 are negative insignificant. ∆Net Assets t and ∆Net Assets t+1 are found negative and positive insignificant respectively. However, in this Panel, the variable Cash t seems to be negative insignificant.

NWC
Panel (III) of Table 5 provides the Fixed Effect Model regression result to capture the effects of WCM on firm value for both groups constrained and unconstrained firms. The variable NWC t are found negative highly significant (p=0.005) at the level of 1 percent. This result recommends that the negative effect of an additional investment in net working capital was driven by the need to the finance it and so bear the additional financing cost. So, precisely, we find that the investment of an additional dollar in net working capital is less in worth than invested a dollar in the cash and that increasing the level of this investment increase the valuation of firm at the reduced rate, these both effects are driven by the cost of financing associated with this investment. Earning t and ∆Earning t are positive significant (p=0.022 and 0.057 respectively) at the level of 5 percent. ∆Earning t+1 are found to be positive insignificant. Interest t seems to be positively significant (p=0.097) at the level of 5 percent. ∆Interest t and ∆Interest t+1 seem to be positively and negatively insignificant, respectively. Dividend t is found to be positive significant (p=0.065) at the level of 5 percent and ∆Dividend t+1 also seem to be negative significant (p=0.087) at the level of 5 percent while ∆Dividend t are seemed to be negative insignificant in this Panel-III. ∆Net Assets t is fount to positive significant (p=0.031) at the level of 5 percent and ∆Net Assets t+1 and Cashtare positive insignificant.

The effects of financial constraint and unconstrained on the relationship of working capital and firm value
Next, we sought to separately analysis the firms; firm size is used for the separation of the sample into two groups: financially constrained and unconstrained firms. Panel-A of Table 6 presents the linear regression results for financially unconstrained firms. Interest t is highly significant at the level at 1 percent and has positive effects on the firm value while ∆Interest t and ∆Interest t+1 are positive and negative insignificant related, respectively. Dividend, Dividend t and Dividend t+1 are found positive but insignificant effects on the firm value. This can be clarified by the small sample and short time period as compared with the prior studies like Faulkender and Wang and Kieschnick et al. ∆Earning t+1 and ∆Net Assets t are found negative as well as insignificant effects. Earning t , ∆Earning t , Net Assets t+1 and Cash t are positive but  Significance level=0.01* shows 10%, Significance level=0.05** show 5% and Significance level=0.001*** show 1% Significance level=0.01 *shows 10%, Significance level=0.05 **show 5% and Significance level=0.001*** show 1% Significance level=0.01 * shows 10%, Significance level=0.05** show 5% and Significance level=0.001*** show 1% found insignificant effects on firm value. RnD t , ∆RnD t and ∆RnD t+1 (0, if data missing) and also expected insignificant. Net Working Capital is also negatively related and has insignificant effects the firm value. It is noted that the value of the coefficient of Cash is found higher than the coefficient of Net Panel-B of Table 7 presents the results for the financially constrained firms. The coefficient of NWC t is negative and significant at the level of 5 percent, which is what originally expected, additional investment in the dollar in working capital, at the current level of working capital, reduce the firm value by $1.33. We believe that this evidence helps to understand the importance of efficient working capital management. Furthermore, the results are consistent with the results of Deloof et al. that confirm that firms looking for to maintain an optimal level of working capital in order to maximize their value. The coefficient of ∆Net Asset t and ∆Net Assets t+1 are positive and also found statistically significant at the level of 5 percent; the coefficient of Cash t is positive and significant at the level of 5 percent, which means one dollar investment in cash increase the value of the firms by $3.10. Earnings t is highly significant at 1 percent with a positive coefficient, while ∆Earnings t and ∆Earnings t+1 are found to be positive but insignificant. Again, it is noted that Interest t and ∆Interest t+1 are highly statistically significant at 1 percent with positive and negative effects respectively. ∆Interest t is found positive but insignificant effect on valuation. Dividend t is positive and highly significant at 1 percent while ∆Dividend t and ∆Dividend t+1 are found to be negative as well as insignificant.
Comparison between financially constrained and unconstrained firms presents that the coefficients of variables are higher for constraint firms than the unconstrained firms. Earning t , Interest t , Interest t+1 and Dividend t are highly significant (p=0.000) at the level of 1 percent for constraint firms but not for the unconstrained firms. Net assets t+1 , NWCt, and Casht, are highly significant in affecting the firm value (p =0.046, 0.055, 0.092 respectively) at the level of 5 percent for the constrained firms but insignificant for the unconstrained firms, indicates that the contribution of NWC and Cash is higher and more important for the constrained firms in contrast to unconstrained firms. The coefficient of Net assets t+1 is higher for constrained firms whereas the coefficient of constrained firms (3.10) of Cash t is lower than that of unconstrained firms (4.50) and the coefficient of constrained firms (-1.535) NWC t is higher than that of the unconstrained firms (-0.265). This indicates that the sensitivity of cash and net working capital is higher for the financially constrained firms. Interest t is found highly significant for both (p=0.000 and 0.005) at the level of 1 percent but the value is higher for the constrained firms whereas, Interest t is only variable turns significant for unconstrained firms but the value is higher for constrained relative to the unconstrained firms. RnD t , RnD t , and RnD t+1 remain insignificant for the both group of firms. Earning t , Earning t+1 , Interest t , Dividend t , Divident t+1 and Net Assets t+1 are insignificant for both group of firms but Earning t , Interest t , Dividend t , Divident t+1 the valued higher for unconstrained firms except Earning t+1 , and Net Assets t+1 valued are higher for constrained firms.

