Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

The Impact of Sustainable Energy on Liquidity and Financial Performance of the Textile Industry

The Impact of Sustainable Energy on Liquidity and Financial Performance of the Textile Industry Sustainable energy is considered to be the most important input for any organization owing to its noteworthy impact on the liquidity and performance of the firms. Hence, it is imperative to evidence the impact of sustainable energy on a firm’s liquid- ity and performance. As the disruptions in sustainable energy adversely impact the performance of manufacturing firms by reducing production directly and amplifying operational leverage, it is significant to investigate the impact the sustainable energy on a firm’s liquidity and performance. Further, the impact of disruptions in sustainable energy is size specific, there- fore, the study also assumes the moderating role of firm size in shaping the stated relation. So, the aim of the current research is to investigate the impact of sustainable energy supply on liquidity and performance of the firms keeping in view the moderation effect of firm size. Using financial data of 120 textile firms from the year 2010 to 2022, the current investiga- tion has employed a panel data methodology to quantify the impact of the sustainable energy disruption on a firm’s liquidity and performance. The results revealed that the sustainable supply of energy sources significantly impacts liquidity and working capital management as well as the performance of the textile sector in Pakistan. Further, firm size tends to moderate the rela- tion between sustainable energy supply and performance. Although the effect is found to be partially moderated. It is recom- mended that in the long run, the firms might opt for alternate energy sources resulting in savings from huge performance losses. Encouraged by the inadequacy of empirical evidence in developing economies like Pakistan and keeping in view the importance of working capital management and performance efficiency, the current work is the need of the day. The impact of sustainable energy sources must be researched to gauge the impact on the manufacturing industry’s performance. Keywords sustainable energy, liquidity, performance, operational leverage, textile sector liquidity creation for the firm, working capital has Introduction played a substantial role during economic turmoil Management of working capital plays an important role (Ban˜ os-Caballero et al., 2019; Enqvist et al., 2014). It in the growth and survival of manufacturing firms. The has also been widely reported in previous literature that effective management of working capital leads not only liquidity constraints has been the important factor which toward value creation and profitability but also enables hinders firms’ performance (Afrifa, 2013) while excess firms to react to market changes efficiently while the liquidity may impact firms’ performance adversely inefficiencies may trigger firms to insolvency and dissolu- (Najib et al., 2021). Therefore, to maintain a balance tion (Padachi & Carole, 2014). Therefore, the factors between liquidity and solvency is important for the firms that impact the management of working capital has been to avoid any negative consequences. an important area for past researchers and scholars to explore (Nyeadi et al., 2018). Keeping in view this notion, the importance and impact of the short-term financial decisions on firm’s performance has widely Lahore College for Women University, Lahore, Pakistan IB&M, University of Engineering & Technology, Lahore, Pakistan been argued in corporate finance literature (Anton & Afloarei Nucu, 2020; Najib et al., 2021). Almost all Corresponding Author: authors agreed that the important of working capital Muhammad Fiaz, Faculty of Management and Business Administration, management is inherent in firms’ ability to create access Lahore College for Women University, Jail Road, Lahore 58000, Pakistan. liquidity (Knoll & Senge, 2019). So as a buffer of Email: mfiaz@lcwu.edu.pk Creative Commons CC BY: This article is distributed under the terms of the Creative Commons Attribution 4.0 License (https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of the work without further permission provided the original work is attributed as specified on the SAGE and Open Access pages (https://us.sagepub.com/en-us/nam/open-access-at-sage). 2 SAGE Open Existing literature provides noteworthy arguments by many ways. First, it directly discusses the issue sus- that firms bankruptcy will be caused by ignoring short- tainable energy supply failures as a determinant of work- term financing needs, adverse selection of financial ing capital by extending previous evidence. Secondly, it opportunities and high involvement in long run invest- provides direct evidence about the role of the energy cri- ments (Aktas et al., 2015). So, it is important to maintain sis on firms’ performance taking into account the moder- a balance between liquidity and performance to avoid ating role of firm size. Although, the relationship of energy crisis and firm performance is obvious still there adverse outcomes. Hence, the shortage of working capi- is need to address the resolutions by taking into account tal has become the primary motive for the firms’ insol- vency (Tufail, 2010). Therefore, the management of firm size that the current investigation will provide to working capital is foremost indispensable for firms practitioners to enable managers to manage working owing to the fact that it can generate balance between capital needs, and the performance of the textile compa- current assets and current liabilities to handle any imbal- nies keeping in view real-time time factors. The present ances in working capital needs but it also has the ability research aims to put forward specifically the distress to handle unexpected liquidity shocks to cover opera- caused by electricity crisis on listed textile companies. In tional expenditures (Asif et al., 2021). fact, as per the best of authors knowledge, no existing Many past studies have directly examined the factors study has stated the transformations between the pre and post-energy crisis leading to firm’s distress by incor- that impact the working capital management on firm per- porating panel data from selected textile companies of formance (Cole et al., 2018; Mensah, 2016; Sarwar, 2020) Pakistan for the time period of 2010 to 2022. but scare evidence are available which analyzed the real time determinants of the working capital management like labor strike, resource availability, and sustainable Overview of the Pakistan Textile Sector energy supply, etc. As far as the economy of Pakistan is concerned, electricity is the most important determinant Textile sector is the largest sector under the umbrella of that have direct impact on firms’ working capital man- non-financial firms having 423 textile units currently. agement and ultimately performance. Like, during sum- Textile sector is considered important for the growth of mer where sustainable energy supply is a regular failure, Pakistan as it contributes 8.5% toward the GDP of the firms have to manage alternate energy supply in the form country. In the year 2020, the textile exports for the of investment in heavy generators etc. which increased country reached to 1.28 billion dollars reported by The the total cost of the production. Further, the continuous News. Further, the textile exports have recorded an changes in fuel prices can disturb the operational budget extraordinary growth of greater than 17% in the value when there will be availability of expensive fuel to run added sector. As per the recent data, the textile industry generators to maintain steady production. In case, where contributes almost more than 60% of total exports firms are not able to provide sustainable energy supply, amounting almost to 5.2 billion US dollars. The textile the production will expected to be stop or disturbed industry contributes 46% to the total output produced impacting sales revenues directly. This case would be and exported by Pakistan. severe if firms will not be able to maintain their produc- Taking into account the importance of textile sector tion which will ultimately lead the firms to insolvency. for the growth of the Pakistan economy, sustainable The ongoing discussion clearly indicates that the tena- power supply plays an important role toward the con- cious problem of sustainable energy supply disruptions in duction of smooth operations. Therefore, the current the form of electricity breakdowns can impact the firms’ study provides notable