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Working Capital Management and Firm’s Valuation, Profitability and Risk: Evidence from a Developing Market
Abstract
Purpose
The purpose of this paper is to examine the effects of working capital management on firm valuation, profitability and risk.
Design/methodology/approach
The paper uses a panel data set of 497 firms covering the period 2007 to 2016. The authors test the effects of working capital management on firm valuation, profitability and risk using the panel data methodology that includes firm and year fixed effects regressions.
Findings
The authors find a significantly negative relationship between net working capital (NWC) and firm valuation, profitability and risk. The results suggest that, in managing working capital, firm managers must make a trade-off between their objectives for profitability and risk control. Working-capital management is of particular importance in firms with less access to capital; it is also important when firms are expanding their investments during periods of economic recovery.
Originality/value
This paper contributes to the literature in several ways. First, to my knowledge, it provides the most comprehensive investigation, to date, on the relationship between working capital management and firm valuation, profitability and risk in an emerging market. Second, this study documents the existence of an optimal level of NWC in an emerging market. Third, firm performance, as measured in both market and accounting value, can be improved with efficient working capital management. Finally, the study includes the impact of the business cycle in an analysis of the effects of working capital management on firm performance.
... However, according to (Prasad et al., 2019), only about 39% look at returns that are directly related to operating activities, including gross margin, net margin, or operating margin (OMR). By incorporating cost management potentials through the operating expense ratio (OER), an area that is still understudied in WC research, this study expands its analysis (Aktas et al., 2015) (Le, 2019). Using data from consumer products companies from 2018 to 2023, this study assesses the effect of DWC on cost and profitability by concentrating on overall operational efficiency. ...
... The usefulness of operational indicators, like the CCC, in assessing operating profitability is reinforced by their close alignment with cash flow timing (Richards & Laughlin, 1980). According to (Aktas et al., 2015) and (Le, 2019), WC also has unrealized potential in risk and cost management. In order to close this gap, this study uses operating margin (OMR) to measure profitability related to WC's operating cycle and takes into account DWC's capacity for cost control using the operating expense ratio (OER). ...
... This suggests that firms with stronger liquidity positions may have more flexibility to negotiated favorable terms with suppliers, reduce financing costs, or better manage day-to-day operational expenditures. These findings are consistent with the past studies who find the negative effect of additional investment in working capital reduces stock-return volatility and firm risk (Le, 2019) (Aktas et al., 2015). ...
Objective— The primary aim of this study is to investigate the effect of dynamic working capital (DWC) management on operational efficiency through operating expenses and operating margins across non-financial firms in emerging markets. Methodology/Technique – This study utilized generalized method of moments (GMM) to evaluate a comprehensive dataset of 438 firms from Indonesia, Malaysia and Thailand for the period 2018 to 2023. Findings – DWC is measured study using both cash conversion cycle (CCC) and working capital ratio (WCR). Results show that optimized DWC management reduces operating expenses (OER) and increases operating margins (OMR). These findings highlight the importance of efficient working capital practices and liquidity management in emerging markets. Novelty – This study provides valuable insights for financial managers in emerging countries, advocating focused strategies on working capital cycles to strengthen operational efficiency and profitability. Type of Paper: Empirical JEL Classification: M13, M40, M49. Keywords: Working capital management, Cash conversion cycle, working capital requirement, Operating efficiency, Emerging countries Reference to this paper should be made as follows: Bashir, R; Ahmad, M; Sherif, S.R. (2024). Determining the nexus between Dynamic Working Capital Management and Operational Efficiency in Emerging Southeast Asia, J. Fin. Bank. Review, 9(2), 49 – 60. https://doi.org/10.35609/jfbr.2024.9.2(1)
... Similar results are obtained in several markets, for example, in the US (C. H. Filbeck et al., 2017;Wang, 2019), in Germany (Campomanes, 2020), in Turkey (Karadagli, 2013), in Brazil (Almeida & Eid, 2014), in Vietnam (Le, 2019) and in Malaysia (Loo & Lau, 2019), with the use of cash conversion cycle and working capital as representative measures of WCM. More recently, C. H. also prove the existence of a negative relation between CCC and expected returns while analyzing a large sample of firms quoted in 22 developed markets and 25 emerging stock markets, between 1993 and 2018. ...
... Firms that during the sample period did not have data in the Eikon-Datastream and Orbis databases were eliminated. Finally, to mitigate the influence of outliers, a 5% winsorization was performed, in line with Deloof (2003), Le (2019), Mathuva (2010), Shin and Soenen (1998), among others. We include firms that during the period ceased to be listed on the stock exchange or went bankrupt, to avoid survivorship bias. ...
