Abstract
The purpose of this study is to analyze the impact of working capital management and business risk on performance of financially constrained and non-constrained manufacturing firms. Furthermore, this study also analyzes the differences in relationship of working capital management, business risk and firm performance by using different proxies of financial constraints. Data for the study is collected for the years 2007-2016, of Pakistan stock exchange listed firms. This research is conducted on financial data extracted from financial statements of 251 Pakistani manufacturing firms. The stated relationship is examined by using GMM technique of estimation. Findings of the study revealed that working capital management has positive impact on firm performance and business risk has negative impact on firm performance. This study analyzed that inverted U-shaped relationship exists between working capital and firm performance. Furthermore, it is revealed that financially constrained firms have lower working capital level than financially non-constrained firms. Moreover, it is analyzed that financially constrained firms have higher business risk than financially non-constrained firms. The current study suggests that financially constrained firms should reduce agency conflicts, perform operations efficiently and use such strategies which leads to minimize the risk and enhance the firm performance. This study suggests that financially constrained firms should manage their working capital efficiently by reducing cash conversion cycle in order to improve the performance.