The Mediating Effect of Profitability on The Relationship Between Working Capital Management and Shareholder Wealth: Evidence from Colombo Stock Exchange

Abstract

The management of working capital plays a crucial role in enterprises and has a substantial influence on the wealth of shareholders. Working capital management, profitability, and shareholder wealth have emerged as significant subjects of discussion in contemporary discourse, since they have been acknowledged as expansive areas of study. The primary aim of this research was to investigate the mediating role of profitability in the association between working capital management and shareholder wealth, focusing specifically on empirical data from the Colombo Stock Exchange. The working capital management was measured using Current Ratio, profitability was quantified by Return on Investment and shareholders’ wealth was measured through Tobin’s Q. Data for the research was collected by examining the annual reports of 100 non-financial firms listed on the Colombo Stock Exchange. Upon conclusion of the study, it yielded findings that addressed the research inquiries, so signifying the successful attainment of the research aims. This paper examines profitability, working capital management, and shareholder wealth in Sri Lankan businesses. A weak, but significant association between working capital management and all factors was found based on the correlation analysis. It was found a significant impact of working capital management on shareholders' wealth. Further, the findings revealed a significant impact of working capital management on profitability and a significant impact of profitability on shareholders’ wealth. Finally, it was evidenced that profitability plays a partial mediation role on the relationship between working capital management and shareholders’ wealth.