Working Capital Management, Hedging and Macroeconomics Covariates of Default Risk: A Textile Sector Analysis in Pakistan

Abstract

Default is an increasingly important issue for the Fall, as market stress builds in a weak economic and financial environment rally. The study seeks to investigate if financial tools such as hedging and working capital management can be used for a precaution against default risk in the textile sector of Pakistan. Furthermore, it provides us an analysis on how macroeconomic variables are managed reduces the risk of default. Several elements can potentially impact the likelihood of a corporation experiencing a default on its debt. Nevertheless, this research has only analyzed Working Capital Management, Hedging, and macroeconomic covariables. Data of 102 textile firms was collected for the time of 2015-2020. The objective of this analysis is to assess the influence of these variables on the likelihood of default. The present study employs a logical approach to inquiry. The deductive approach would be the most suitable to evaluate the hypothesis of causation in the study. Our study provides evidence of a strong and statistically significant negative relationship between working capital management and default risk. The importance of the impact of CPI and R&D Investment is observed at a significant level.  The statistical significance of the relationship between GDP growth and the probability of default is acceptable. The statistical significance of the impact of interest rates on default likelihood is insignificant. This study offers significant theoretical contributions by incorporating well-established financial theories, including Credit Rationing Theory, to develop a complete framework for understanding default risk. This article examines how these ideas shed light on the behavior of lenders, conflicts of interest inside agencies, and the impact of free cash flow on corporate decision-making. Furthermore, this study investigates the often-overlooked aspect of working capital management and the role of hedging in risk management. This study offers practical insights for finance experts, corporate administrators, legislators, and investors.