... Cash conversion cycle is a frequently used measure to represent working capital efficiency (e.g., X. Deloof, 2003;Lazaridis & Tryfonidis, 2006;Le, 2019;Wang, 2019). Furthermore, CCC intuitively realizes the breakdown of the various working capital components, as it is calculated as follows: ...
Based on the working capital management trade-offs, this paper investigates the existence of an optimal point not only of the cash conversion cycle, but also of its components,
which maximizes the stock returns of European listed firms. Most studies analyze the non-linear relationship between working capital management and accounting profitability.
Studies analyzing stock returns focus on a linear relationship. Therefore, this work adds new knowledge for the literature. The relation between working capital management and stock returns is analyzed with panel data models, in which the quadratic function of cash
conversion cycle, or of its components (days sales outstanding, days sales inventory, and days payable outstanding), is considered to capture the existence of an optimal point. The
results confirm the existence of an optimal cash conversion cycle point that maximizes stock returns. The conclusions are relevant for managers, investors, and shareholders, as they prove that firms able to efficiently manage working capital trade-offs reward shareholders with higher returns
... Assets are considered productive based on the intensity of asset usage or accounts receivable turnover (Banamtuan et al., 2020). Research by Bates et al. (2009), Isshaq et al. (2009), and Le (2019 further explain the productivity of asset management can affect firm performance. Firm performance affected by asset management includes firm value, profitability, and risk. ...
... Asset management is a policy of utilizing assets optimally to improve company performance. Poorly planned asset management has the potential to increase firm performance risks in the form of profitability, firm value, and risk (Bates et al., 2009;Isshaq et al., 2009;Le, 2019). Spatt (2020) wrote that asset management is prone to conflicts of interest between principals and agents. ...
... Asset management is an agent policy to manage assets effectively and efficiently (Lima et al., 2020). Asset management aims to optimally utilize assets to improve firm performance (Bates et al., 2009;Isshaq et al., 2009;Le, 2019). Firm performance is translated into profitability, firm value, and risk. ...
Purpose: This study aims to explain the effect of investment policy, funding policy, and asset management on firm value. The theory used to explain the relationship between variables in the research model is agency theory.Method: Data was collected from 65 samples of mining sector companies listed on the Indonesia Stock Exchange between 2015 and 2019. Using panel data, this study used panel regression analysis to explain the relationship between variables.Findings: The test results indicate that investment policy and funding policy do not affect firm value. Asset management has a significant positive effect. The effect of asset management on firm value also confirms agency theory.Originality/ValueThis study used a research sample of mining sector companies for the 2015-2019 period which faced pressure in the form of falling demand for Indonesian mining commodities in the world market and issues of environmental damage. The financial condition of the mining sector in the research period generally experienced financial difficulties due to these pressures.
... To date, research on the relation between WCM and stock risk is scarce and is mainly focused on the study of a linear relation that has been met with mixed evidence. Lee and Kim (1998), and Wang (2019) found a positive relation, while Le (2019) found a negative relation. The inconclusive evidence can be due to the fact that a linear relation neglects the trade-offs that have already been acknowledged by scholars (e.g., Abuzayed, 2012;Autukaite and Molay, 2011;Deloof, 2003;Padachi, 2006). ...
... When analysing a sample of 497 listed firms in Vietnam between 2007 and 2016, Le (2019) found a negative relation between CCC and total stock risk. Similar results were obtained by Akbar et al. (2021) Table I. ...
... Furthermore, the empirical results are not unanimous. Akbar et al. (2021) and Le (2019) concluded that there is a negative relation between WCM and stock risk, while Lee and Kim (1998) and ...
Purpose: This paper investigates the existence of an optimal point of the cash conversion cycle (CCC) and its components, which minimizes firms’ stock risk.
Methodology: This study applies fixed effect models to a sample of firms listed in Euronext exchanges, from 2011 to 2019. Stock risk is proxied by the standard deviation of stock returns. The quadratic function of the CCC and its components (days sales outstanding – DSO, days sales inventory – DSI, and days payable outstanding – DPO) is applied to capture an optimal point of the working capital management (WCM).