arguments as how the textile liquidity and performance by aggregating total expenses firms can cope with the power shortage and what alter- and disturbing sales targets. Hence, the need to identify native measures can make steady working capital man- the impacts of sustainable energy/power supply on the agement leading to reducing its adverse impact on liquidity and working capital needs of the manufacturing overall performance. sector and ultimately its impact on performance is Figures 1 and 2 defines the economic reality regarding inevitable. the power consumption requirements by each sector and Further, previous studies have also shown their con- supply capacity of power resources. It is quite obvious cerns regarding the role of firm size on firm performance that current generation of power resources is inadequate that occurs when sustainable energy supply is taken as a to meet the needs of all sector leading toward the power determinant of working capital management (Cole et al., shortfall. Further, the continuous inflationary pressure 2018) which is an area yet to be explored. Therefore, the of fuel and electricity prices has disturb the working cap- current study also seeks to determine the moderating role ital management of the industry and budgeted estimates of firm size on working capital-performance relation. as well. So, the phenomena under consideration must be The current work contributes to the ongoing literature brought forward by some logical reasoning to devise Asif et al. 3 most businesses’ success especially manufacturing. While, for many developing countries where sustainable power supply is a major hindrance in conducting firm’s opera- tional activities (Allcott et al., 2016). The shortfall of elec- trical power has impacted almost every sector of the business. Many studies conducted in the past has estab- lished rationale logics regarding the loss of performance due to unreliable electricity supply for which these busi- nesses have suffered losses for billions of Rs. (Pasha et al., 1990). The unsustainable power supply can hamper the per- formance of the business in many ways. Firstly, it can force firms to make heavy expensive investments for self- Figure 1. Power supply and demand analysis. generation of sustainable electricity sources which can lead toward high operational expenses and ultimately high operational leverage (Asif et al., 2021; Xu et al., 2022). Secondly, due to incapability to invest in such expensive investment, the small businesses may have to shut down their productions owing to power failure which can further increased the cost of labor and raw materials into production process (Allcott et al., 2016). Thirdly, many business units can outsource some of their production activities which can further increase the cost of production (Fisher-Vanden et al., 2015). Therefore, the main research hypothesis can be stated as follows: H : ‘‘There exists a direct relation between sustainable power supply as a determinants of working capital and firm performance in the Textile sector of Pakistan’’ Figure 2. Power consumption share by individual sector. Since the impact of sustainable power supply in industry specific. It is more evident on the firms who are electricity some rational strategies to come out of the current pre- intensive like textile manufacturing units and further the vailing situation. intensity of sustainable electricity shortfall also depends Previous studies conducted in Pakistan have given on the size of the firm. Large firms with high access to more preference to the issues of managing working capi- capital market can manage alternative expensive electric- tal, profits and capital as a whole for non-financial sector ity resources while small firms find it difficult to manage but the textile sector was not being given full importance with limited capital investment. So, the intensity of the keeping in view its relative importance toward the eco- sustainable power shortfall is tend to be industry as well nomic development. Therefore, the gap must be covered as size specific. Therefore, we assume that firm size tend by creative research including the current problems of to moderates the relation between sustainable power sup- sustainable energy supply to explore its impact on the ply as a determinants of working capital and firm perfor- liquidity and profitability in the textile sector of mance. Based on these discussions the hypothesis for the Pakistan. current research is stated as follows: H : ‘‘There exists a direct relation between working Hypotheses Development capital management and performance in the Textile sector of Pakistan’’ The aim of the current study is to quantify the impact of power crisis as a determinant of working capital on firms’ performance. In the eyes of many scholars, electricity is Research Methodology considered the main driver effect the performance of every sector of an economy (Xu et al., 2022). Though, The population of the study consists of all the firms in the sustainable power supply is a substantial input for from the textile industry in Pakistan. Currently, 423 4 SAGE Open Table 1. Study Variables. Table 2. Summary Statistics. Variable Symbol Formula Measurement Variable Symbol Mean Std. deviation Performance ROA Net income/total NI/TA Performance ROA 0.036 1.34 assets ROE 0.258 2.03 ROE Net income/total NI/TE Liquidity LIQ 0.356 1.98 equity Sustainable power supply CE 0.245 0.41 Liquidity LIQ Liquid assets/total LA/TA Leverage LEV 0.667 0.46 assets Sales growth SG 0.344 0.25 Sustainable CE Change in expense/ (LYE-CYE)/GS Size SIZE 14.578 1.56 power supply gross sales Tangibility TAN 0.567 0.36 Leverage LEV Total debt/total TD/TA GDP GDP 6.670 0.06 assets CPI CPI 8.677 3.960 Sales growth SG Change in sales (LYS-CYS)/LYS ratio Size SIZE Logarithm of total Log of TA To analyze the moderation impact of firm size on the sus- assets tainable energy-performance relation, the variable of size Tangibility TAN Fixed assets/total FA/TA assets is re-measured to divide the firms into their relative size GDP GDP Gross domestic GDP using median of firm size. Then, equations are revised product and re-estimated using size category as moderator. The CPI CPI Consumer price CPI revised equation is as follows: index Dep ¼a +b CE +b Size+b SIZE CE+b LEV it it 1 it 2 3 it 4 it +b SG +b TAN +b GDP +b CPI +e it it it it it 5 6 7 8 textile firms are working under the umbrella of the textile ð4Þ sector. To be included in the sample, the firms have to fulfill certain filtering criteria. It is considered that selected textile firms must be listed on the Pakistan stock Analysis and Findings and Discussions exchange throughout the study period. The sample firms Table 2 shows the descriptive statistics of the study vari- have complete data for the selected study variables for ables. It is obvious from the statistics shown in Table 2 the selected study period. Firms must not belong to the that mean value of ROA is 3.36% while mean value of financial industry. After applying filtering criteria, we ROE is found to be 25.8% which means that textile firms are left with 120 firms listed on PSX from the textile in Pakistan are making their earnings from equity rather industry of Pakistan. Table 1 defines the selected study than assets utilization. This could be due to the fact that variables and their measurement: disruption in sustainable energy supply may hinder firm Due to the presence of endogeneity problems within assets to be translated into performance. Further, the study variable, fixed effects provides inconsistent and biased estimates. The problems of FE inconsistency is mean value of liquidity variable stands at 35.6% showing resolves by the use of two steps panel GMM method that textile firms in Pakistan maintain almost 36% of developed by Arellano and Bover in 1988. GMM is their total assets in the form of liquid resources. Overall, applied on panel data of 120 textile firms with 13 years descriptive statistics shows that firms in Pakistan remain financial data (2010–2022). The regression equations are profitable during the study period. as follows: Table 3 explains the correlation diagnostics of the study variables. The diagnostics for correlation among Liq ¼ a + b CE + b LEV + b SG + b SIZE the selected study variables clearly shows that variables it it it it it it 1 2 3 4 are free from multicollinearity and further tests can be + b TAN + b GDP + b CPI + e it it it it 5 6 7 performed to investigate the stated relationship. ð1Þ Results of regression analysis are given below in Tables 4 to 6. The empirical findings for equation (1) are ROA ¼ a + b CE + b LEV + b SG + b SIZE it it it it it it 1 2 3 4 given in Table 4 while empirical findings of equations (2) + b TAN + b GDP + b CPI + e it it it it 5 6 7 and (3) are given in Tables 5 and 6. Empirical findings ð2Þ from the panel regression stated under Table 4 show that the value of adj. R stands at .806 indicating the selected ROE ¼ a + b CE + b LEV + b SG + b SIZE it it it it it it 1 2 3 4 model explains 80.6% variance in explained variable. + b TAN + b GDP + b CPI + e it it it it 5 6 7 The p value for main independent variable sustainable ð3Þ energy supply is found to be statistically significant at Asif et al. 5 Table 3. Correlation Diagnostics. Variable ROA ROE LIQ CE LEV SG SIZE TAN GDP CPI ROA 1 ROE .32*** 1 LIQ .46** .32*** 1 CE 2.12*** 2.45** 2.33** 1 LEV 2.34*** 2.39** .45*** .32*** 1 SG .39*** .28*** .36** .41*** .22*** 1 SIZE 2.29** 2.44*** .49** .38*** .37*** .45*** 1 TAN .33*** .28** .38** .35** .45*** .23** .45*** 1 GDP .17** .18* .23*** .18*** .26*** .37*** .32*** .44*** 1 CPI 2.22** 2.27** 2.19** .26** .21** 2.32*** .21*** 2.32** 2.33** 1 Note.