Does family ownership moderate the relationship between working capital management and financial distress? Empirical evidence

Purpose The present study aims to investigate whether family ownership and working capital management influence a firm's chance of financial distress. Furthermore, this study examines the moderating effect of family ownership on the relationship between working capital management and financial distress. Design/methodology/approach This study uses a sample of 206 nonfinancial Pakistan Stock Exchange (PSX) listed companies from 2010 to 2021. Financial distress is measured using Altman's Z-score. Working capital efficiency is calculated using the cash ratio. The system-GMM regression was used for analysis. Additionally, several tests, including 2SLS, Logistic regression and alternative proxies for financial distress and working management, were carried out to ensure the robustness of the results. Findings Working capital (cash ratio) has a significant negative impact, whereas family ownership has a significant positive impact on the likelihood of financial distress. Regarding moderating impact, the result shows that the interactive variable has a significant positive impact on financial distress. This demonstrates that family ownership mitigates the negative impact of the cash ratio on financial distress. The positive impact of the cash ratio on financial stability is weaker in family-owned firms. Practical implications This study's findings provide policymakers, business managers, regulators, and investors with a deeper understanding of the relationship between working capital management and the likelihood of financial distress in Pakistani firms, as well as the role of family ownership in this context. Originality/value This research examines the relationship between working capital management and financial distress. In addition, the current study extended the analysis by testing, for the first time, the moderating role of family ownership in the relationship between working capital management and distress in an emerging economy.