Results: Results show the existence of a U-shaped relation between WCM and stock risk, suggesting the existence of an optimal CCC and DSI point that minimizes stock risk
Originality: To the best of our knowledge, this is the first paper that explores the existence of an optimal CCC point and also an optimal point of its components (DSO, DSI, and DPO), which minimizes stock risk. This paper is also the first to assess the impact of WCM on stock risk of firms listed in European stock exchanges. The results are also relevant to managers, shareholders, and investors since they demonstrate that firms can minimize the risk of their stocks by practicing an optimal WCM.
... Literature works discuss working capital management determined that efficient management could improve corporate profitability. The applied working capital level of a company also influenced the profitability based on the supply, debt, and credit levels (Le, 2019). ...
... It makes a company loses its opportunities to fund some high-value investment projects (Le, 2019). A company will experience higher storage costs. ...
... On the other hand, the added investment in working capital would decrease the liquidity risk. It means the company could meet the financial obligation due and pay the debt with the current assets (Le, 2019). The collateral investment as the working capital could decrease the corporate risk because the company has cash reserves (Aktas, Croci, & Petmezas, 2015). ...
Company policies related to working capital are very important to note, given the amount of working capital as a proportion of company assets. The financial manager must be able to maximize the use of working capital for the benefit of shareholders. This research aims to assess and analyze the effect of working capital management measured by the cash conversion cycle on profitability and risk in manufacturing companies in Indonesia. Data used are from financial statements of manufacturing companies listed on the Indonesia Stock Exchange and fulfill research requirements using with purposive sampling method amount to 81 companies from 2014 to 2018. The result of the study shows that the cash conversion cycle has a negative significant effect on the profitability and risk of the company. Pengaruh Manajemen Modal Kerja terhadap Profitabilitas dan Resiko Bisnis Perusahaan Manufaktur Indonesia Abstrak Kebijakan perusahaan mengenai modal kerja sangat penting untuk diperhatikan, mengingat besarnya modal kerja sebagai proporsi aset yang dimiliki perusahaan. Manajer keuangan perusahaan harus mampu memaksimalkan penggunaan modal kerja demi keuntungan pemegang saham. Penelitian ini bertujuan untuk menguji dan menganalisis pengaruh manajemen modal kerja yang di ukur melalui siklus konversi kas terhadap profitabilitas dan risiko yang di hadapi perusahaan manufaktur di Indonesia. Data yang digunakan adalah laporan keuangan perusahaan manufaktur yang terdaftar di Bursa Efek Indonesia dan pengambilan sampel dalam penelitian ini menggunakan metode purposive sampling sejumlah 81 perusahaan dalam jangka waktu 2014-2018. Hasil penelitian ini menunjukan bahwa manajemen modal kerja yang di ukur melalui siklus konversi kas berpengaruh negatif signifikan terhadap profitabilitas dan risiko perusahaan.
... Literatur keuangan perusahaan mengakui pentingnya keputusan keuangan jangka pendek bagi profitabilitas perusahaan, namun hasil penelitian yang ditemukan memiliki arah penelitian yang berbeda (Anton and Afloarei Nucu 2020; Wang, Akbar, and Akbar 2020). Beberapa penelitian menemukan bahwa modal kerja berpengaruh negatif terhadap kinerja perusahaan (Chalmers, Sensini, and Shan 2020;Gonçalves, Gaio, and Robles 2018;Ren et al. 2019;Sianturi 2021;Herdiyana, Sumarno, and Endri 2020;Le 2019;Wang, Akbar, and Akbar 2020). Perusahaan yang memiliki banyak hutang dapat mengurangi insentif perusahaan dalam meningkatkan manajemen modal kerja perusahaan, manajemen perlu membuat tradeoff antara tujuan mereka untuk profitabilitas dan pengendalian risiko (Le 2019). ...
... Beberapa penelitian menemukan bahwa modal kerja berpengaruh negatif terhadap kinerja perusahaan (Chalmers, Sensini, and Shan 2020;Gonçalves, Gaio, and Robles 2018;Ren et al. 2019;Sianturi 2021;Herdiyana, Sumarno, and Endri 2020;Le 2019;Wang, Akbar, and Akbar 2020). Perusahaan yang memiliki banyak hutang dapat mengurangi insentif perusahaan dalam meningkatkan manajemen modal kerja perusahaan, manajemen perlu membuat tradeoff antara tujuan mereka untuk profitabilitas dan pengendalian risiko (Le 2019). Kurangnya informasi dan kesalahan dalam memprediksi peluang pertumbuhan ke depan dapat mengakibatkan perusahaan melakukan kesalahan investasi tinggi pada modal kerja sehingga memberikan dampak negatif pada kinerja perusahaan yang dapat menghambat keberlanjutan perusahaan (Wang, Akbar, and Akbar 2020). ...