*, **, *** signify the level of significance at 10%, 5% and 1% respectively. Table 4. Empirical Findings From Equation (1). Table 5. Empirical Findings From Equation (2). Dependent: ROA Dependent: ROE Variable Coefficient Std. error t-Statistic p Variable Coefficient Std. error t-Statistic p Coefficient 8.472 72.36 .11 .036 Coefficient 7.48 14.41 .52 .65 CE 2.537 3.71 2.15 .045 CE 2.75 0.48 21.56 .04 LEV 2.003 .05 2.06 .022 LEV 224.76 2.29 210.81 .00 SG .137 .87 .15 .019 SG .21 0.16 1.22 .01 SIZE 2.908 12.63 2.71 .015 SIZE 213.23 2.61 25.06 .02 TAN 2.504 16.34 .15 .036 TAN 15.48 2.26 6.84 .03 GDP .184 .07 .04 .058 GDP 3.32 1.12 2.96 .00 CPI 2.018 .14 2.13 .012 CPI 213.22 2.56 25.16 .00 Note. Dependent is ROA. CE explains change in expense ratio, Lev stands Note. Dependent is ROE. CE explains change in expense ratio, Lev stands for leverage, SG shows sales growth, Size explains size of the firm, TAN for leverage, SG shows sales growth, Size explains size of the firm, TAN explains tangibility, GDP accounts for gross domestic product, and CPI explains tangibility, GDP accounts for gross domestic product, and CPI shows inflation. shows inflation. 5% while it is found to be negatively associated to ROA profitable but high inflation leads to high operational stating that high shift in expense ratio may damage expense which ultimately adversely impact performance. return from assets and hence performance. While, the These relations are as per the conventional wisdom variable of leverage is also found to be statistically signif- define in the existing literature (Afzal, 2012; Asif et al., icant and negatively associated to explained variable pos- 2021). It can be suggested on the basis of obtained find- ing that high operational leverage tend to impact ings that the maintenance of efficient working capital is performance adversely when performance is translated in very significant for textile industry. However, currently the form of ROA. the textile industry in Pakistan is on slow pace due to The findings from Table 4 indicate that the control additional operational costs. variables are found to have significant association with Table 5 shows the empirical findings for equation (2). ROA stating that null hypothesis is rejected because p- In case of equation (2), the results show that the value of value is \.05 proving existence of significant relation adj. R stands at .577 stating that model can explain between control and explained variables. It is because 57.7% variations in explained variable. The p value for that efficient management of working capital in the form main independent variable sustainable energy supply is of low change in expense ratio leads toward smooth found to be statistically significant at 5% while it is found operationalization of business. Further, the results of to be negatively associated to ROE stating that high shift macroeconomic variables defines that GDP is found to in expense ratio may damage return from equity and have positive while inflation has negative association hencefirm performance. While, thevariableofleverageis with ROA although both relation are statistically signifi- also found to be statistically significant and negatively cant at 5%. This is because at high level of economic associated to explained variable posing that high opera- development, firms tend to adopt aggressive strategy to tional leverage tend to impact performance adversely translate their assets into sales and hence tend to be more when performance is translated in the form of ROE. 6 SAGE Open Table 6. Empirical Findings From Equation (3). maintenance of efficient working capital is significant for textile industry for the maintenance of expected profit- Dependent: Liquidity ability level to maintain performance. However, cur- rently the textile industry in Pakistan is on slow pace due Variable Coefficient Std. error t-Statistic p to additional operational costs. Therefore, remedial mea- Coefficient 6.72 13.72 .48 .05 sures are necessary to devise and implement to ensure CE 21.52 0.72 22.11 .02 sustain performance. LEV 24.78 3.36 21.42 .03 Table 6 explains the reasoning and findings of the SG 2.34 0.98 2.38 .00 SIZE 210.56 3.73 22.83 .00 regression model for equation (3) where liquidity is taken TAN 215.23 4.78 23.19 .00 as dependent variable of the study. It is clear from the GDP 1.35 1.54 .87 .04 obtained statistics that model is found to be significant CPI 22.44 2.22 21.09 .05 2 2 and appropriate with adj. R of 59.36%. The value of R explains that selected model explains almost 60% of the Note. Dependent is LIQ. CE explains change in expense ratio, Lev stands variations in explained variable. While, change in for leverage, SG shows sales growth, Size explains size of the firm, TAN explains tangibility, GDP accounts for gross domestic product, and CPI expense ratio, leverage, tangibility, and CPI are found to shows inflation. be negatively associated with liquidity. These result are highly significant and show that in case of high expense ratio, the low free cash flow may pose firms toward low The findings from Table 5 indicate that the control liquidity and performance. While, high leverage, and tan- variables are found to have significant association with gibility also show that when firms invest more in long ROE stating that null hypothesis is rejected because p- term liabilities and fixed assets, they have less to be value is \.05 proving existence of significant relation shown as working capital which will impact liquidity of between control and explained variables. It is because the firms. And the high inflation also found to have high that efficient management of working capital in the form operational expense and less liquidity. The regression of low change in expense ratio leads toward smooth outcomes for the model 3 can be justified through prior operationalization of business. Further, the results of research work in literature (Afrifa, 2013; Audretsch & macroeconomic variables defines that GDP is found to Elston, 2002). For example, literature supported that have positive while inflation has negative association when a firms’ expenses increases its performance tend to with ROE although both relation are statistically signifi- reduce which ultimately impact ROA and ROE cant at 5%. This is because at high level of economic adversely. So, firms have to invest extra funds to main- development, firms tend to fund their sources from tain the sustainable power supply to continue production equity which provides a capital cushion against unex- but the burden of high expense is manageable by large pected risk hence tend to be more profitable. firms which have budget to do so. Hence, the size of the Simultaneously, high inflation leads to high operational firm has significant impact with profitability (ROA, expense which ultimately adversely impact performance. ROE) and liquidity because of the reason that firm size These relations are as per the conventional wisdom as matters in the issue of budgeting and funds availability. defined in the existing literature (Afzal, 2012; Allcott Therefore, the current investigation also seeks a moder- et al., 2016; Fisher-Vanden et al., 2015). So, it can be ating role of firm size on the stated relation. The result suggested on the basis of obtained findings that the for the moderation analysis are given in Table 7. Table 7. Empirical Findings for Moderation Impact of Firm Size. Variable ROA ROE Liquidity Coefficient 3.373*** (.007) 10.506*** (.82) 20.0018** (28.28) CE 1.015*** (.258) .829*** (.17) .049*** (12.37) SIZE 2.0236*** (23.15) 2.0745*** (21.12) .1195*** (9.07) SIZE*CE 