Discussion
Interestingly, the evidence of our findings is similar to the findings of Faulkender and Wang, Autukaite and Molay, Kieschnick et al., and Wasiuzzaman [3]. The investment of an extra dollar in the net working capital is less than that an extra dollar invested in the cash. However, evidence given in Fazzari and Peterson the investment in the working capital is more sensitive in financially constrained than investment in the net assets. The mean values for all variables are higher for the constrained firms except for Earning 1 , Earning t+1 , Dividend 1 and Dividend t+1 . This is due to the unconstrained firms have better access to the capital market.
The result of regression analysis also indicates consistent evidence in Faulkender and Wang and Wasiuzzaman. Next, we analyzed the net working capital as it represents the effects of the value of a dollar invested in the net working capital the conditional on the level of current net working capital investments. We examine the entire sample as well as divide the sample into two groups financial constrained and unconstrained. The results of our study make it clear that why corporate finance emphasis on the importance of working capital management and firms too. Examining the regression Panel-I, II and III of Tables 3-5 Significance level=0.01 * shows 10%, Significance level= 0.05** show 5% and Significance level=0.001*** show 1% Significance level=0.01 * shows 10%, Significance level= 0.05** show 5% and Significance level=0.001*** show 1% and its added value is reducing at a rate of $-3.038 per extra dollar of the investment. These findings also in line with Fazzari and Petersen that marginal valuation argument of the investing in the working capital. Evidence of our study, reveals the significance for the firm's efficiently manages their net working capital well ordered as possible . The result  of Panel-I, II and III of Tables 3-5 shows Earnings t is significant and positively related. Further, ∆Earnings t is positive significant in Panel-I  and II of Tables 3 and 4 but ∆Earnings t+1 is insignificant in Panel-I,  II and III of Tables 3-5 also ∆Earning t+1 is insignificant in Panel-II of  Table 4. Interest t is highly significant and has positively related in Panel I and II and III of Tables 3-5. Although, ∆Interest t+1 is to be negatively significant related to the firms in Panel I and II of Tables 3 and 4 but insignificant in Panel-III of Table 5 and ∆Interest t is found negative insignificant in all Panel of  Tables 3-5 shows Cash t are found negative and positive insignificant related to the value, respectively.
Looking at the effects of financial constrained and unconstrained on the relationship of the working capital and valuation of firms, we examine linear regression result shown in Panel-A of Table 6 for unconstrained firms and fixed effect regression result shown in Panel-B of Table 7 for constrained firms and key results are again similar with Faulkender and Wang, the values of constrained are higher than that the values of unconstrained firms.
Looking at differences in the coefficient for constrained against unconstrained, another interesting finding emerges. Earning t , Interest t , Interest t+1 , and Dividend t are highly significant for constraint firms but not for the unconstrained firms and also coefficients of these variables are higher for the constrained relative to the unconstrained. The average value of a dollar distribution through dividends is higher in the group of constrained firms. Firms which pay low dividends also have less cash flow than the high dividend firms. The reason behind this, firms with low dividend consists of unconstrained firms and these firms' shows the higher sensitivity for cash flow due to their access to the external markets since firms with low dividend should be effective access to the external markets than that high dividend firms.
Net assets t+1 , NWC t , and Cash t are highly significant in the group of constrained firms but insignificant in the group of unconstrained firms. The coefficient of Net assets t+1 and NWC t are higher for constrained firms. This indicates that the sensitivity of net working capital is higher for the financially constrained firms. These results suggest that market responds more positively to the new investments made by the constrained. Whereas the coefficient of the constrained firms for Cash t is less than that of the unconstrained firms, is not consistent with the evidence of Faulkender and Wang and Shaista Wasiuzzaman, they suggest that cash reserve is more valuable to the financially constrained firms and mostly reliant on the internal funds and therefore the level of cash holding is higher than do that can be ease of the access more cash when they need it. Interest t is highly significant for both groups of firms whereas, Interest t is only variable turns significant for an unconstrained group of firms but the value is higher for constrained relative to the unconstrained firms. RnD t , RnDt, and RnD t+1 remain insignificant for the both group of firms. Earning t , Earning t+1 , Interest t , Dividend t , Divident t+1 and Net Assets t+1 are insignificant for both constrained and unconstrained firms but Earning t , Interest t , Dividend t , Divident t+1 the valued higher for unconstrained firms except Earning t+1 , and Net Assets t+1 valued are higher for constrained firms (Appendices 1 and 2).

Conclusion
Management of working capital is essential to the firm value. There are no studies published to date available on the effects of working capital on the valuation of the firm, especially in the context of Pakistan; even though the fact that textbooks of corporate finance discuss this subject as if it is crucial to the valuation of the firm. Consequently, in this study, we aim to determine how working capital affects the firm valuation and provide evidence on the basis of our findings for Pakistani Firms.
Further, and just importantly, in addition, we also determine the effects of financially constrained and unconstrained on the association of working capital management and the firm value. Using a sample 49 Pakistani firms listed on Karachi Stock Exchange for a time period of 2004 to 2016 and a total 490 observations. The evidence of regression analysis exhibit how vital is to the management of working capital efficiently and this is truly associated with financially constrained firms as it affects the firm value while for the unconstrained firms it is not true that better management of working capital is crucial for the firm value. This is confirming that financially constrained firms seek to hold the optimal level of the working capital for maximizing their firm value.
The contribution of this study to the limited but growing literature on the working capital management, an area that has not been given much attention it needs, especially in the context of Pakistani firms. The results of this study would be helpful for the managers and highlight the importance of efficient working capital management, not only managers but also helpful for the investors in evaluating the management of working capital as it may be able to give some valuable indication about the financial wellbeing, in addition, to choose the best investment options.