... Hal ini juga bisa berarti bahwa modal kerja bukan menjadi satusatunya faktor utama untuk menentukan perolehan laba di dalam perusahaan. Faktor lain seperti kondisi ekonomi juga bisa menjadi pertimbangan bagi perusahaan untuk menyesuaikan kebutuhannya dengan tingkat modal kerja (Herdiyana, Sumarno, and Endri 2020;Le 2019). ...
Working capital decisions are important for financing the operations of manufacturing companies, especially during a pandemic which indicates a decline in working capital. This study aims to examine the effect of working capital (Net Working Capital - NWC) on the profitability of manufacturing companies on the Indonesia Stock Exchange (IDX) during non-pandemic and pandemic conditions covid-19, as well as testing the moderating effect of financial constraint. The sample is determined by technique purposive sampling for manufacturing companies from 2018-2021 and analyzed with moderation regression. Results do not confirm Resource-Based Theory where working capital has a significant negative effect on profitability because high working capital creates additional costs that can reduce profits. In addition, the data shows that each sub-sector has different characteristics in terms of working capital requirements and profit-generating capabilities. There are sub-sectors with low (high) working capital that have high (low) profitability. This negative direction of working capital and profits continued until the pandemic conditions, of course, several sub-sectors experienced a decline in profitability. This study also shows that there is no moderating effect financial constraint, but financial constraint has a significant positive effect on profitability. The lower financial constraint, the company's profits continued to decline which could be due to the company's less than optimal management of available funds. The theoretical and practical implications of this study are unconfirmed Resource-Based Theory due to differences in sub-sector and company characteristics. The results show the importance of management in managing working capital optimally to profitability even in pandemic and financial constraints.
... We use a data set of firms listed on Vietnamese stock exchanges between 2007 and 2019. Vietnam is a transitional economy with low financial reporting disclosure standards (Blenman and Le, 2014), low market efficiency (Gupta et al., 2014) and limited alternative sources of external capital (Le, 2019). Ownership structure and capital access are unique in Vietnam, where the government and foreign investors are key market participants Moore, 2023, 2022). ...
... The Vietnamese government finances the SOCs. Compared with other firms, SOCs incur a lower cost of accessing capital from several state-owned commercial banks (Le, 2019;Reddy and Le, 2020). In addition, foreign investors provide a large source of capital in Vietnamese markets (Blenman and Le, 2014;Reddy and Le, 2020). ...
... In addition, foreign investors provide a large source of capital in Vietnamese markets (Blenman and Le, 2014;Reddy and Le, 2020). Following previous studies (Le, 2019;Le and Moore, 2023), we analyse the sample by dividing it into subsamples of high and low capital access and subsamples of SOCs and non-SOCs. The high capital-access subsample comprises firms with a combined government ownership and foreign ownership of more than 50% (Le, 2019). ...
Purpose
This study aims to examine the effects of market liquidity on earnings management (EM) of seasoned equity offering (SEO) firms considering external capital access.
Design/methodology/approach
This study uses a panel data set of 158 Vietnamese SEO firms from 2007 to 2019. Both real and accrual EM measures are analysed. The study uses two proxies for market liquidity: stock turnover (the ratio of total shares traded over the year divided by total shares outstanding for the year) and high–low spread (estimated following Corwin and Schultz [2012]) and fixed-effects panel and two-stage least squares regression in the analysis.
Findings
Firms with high (low) market liquidity report low (high) EM, and the result is robust after controlling for endogeneity. The results hold for both real and accrual-based EM for both market liquidity proxies. However, the results are robust only for firms with low external capital access and non-state-owned companies. The authors find a negative market reaction to earnings manipulation.
Practical implications
This study’s findings help policymakers, investors and managers make better decisions regarding SEO firms and reduce the risk of inaccurate information due to EM.
Originality/value
Among the few studies that test the influence of market liquidity on EM, to the best of the authors’ knowledge, this study is the first to examine the effect of market liquidity on EM in the context of SEO firms considering the impact of capital access.
... Nguyen (2019) uncovered asymmetry in cash adjustments, which is crucial for understanding how firms align with targets (Nguyen, 2019). Le (2019) emphasised the negative relationship between net working capital and key metrics, which is particularly vital for firms with limited capital access (Le, 2019). Joo and Parhizgari (2021) highlighted the influence of credit rating changes on leverage adjustments, especially for over-levered firms (Joo and Parhizgari, 2021). ...