2.784*** (.356) 1.194*** (.088) .4407*** (5.14) LEV 21.804** (2.309) 2.022*** (2.004) 2.056*** (5.14) SG .0224** (.004) 2.544*** (.023) .257*** (.142) TAN 1.422*** (.0289) 1.902*** (.38) .092*** (.10) GDP .332*** (.025) .345*** (.028) .045*** (1.12) CPI .048*** (.004) .0148*** (2.58) .156*** (2.72) Note. Dependent is LIQ. CE explains change in expense ratio, Size explains size of the firm while size*CE shows moderation of firm size, Lev stands for leverage, SG shows sales growth, TAN explains tangibility, GDP accounts for gross domestic product and CPI shows inflation. *, **, *** signify the level of significance at 10%, 5% and 1% respectively. Asif et al. 7 Table 8. Hypotheses Testing Results. recommended that although the sustainable energy is beneficial for the corporate firms in their urge to achieve Hypotheses Linkages of variables Result efficiencies and performance but at the same time it is the need of the day that the concept of the sustainable H Sustainable power  working capital Supported energy must be clear to the corporate managers and there H Sustainable power  working capital Supported H Moderation of firm size Supported 3 must be a clear differentiation between what is sustain- able and what is not? Further there must be clear objec- tive for the corporate managers based on which the measurement for the concept of sustainable energy will The moderation analysis of size variables are per- be focused to have its impact on corporate performance. formed by introducing a dummy variable of size into the It is also recommended that in the long run, the firms model. For this purpose, the data is divided into two might have to opt alternate energy sources resulting in parts one for small size firms and other for large size savings of corporate costs, huge performance losses and firms based on the median value of firm size. The 1 and most importantly environment protection. The limitation 0 codes are assigned to large and small size firms into the of the study is the non-availability of financial data and model to show the moderation effect of size variable. research restrictions. This major implications of the The result for the moderation analysis are found to be study for textile sector can also be managed by conduct- highly significant and shown in Table 7. ing research on different explanatory variables like com- The negative impact of firm size on explained variable pany governance and access to financial markets to shows that small size firms are low in profitability when further its scope. Further this research can be replicated translated into ROA and ROE but at the same time on other corporate industries to view the impact of vari- small is also related to low liquidity. While, the moderat- able of interest. ing variables of firm size for ROA and ROE show posi- tive association explaining that when ROA and ROE are Declaration of Conflicting Interests used as explained variables, size tend to moderates the The author(s) declared no potential conflicts of interest with relation of sustainable power supply and firm profitabil- respect to the research, authorship, and/or publication of this ity. It means that large size firms can better manage their article. working capital and can be profitable even if change in expense ratio is high. Further, the moderating role of Funding firm size shows that there exist a U-shaped relation between firms’ size and profitability. It may be due to the The author(s) received no financial support for the research, fact that up to a particular level of increase in expense authorship, and/or publication of this article. large firms are able to control the profitability of the firms afterward the profit tend to decline if large firms ORCID iD are not capable enough to handle increase in expense. Muhammad Fiaz https://orcid.org/0000-0003-0818-2841 While, the moderating role of firm size is not proved in case where liquidity is used as dependent variable. This could be due to the fact that large size firms have higher References liquidity and they can also manage their operational Afrifa, G. A. (2013). Working capital management practices of expense and ultimately working capital. The detail of UK SMEs: The role of education and experience. Interna- hypothesis testing for main hypothesis is given below in tional Journal of Academic Research in Accounting, Finance Table 8: and Management Sciences, 3(4), 185–196. Afzal, H. M. (2012). Impact of electricity crisis and interest rate on textile industry of Pakistan. Academy of Contemporary Conclusion Research Journal, 1, 32–35. Aktas, N., Croci, E., & Petmezas, D. (2015). Is working capital The current research was conducted to view the impact management value-enhancing? Evidence from firm perfor- of sustainable power supply on the financial performance mance and investments. Journal of Corporate Finance, 30, of corporate firms. The moderating role of firm size was 98–113. also considered in the light of the importance given by Allcott, H., Collard-Wexler, A., & O’Connell, S. D. (2016). literature to firm size. The results of the study revealed How do electricity shortages affect industry? Evidence from the fact that the sustainable supply of energy sources sig- India. American Economic Review, 106(3), 587–624. nificantly impact the performance of the textile sector in Anton, S., & Afloarei Nucu, A. (2020). The impact of working Pakistan. Moreover, the firm size tends to moderate the capital management on firm profitability: Empirical evi- association of sustainable energy supply and corporate dence from the Polish listed firms. Journal of Risk and Finan- firm performance on the basis of these results it can be cial Management, 14(1), 9. 8 SAGE Open Asif, R., Aslam, R., & Abid, H. (2021). An investigation into Najib, M., Ermawati, W. J., Fahma, F., Endri, E., & Suhar- the impact of power outage on working capital management tanto, D. (2021). FinTech in the small food business and its in textile sector of Pakistan. Journal of Accounting and relation with open innovation. Journal of Open Innovation: Finance in Emerging Economies, 7(4), 833–848. Technology, Market, and Complexity, 7(1), 88. Audretsch, D. B., & Elston, J. A. (2002). Does firm size matter? Nyeadi, J. D., Sare, Y. A., & Aawaar, G. (2018). Determinants Evidence on the impact of liquidity constraints on firm of working capital requirement in listed firms: Empirical evi- investment behavior in Germany. International Journal of dence using a dynamic system GMM. Cogent Economics & Industrial Organization, 20(1), 1–17. Finance, 6(1), 1558713. Ban˜ os-Caballero, S., Garcı´a-Teruel, P. J., & Martı´nez-Solano, Padachi, D. K., & Carole, H. (2014). Focus on working capital P. (2019). Net operating working capital and firm value: A management practices among Mauritian SMEs: Survey evi- cross-country analysis. BRQ Business Research Quarterly, dence and empirical analysis. 23, 234–251. Pasha, H. A., Ghaus, A., & Malik, S. (1990). The differential Cole, M. A., Elliott, R. J. R., Occhiali, G., & Strobl, E. (2018). impact of power load shedding on industrial units in Power outages and firm performance in Sub-Saharan Africa. Pakistan. Pakistan Journal of Applied Economics, 9(2), Journal of Development Economics, 134, 150–159. 117–146. Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of Sarwar, A. (2020). The determinants of working capital working capital management on firm profitability in differ- management in Pakistan: The case of manufacturing sec- ent business cycles: Evidence from Finland. Research in tor. Competitive Social Science Research Journal, 1(2), International Business and Finance, 32, 36–49. 31–53. Fisher-Vanden, K., Mansur, E. T., & Wang, Q. (2015). Elec- Tufail, S. (2010). Impact of working capital management on tricity shortages and firm productivity: Evidence from Chi- profitability of textile sector of Pakistan [Conference ses- na’s industrial firms. Journal of Development Economics, sion]. Proceedings of 3rd International Conference on Busi- 114, 172–188. ness Management. Knoll, L., & Senge, K. (2019). Public debt management Xu, J., Akhtar, M., Haris, M., Muhammad, S., Abban, O. J., between discipline and creativity. Accounting for energy & Taghizadeh-Hesary, F. (2022). Energy crisis, firm profit- performance contracts in Germany. Historical Social ability, and productivity: An emerging economy perspective. Research/Historische Sozialforschung, 44(168), 155–174. Energy Strategy Reviews, 41, 100849. Mensah, J. T. (2016). Bring back our light: Power outages and industrial performance in sub-saharan Africa (No. 333-2016- 14636). http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png SAGE Open SAGE

The Impact of Sustainable Energy on Liquidity and Financial Performance of the Textile Industry

Asif, Rabia; Fiaz, Muhammad; Zulfiqar, Zunaina
SAGE Open , Volume 12 (4): 1 – Dec 1, 2022
Download PDF
8 pages

Loading next page...
 
/lp/sage/the-impact-of-sustainable-energy-on-liquidity-and-financial-z9zbKTRDHv

References (25)

Publisher
SAGE
Copyright
© The Author(s) 2022
ISSN
2158-2440
eISSN
2158-2440
DOI
10.1177/21582440221141704
Publisher site
See Article on Publisher Site

Abstract

Sustainable energy is considered to be the most important input for any organization owing to its noteworthy impact on the liquidity and performance of the firms. Hence, it is imperative to evidence the impact of sustainable energy on a firm’s liquid- ity and performance. As the disruptions in sustainable energy adversely impact the performance of manufacturing firms by reducing production directly and amplifying operational leverage, it is significant to investigate the impact the sustainable energy on a firm’s liquidity and performance. Further, the impact of disruptions in sustainable energy is size specific, there- fore, the study also assumes the moderating role of firm size in shaping the stated relation. So, the aim of the current research is to investigate the impact of sustainable energy supply on liquidity and performance of the firms keeping in view the moderation effect of firm size. Using financial data of 120 textile firms from the year 2010 to 2022, the current investiga- tion has employed a panel data methodology to quantify the impact of the sustainable energy disruption on a firm’s liquidity and performance. The results revealed that the sustainable supply of energy sources significantly impacts liquidity and working capital management as well as the performance of the textile sector in Pakistan. Further, firm size tends to moderate the rela- tion between sustainable energy supply and performance. Although the effect is found to be partially moderated. It is recom- mended that in the long run, the firms might opt for alternate energy sources resulting in savings from huge performance losses. Encouraged by the inadequacy of empirical evidence in developing economies like Pakistan and keeping in view the importance of working capital management and performance efficiency, the current work is the need of the day. The impact of sustainable energy sources must be researched to gauge the impact on the manufacturing industry’s performance. Keywords sustainable energy, liquidity, performance, operational leverage, textile sector liquidity creation for the firm, working capital has Introduction played a substantial role during economic turmoil Management of working capital plays an important role (Ban˜ os-Caballero et al., 2019; Enqvist et al., 2014). It in the growth and survival of manufacturing firms. The has also been widely reported in previous literature that effective management of working capital leads not only liquidity constraints has been the important factor which toward value creation and profitability but also enables hinders firms’ performance (Afrifa, 2013) while excess firms to react to market changes efficiently while the liquidity may impact firms’ performance adversely inefficiencies may trigger firms to insolvency and dissolu- (Najib et al., 2021). Therefore, to maintain a balance tion (Padachi & Carole, 2014). Therefore, the factors between liquidity and solvency is important for the firms that impact the management of working capital has been to avoid any negative consequences. an important area for past researchers and scholars to explore (Nyeadi et al., 2018). Keeping in view this notion, the importance and impact of the short-term financial decisions on firm’s performance has widely Lahore College for Women University, Lahore, Pakistan IB&M, University of Engineering & Technology, Lahore, Pakistan been argued in corporate finance literature (Anton & Afloarei Nucu, 2020; Najib et al., 2021). Almost all Corresponding Author: authors agreed that the important of working capital Muhammad Fiaz, Faculty of Management and Business Administration, management is inherent in firms’ ability to create access Lahore College for Women University, Jail Road, Lahore 58000, Pakistan. liquidity (Knoll & Senge, 2019). So as a buffer of Email: mfiaz@lcwu.edu.pk Creative Commons CC BY: This article is distributed under the terms of the Creative Commons Attribution 4.0 License (https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of the work without further permission provided the original work is attributed as specified on the SAGE and Open Access pages (https://us.sagepub.com/en-us/nam/open-access-at-sage). 2 SAGE Open Existing literature provides noteworthy arguments by many ways. First, it directly discusses the issue sus- that firms bankruptcy will be caused by ignoring short- tainable energy supply failures as a determinant of work- term financing needs, adverse selection of financial ing capital by extending previous evidence. Secondly, it opportunities and high involvement in long run invest- provides direct evidence about the role of the energy cri- ments (Aktas et al., 2015). So, it is important to maintain sis on firms’ performance taking into account the moder- a balance between liquidity and performance to avoid ating role of firm size. Although, the relationship of energy crisis and firm performance is obvious still there adverse outcomes. Hence, the shortage of working capi- is need to address the resolutions by taking into account tal has become the primary motive for the firms’ insol- vency (Tufail, 2010). Therefore, the management of firm size that the current investigation will provide to working capital is foremost indispensable for firms practitioners to enable managers to manage working owing to the fact that it can generate balance between capital needs, and the performance of the textile compa- current assets and current liabilities to handle any imbal- nies keeping in view real-time time factors. The present ances in working capital needs but it also has the ability research aims to put forward specifically the distress to handle unexpected liquidity shocks to cover opera- caused by electricity crisis on listed textile companies. In tional expenditures (Asif et al., 2021). fact, as per the best of authors knowledge, no existing Many past studies have directly examined the factors study has stated the transformations between the pre and post-energy crisis leading to firm’s distress by incor- that impact the working capital management on firm per- porating panel data from selected textile companies of formance (Cole et al., 2018; Mensah, 2016; Sarwar, 2020) Pakistan for the time period of 2010 to 2022. but scare evidence are available which analyzed the real time determinants of the working capital management like labor strike, resource availability, and sustainable Overview of the Pakistan Textile Sector energy supply, etc. As far as the economy of Pakistan is concerned, electricity is the most important determinant Textile sector is the largest sector under the umbrella of that have direct impact on firms’ working capital man- non-financial firms having 423 textile units currently. agement and ultimately performance. Like, during sum- Textile sector is considered important for the growth of mer where sustainable energy supply is a regular failure, Pakistan as it contributes 8.5% toward the GDP of the firms have to manage alternate energy supply in the form country. In the year 2020, the textile exports for the of investment in heavy generators etc. which increased country reached to 1.28 billion dollars reported by The the total cost of the production. Further, the continuous News. Further, the textile exports have recorded an changes in fuel prices can disturb the operational budget extraordinary growth of greater than 17% in the value when there will be availability of expensive fuel to run added sector. As per the recent data, the textile industry generators to maintain steady production. In case, where contributes almost more than 60% of total exports firms are not able to provide sustainable energy supply, amounting almost to 5.2 billion US dollars. The textile the production will expected to be stop or disturbed industry contributes 46% to the total output produced impacting sales revenues directly. This case would be and exported by Pakistan. severe if firms will not be able to maintain their produc- Taking into account the importance of textile sector tion which will ultimately lead the firms to insolvency. for the growth of the Pakistan economy, sustainable The ongoing discussion clearly indicates that the tena- power supply plays an important role toward the con- cious problem of sustainable energy supply disruptions in duction of smooth operations. Therefore, the current the form of electricity breakdowns can impact the firms’ study provides notable arguments as how the textile liquidity and performance by aggregating total expenses firms can cope with the power shortage and what alter- and disturbing sales targets. Hence, the need to identify native measures can make steady working capital man- the impacts of sustainable energy/power supply on the agement leading to reducing its adverse impact on liquidity and working capital needs of the manufacturing overall performance. sector and ultimately its impact on performance is Figures 1 and 2 defines the economic reality regarding inevitable. the power consumption requirements by each sector and Further, previous studies have also shown their con- supply capacity of power resources. It is quite obvious cerns regarding the role of firm size on firm performance that current generation of power resources is inadequate that occurs when sustainable energy supply is taken as a to meet the needs of all sector leading toward the power determinant of working capital management (Cole et al., shortfall. Further, the continuous inflationary pressure 2018) which is an area yet to be explored. Therefore, the of fuel and electricity prices has disturb the working cap- current study also seeks to determine the moderating role ital management of the industry and budgeted estimates of firm size on working capital-performance relation. as well. So, the phenomena under consideration must be The current work contributes to the ongoing literature brought forward by some logical reasoning to devise Asif et al. 3 most businesses’ success especially manufacturing. While, for many developing countries where sustainable power supply is a major hindrance in conducting firm’s opera- tional activities (Allcott et al., 2016). The shortfall of elec- trical power has impacted almost every sector of the business. Many studies conducted in the past has estab- lished rationale logics regarding the loss of performance due to unreliable electricity supply for which these busi- nesses have suffered losses for billions of Rs. (Pasha et al., 1990). The unsustainable power supply can hamper the per- formance of the business in many ways. Firstly, it can force firms to make heavy expensive investments for self- Figure 1. Power supply and demand analysis. generation of sustainable electricity sources which can lead toward high operational expenses and ultimately high operational leverage (Asif et al., 2021; Xu et al., 2022). Secondly, due to incapability to invest in such expensive investment, the small businesses may have to shut down their productions owing to power failure which can further increased the cost of labor and raw materials into production process (Allcott et al., 2016). Thirdly, many business units can outsource some of their production activities which can further increase the cost of production (Fisher-Vanden et al., 2015). Therefore, the main research hypothesis can be stated as follows: H : ‘‘There exists a direct relation between sustainable power supply as a determinants of working capital and firm performance in the Textile sector of Pakistan’’ Figure 2. Power consumption share by individual sector. Since the impact of sustainable power supply in industry specific. It is more evident on the firms who are electricity some rational strategies to come out of the current pre- intensive like textile manufacturing units and further the vailing situation. intensity of sustainable electricity shortfall also depends Previous studies conducted in Pakistan have given on the size of the firm. Large firms with high access to more preference to the issues of managing working capi- capital market can manage alternative expensive electric- tal, profits and capital as a whole for non-financial sector ity resources while small firms find it difficult to manage but the textile sector was not being given full importance with limited capital investment. So, the intensity of the keeping in view its relative importance toward the eco- sustainable power shortfall is tend to be industry as well nomic development. Therefore, the gap must be covered as size specific. Therefore, we assume that firm size tend by creative research including the current problems of to moderates the relation between sustainable power sup- sustainable energy supply to explore its impact on the ply as a determinants of working capital and firm perfor- liquidity and profitability in the textile sector of mance. Based on these discussions the hypothesis for the Pakistan. current research is stated as follows: H : ‘‘There exists a direct relation between working Hypotheses Development capital management and performance in the Textile sector of Pakistan’’ The aim of the current study is to quantify the impact of power crisis as a determinant of working capital on firms’ performance. In the eyes of many scholars, electricity is Research Methodology considered the main driver effect the performance of every sector of an economy (Xu et al., 2022). Though, The population of the study consists of all the firms in the sustainable power supply is a substantial input for from the textile industry in Pakistan. Currently, 423 4 SAGE Open Table 1. Study Variables. Table 2. Summary Statistics. Variable Symbol Formula Measurement Variable Symbol Mean Std. deviation Performance ROA Net income/total NI/TA Performance ROA 0.036 1.34 assets ROE 0.258 2.03 ROE Net income/total NI/TE Liquidity LIQ 0.356 1.98 equity Sustainable power supply CE 0.245 0.41 Liquidity LIQ Liquid assets/total LA/TA Leverage LEV 0.667 0.46 assets Sales growth SG 0.344 0.25 Sustainable CE Change in expense/ (LYE-CYE)/GS Size SIZE 14.578 1.56 power supply gross sales Tangibility TAN 0.567 0.36 Leverage LEV Total debt/total TD/TA GDP GDP 6.670 0.06 assets CPI CPI 8.677 3.960 Sales growth SG Change in sales (LYS-CYS)/LYS ratio Size SIZE Logarithm of total Log of TA To analyze the moderation impact of firm size on the sus- assets tainable energy-performance relation, the variable of size Tangibility TAN Fixed assets/total FA/TA assets is re-measured to divide the firms into their relative size GDP GDP Gross domestic GDP using median of firm size. Then, equations are revised product and re-estimated using size category as moderator. The CPI CPI Consumer price CPI revised equation is as follows: index Dep ¼a +b CE +b Size+b SIZE CE+b LEV it it 1 it 2 3 it 4 it +b SG +b TAN +b GDP +b CPI +e it it it it it 5 6 7 8 textile firms are working under the umbrella of the textile ð4Þ sector. To be included in the sample, the firms have to fulfill certain filtering criteria. It is considered that selected textile firms must be listed on the Pakistan stock Analysis and Findings and Discussions exchange throughout the study period. The sample firms Table 2 shows the descriptive statistics of the study vari- have complete data for the selected study variables for ables. It is obvious from the statistics shown in Table 2 the selected study period. Firms must not belong to the that mean value of ROA is 3.36% while mean value of financial industry. After applying filtering criteria, we ROE is found to be 25.8% which means that textile firms are left with 120 firms listed on PSX from the textile in Pakistan are making their earnings from equity rather industry of Pakistan. Table 1 defines the selected study than assets utilization. This could be due to the fact that variables and their measurement: disruption in sustainable energy supply may hinder firm Due to the presence of endogeneity problems within assets to be translated into performance. Further, the study variable, fixed effects provides inconsistent and biased estimates. The problems of FE inconsistency is mean value of liquidity variable stands at 35.6% showing resolves by the use of two steps panel GMM method that textile firms in Pakistan maintain almost 36% of developed by Arellano and Bover in 1988. GMM is their total assets in the form of liquid resources. Overall, applied on panel data of 120 textile firms with 13 years descriptive statistics shows that firms in Pakistan remain financial data (2010–2022). The regression equations are profitable during the study period. as follows: Table 3 explains the correlation diagnostics of the study variables. The diagnostics for correlation among Liq ¼ a + b CE + b LEV + b SG + b SIZE the selected study variables clearly shows that variables it it it it it it 1 2 3 4 are free from multicollinearity and further tests can be + b TAN + b GDP + b CPI + e it it it it 5 6 7 performed to investigate the stated relationship. ð1Þ Results of regression analysis are given below in Tables 4 to 6. The empirical findings for equation (1) are ROA ¼ a + b CE + b LEV + b SG + b SIZE it it it it it it 1 2 3 4 given in Table 4 while empirical findings of equations (2) + b TAN + b GDP + b CPI + e it it it it 5 6 7 and (3) are given in Tables 5 and 6. Empirical findings ð2Þ from the panel regression stated under Table 4 show that the value of adj. R stands at .806 indicating the selected ROE ¼ a + b CE + b LEV + b SG + b SIZE it it it it it it 1 2 3 4 model explains 80.6% variance in explained variable. + b TAN + b GDP + b CPI + e it it it it 5 6 7 The p value for main independent variable sustainable ð3Þ energy supply is found to be statistically significant at Asif et al. 5 Table 3. Correlation Diagnostics. Variable ROA ROE LIQ CE LEV SG SIZE TAN GDP CPI ROA 1 ROE .32*** 1 LIQ .46** .32*** 1 CE 2.12*** 2.45** 2.33** 1 LEV 2.34*** 2.39** .45*** .32*** 1 SG .39*** .28*** .36** .41*** .22*** 1 SIZE 2.29** 2.44*** .49** .38*** .37*** .45*** 1 TAN .33*** .28** .38** .35** .45*** .23** .45*** 1 GDP .17** .18* .23*** .18*** .26*** .37*** .32*** .44*** 1 CPI 2.22** 2.27** 2.19** .26** .21** 2.32*** .21*** 2.32** 2.33** 1 Note.*, **, *** signify the level of significance at 10%, 5% and 1% respectively. Table 4. Empirical Findings From Equation (1). Table 5. Empirical Findings From Equation (2). Dependent: ROA Dependent: ROE Variable Coefficient Std. error t-Statistic p Variable Coefficient Std. error t-Statistic p Coefficient 8.472 72.36 .11 .036 Coefficient 7.48 14.41 .52 .65 CE 2.537 3.71 2.15 .045 CE 2.75 0.48 21.56 .04 LEV 2.003 .05 2.06 .022 LEV 224.76 2.29 210.81 .00 SG .137 .87 .15 .019 SG .21 0.16 1.22 .01 SIZE 2.908 12.63 2.71 .015 SIZE 213.23 2.61 25.06 .02 TAN 2.504 16.34 .15 .036 TAN 15.48 2.26 6.84 .03 GDP .184 .07 .04 .058 GDP 3.32 1.12 2.96 .00 CPI 2.018 .14 2.13 .012 CPI 213.22 2.56 25.16 .00 Note. Dependent is ROA. CE explains change in expense ratio, Lev stands Note. Dependent is ROE. CE explains change in expense ratio, Lev stands for leverage, SG shows sales growth, Size explains size of the firm, TAN for leverage, SG shows sales growth, Size explains size of the firm, TAN explains tangibility, GDP accounts for gross domestic product, and CPI explains tangibility, GDP accounts for gross domestic product, and CPI shows inflation. shows inflation. 5% while it is found to be negatively associated to ROA profitable but high inflation leads to high operational stating that high shift in expense ratio may damage expense which ultimately adversely impact performance. return from assets and hence performance. While, the These relations are as per the conventional wisdom variable of leverage is also found to be statistically signif- define in the existing literature (Afzal, 2012; Asif et al., icant and negatively associated to explained variable pos- 2021). It can be suggested on the basis of obtained find- ing that high operational leverage tend to impact ings that the maintenance of efficient working capital is performance adversely when performance is translated in very significant for textile industry. However, currently the form of ROA. the textile industry in Pakistan is on slow pace due to The findings from Table 4 indicate that the control additional operational costs. variables are found to have significant association with Table 5 shows the empirical findings for equation (2). ROA stating that null hypothesis is rejected because p- In case of equation (2), the results show that the value of value is \.05 proving existence of significant relation adj. R stands at .577 stating that model can explain between control and explained variables. It is because 57.7% variations in explained variable. The p value for that efficient management of working capital in the form main independent variable sustainable energy supply is of low change in expense ratio leads toward smooth found to be statistically significant at 5% while it is found operationalization of business. Further, the results of to be negatively associated to ROE stating that high shift macroeconomic variables defines that GDP is found to in expense ratio may damage return from equity and have positive while inflation has negative association hencefirm performance. While, thevariableofleverageis with ROA although both relation are statistically signifi- also found to be statistically significant and negatively cant at 5%. This is because at high level of economic associated to explained variable posing that high opera- development, firms tend to adopt aggressive strategy to tional leverage tend to impact performance adversely translate their assets into sales and hence tend to be more when performance is translated in the form of ROE. 6 SAGE Open Table 6. Empirical Findings From Equation (3). maintenance of efficient working capital is significant for textile industry for the maintenance of expected profit- Dependent: Liquidity ability level to maintain performance. However, cur- rently the textile industry in Pakistan is on slow pace due Variable Coefficient Std. error t-Statistic p to additional operational costs. Therefore, remedial mea- Coefficient 6.72 13.72 .48 .05 sures are necessary to devise and implement to ensure CE 21.52 0.72 22.11 .02 sustain performance. LEV 24.78 3.36 21.42 .03 Table 6 explains the reasoning and findings of the SG 2.34 0.98 2.38 .00 SIZE 210.56 3.73 22.83 .00 regression model for equation (3) where liquidity is taken TAN 215.23 4.78 23.19 .00 as dependent variable of the study. It is clear from the GDP 1.35 1.54 .87 .04 obtained statistics that model is found to be significant CPI 22.44 2.22 21.09 .05 2 2 and appropriate with adj. R of 59.36%. The value of R explains that selected model explains almost 60% of the Note. Dependent is LIQ. CE explains change in expense ratio, Lev stands variations in explained variable. While, change in for leverage, SG shows sales growth, Size explains size of the firm, TAN explains tangibility, GDP accounts for gross domestic product, and CPI expense ratio, leverage, tangibility, and CPI are found to shows inflation. be negatively associated with liquidity. These result are highly significant and show that in case of high expense ratio, the low free cash flow may pose firms toward low The findings from Table 5 indicate that the control liquidity and performance. While, high leverage, and tan- variables are found to have significant association with gibility also show that when firms invest more in long ROE stating that null hypothesis is rejected because p- term liabilities and fixed assets, they have less to be value is \.05 proving existence of significant relation shown as working capital which will impact liquidity of between control and explained variables. It is because the firms. And the high inflation also found to have high that efficient management of working capital in the form operational expense and less liquidity. The regression of low change in expense ratio leads toward smooth outcomes for the model 3 can be justified through prior operationalization of business. Further, the results of research work in literature (Afrifa, 2013; Audretsch & macroeconomic variables defines that GDP is found to Elston, 2002). For example, literature supported that have positive while inflation has negative association when a firms’ expenses increases its performance tend to with ROE although both relation are statistically signifi- reduce which ultimately impact ROA and ROE cant at 5%. This is because at high level of economic adversely. So, firms have to invest extra funds to main- development, firms tend to fund their sources from tain the sustainable power supply to continue production equity which provides a capital cushion against unex- but the burden of high expense is manageable by large pected risk hence tend to be more profitable. firms which have budget to do so. Hence, the size of the Simultaneously, high inflation leads to high operational firm has significant impact with profitability (ROA, expense which ultimately adversely impact performance. ROE) and liquidity because of the reason that firm size These relations are as per the conventional wisdom as matters in the issue of budgeting and funds availability. defined in the existing literature (Afzal, 2012; Allcott Therefore, the current investigation also seeks a moder- et al., 2016; Fisher-Vanden et al., 2015). So, it can be ating role of firm size on the stated relation. The result suggested on the basis of obtained findings that the for the moderation analysis are given in Table 7. Table 7. Empirical Findings for Moderation Impact of Firm Size. Variable ROA ROE Liquidity Coefficient 3.373*** (.007) 10.506*** (.82) 20.0018** (28.28) CE 1.015*** (.258) .829*** (.17) .049*** (12.37) SIZE 2.0236*** (23.15) 2.0745*** (21.12) .1195*** (9.07) SIZE*CE 2.784*** (.356) 1.194*** (.088) .4407*** (5.14) LEV 21.804** (2.309) 2.022*** (2.004) 2.056*** (5.14) SG .0224** (.004) 2.544*** (.023) .257*** (.142) TAN 1.422*** (.0289) 1.902*** (.38) .092*** (.10) GDP .332*** (.025) .345*** (.028) .045*** (1.12) CPI .048*** (.004) .0148*** (2.58) .156*** (2.72) Note. Dependent is LIQ. CE explains change in expense ratio, Size explains size of the firm while size*CE shows moderation of firm size, Lev stands for leverage, SG shows sales growth, TAN explains tangibility, GDP accounts for gross domestic product and CPI shows inflation. *, **, *** signify the level of significance at 10%, 5% and 1% respectively. Asif et al. 7 Table 8. Hypotheses Testing Results. recommended that although the sustainable energy is beneficial for the corporate firms in their urge to achieve Hypotheses Linkages of variables Result efficiencies and performance but at the same time it is the need of the day that the concept of the sustainable H Sustainable power  working capital Supported energy must be clear to the corporate managers and there H Sustainable power  working capital Supported H Moderation of firm size Supported 3 must be a clear differentiation between what is sustain- able and what is not? Further there must be clear objec- tive for the corporate managers based on which the measurement for the concept of sustainable energy will The moderation analysis of size variables are per- be focused to have its impact on corporate performance. formed by introducing a dummy variable of size into the It is also recommended that in the long run, the firms model. For this purpose, the data is divided into two might have to opt alternate energy sources resulting in parts one for small size firms and other for large size savings of corporate costs, huge performance losses and firms based on the median value of firm size. The 1 and most importantly environment protection. The limitation 0 codes are assigned to large and small size firms into the of the study is the non-availability of financial data and model to show the moderation effect of size variable. research restrictions. This major implications of the The result for the moderation analysis are found to be study for textile sector can also be managed by conduct- highly significant and shown in Table 7. ing research on different explanatory variables like com- The negative impact of firm size on explained variable pany governance and access to financial markets to shows that small size firms are low in profitability when further its scope. Further this research can be replicated translated into ROA and ROE but at the same time on other corporate industries to view the impact of vari- small is also related to low liquidity. While, the moderat- able of interest. ing variables of firm size for ROA and ROE show posi- tive association explaining that when ROA and ROE are Declaration of Conflicting Interests used as explained variables, size tend to moderates the The author(s) declared no potential conflicts of interest with relation of sustainable power supply and firm profitabil- respect to the research, authorship, and/or publication of this ity. It means that large size firms can better manage their article. working capital and can be profitable even if change in expense ratio is high. Further, the moderating role of Funding firm size shows that there exist a U-shaped relation between firms’ size and profitability. It may be due to the The author(s) received no financial support for the research, fact that up to a particular level of increase in expense authorship, and/or publication of this article. large firms are able to control the profitability of the firms afterward the profit tend to decline if large firms ORCID iD are not capable enough to handle increase in expense. Muhammad Fiaz https://orcid.org/0000-0003-0818-2841 While, the moderating role of firm size is not proved in case where liquidity is used as dependent variable. This could be due to the fact that large size firms have higher References liquidity and they can also manage their operational Afrifa, G. A. (2013). Working capital management practices of expense and ultimately working capital. The detail of UK SMEs: The role of education and experience. Interna- hypothesis testing for main hypothesis is given below in tional Journal of Academic Research in Accounting, Finance Table 8: and Management Sciences, 3(4), 185–196. Afzal, H. M. (2012). Impact of electricity crisis and interest rate on textile industry of Pakistan. Academy of Contemporary Conclusion Research Journal, 1, 32–35. Aktas, N., Croci, E., & Petmezas, D. (2015). Is working capital The current research was conducted to view the impact management value-enhancing? Evidence from firm perfor- of sustainable power supply on the financial performance mance and investments. Journal of Corporate Finance, 30, of corporate firms. The moderating role of firm size was 98–113. also considered in the light of the importance given by Allcott, H., Collard-Wexler, A., & O’Connell, S. D. (2016). literature to firm size. The results of the study revealed How do electricity shortages affect industry? Evidence from the fact that the sustainable supply of energy sources sig- India. American Economic Review, 106(3), 587–624. nificantly impact the performance of the textile sector in Anton, S., & Afloarei Nucu, A. (2020). The impact of working Pakistan. Moreover, the firm size tends to moderate the capital management on firm profitability: Empirical evi- association of sustainable energy supply and corporate dence from the Polish listed firms. Journal of Risk and Finan- firm performance on the basis of these results it can be cial Management, 14(1), 9. 8 SAGE Open Asif, R., Aslam, R., & Abid, H. (2021). An investigation into Najib, M., Ermawati, W. J., Fahma, F., Endri, E., & Suhar- the impact of power outage on working capital management tanto, D. (2021). FinTech in the small food business and its in textile sector of Pakistan. Journal of Accounting and relation with open innovation. Journal of Open Innovation: Finance in Emerging Economies, 7(4), 833–848. Technology, Market, and Complexity, 7(1), 88. Audretsch, D. B., & Elston, J. A. (2002). Does firm size matter? Nyeadi, J. D., Sare, Y. A., & Aawaar, G. (2018). Determinants Evidence on the impact of liquidity constraints on firm of working capital requirement in listed firms: Empirical evi- investment behavior in Germany. International Journal of dence using a dynamic system GMM. Cogent Economics & Industrial Organization, 20(1), 1–17. Finance, 6(1), 1558713. Ban˜ os-Caballero, S., Garcı´a-Teruel, P. J., & Martı´nez-Solano, Padachi, D. K., & Carole, H. (2014). Focus on working capital P. (2019). Net operating working capital and firm value: A management practices among Mauritian SMEs: Survey evi- cross-country analysis. BRQ Business Research Quarterly, dence and empirical analysis. 23, 234–251. Pasha, H. A., Ghaus, A., & Malik, S. (1990). The differential Cole, M. A., Elliott, R. J. R., Occhiali, G., & Strobl, E. (2018). impact of power load shedding on industrial units in Power outages and firm performance in Sub-Saharan Africa. Pakistan. Pakistan Journal of Applied Economics, 9(2), Journal of Development Economics, 134, 150–159. 117–146. Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of Sarwar, A. (2020). The determinants of working capital working capital management on firm profitability in differ- management in Pakistan: The case of manufacturing sec- ent business cycles: Evidence from Finland. Research in tor. Competitive Social Science Research Journal, 1(2), International Business and Finance, 32, 36–49. 31–53. Fisher-Vanden, K., Mansur, E. T., & Wang, Q. (2015). Elec- Tufail, S. (2010). Impact of working capital management on tricity shortages and firm productivity: Evidence from Chi- profitability of textile sector of Pakistan [Conference ses- na’s industrial firms. Journal of Development Economics, sion]. Proceedings of 3rd International Conference on Busi- 114, 172–188. ness Management. Knoll, L., & Senge, K. (2019). Public debt management Xu, J., Akhtar, M., Haris, M., Muhammad, S., Abban, O. J., between discipline and creativity. Accounting for energy & Taghizadeh-Hesary, F. (2022). Energy crisis, firm profit- performance contracts in Germany. Historical Social ability, and productivity: An emerging economy perspective. Research/Historische Sozialforschung, 44(168), 155–174. Energy Strategy Reviews, 41, 100849. Mensah, J. T. (2016). Bring back our light: Power outages and industrial performance in sub-saharan Africa (No. 333-2016- 14636).

Journal

SAGE Open – SAGE

Published: Dec 1, 2022

Keywords: sustainable energy; liquidity; performance; operational leverage; textile sector

There are no references for this article.