... Nguyen (2019) uncovered asymmetry in cash adjustments, which is crucial for understanding how firms align with targets (Nguyen, 2019). Le (2019) emphasised the negative relationship between net working capital and key metrics, which is particularly vital for firms with limited capital access (Le, 2019). Joo and Parhizgari (2021) highlighted the influence of credit rating changes on leverage adjustments, especially for over-levered firms (Joo and Parhizgari, 2021). ...
Purpose
The purpose of the study is to examine factors influencing cash holding of firms during periods of crisis. In recent times, the level of cash holdings in firms has seen a steady rise across industries for diverse reasons. However, the need to study cash holding becomes even more compelling during geopolitical instability as it causes firms to hold greater cash reserves for precautionary reasons.
Design/methodology/approach
This paper systematically reviews literature from 1984 to 2024 by organising the findings thematically based on the relationship between corporate cash holdings (CCH) and firm performance in times of war. The paper used 47 research articles from the Scopus database and Google Scholar. Literature connected to CCH, firm performance and war times was explored. The title and abstract analysis were conducted using VOSviewer software. As a result, the predetermined body of literature was visualised, and six theme-based clusters were identified.
Findings
This paper systematically reviews empirical studies, categorising them into six theme-based groups. These clusters encompass CCH and Determinants, Optimal Cash Holding Levels, Cash Holding Adjustment Speed and Theory, Cash Holding and Firm Value, Cash Holding and Firm Performance, Cash Holding in the Context of the Ukraine War and the adaptive financial strategies of firms in response to economic conditions by using cash holding as a hedging instrument. Inflation prompts adjustments in cash-holding strategies at a macro level. During crises, lower interest rates lead to increased cash holdings. Various motives influence firms’ cash-to-assets ratios. According to the pecking order theory, geopolitical risk negatively affects cash holdings. Exposure to pandemics prompts an increase in cash reserves. War shocks have a profound impact on economies, markets and stability; hence, geographic diversification can reduce the need for precautionary cash. In times of uncertainty, the financial stress of firms can get elevated, and therefore, having a well-diversified geographical portfolio of a firm’s investments can aid in meeting any financially distressing situation.
Originality/value
The literature on CCH has been phenomenal. This paper attempts to structure the issues surrounding cash holding and firm performance in wartime, like the Ukraine war, using the VOSviewer software. This study endeavours to highlight the reasons for cash holding during crises and understand how cash holding affects firm performance. Finally, this paper also tries to comprehend whether cash holding helps as a hedging instrument in times of war.
... Findings indicate that working capital has a material influence on companies' ROA. Other studies such as [46,47] used time series in Vietnam from 2007 to 2026 and found varying results. The references [48][49][50] used cross-sectional data and also discovered results between the two variables. ...
... Studies by [42,[54][55][56]65] support for this finding. However, those by [16,34,46,53] run contrary to this finding. Based on its results, the study's hypothesis that working capital management had a significantly positive effect on firms' financial performance as measured by ROA, ROE, and ROCE could not be rejected. ...
The paper examines the nexus between working capital management (WCM) and financial performance of listed non-financial firms in Ghana. An unbalanced panel data for the period 2008 to 2021 was used for the study. It is observed that the residual terms of the models were cross-sectionally independent and all the series were first-differenced stationary and cointegrated in the long term The elasticities of the predictors were explored via the Fully Modified Ordinary Least Squares (FMOLS) and the Dynamic Ordinary Least Squares (DOLS) techniques. The findings of the study indicate that WCM proxied by accounts receivable period (ACP), accounts payment period (APP), and inventory turnover period (ITP) have significant positive effect on firms’ financial performance measured by return on assets (ROA), return on equity (ROE), and return on capital employed (ROCE). This suggests that the working capital management practices of non-financial firms in Ghana improve their financial performance. Also, firm size and asset growth improve firm financial performance. On the causalities between the variables, bidirectional causalities between ACP, APP, ITP, size, and thecompanies’ ROA, ROE, and ROCE are disclosed. Finally, causality from growth to the ROA, ROE, and ROCE of the firms are unraveled. It is recommended that policy makers of non-financial firms in Ghana should not overlook WCM practices in their financial decisions, since ignoring them could seriously compromise the firms’ short- and long-term sustainability.
... While the study uses OM, it also pays attention to the cost management potential of WCM by employing the operating expense ratio (OER). Few prior empirical works assess the cost or risk management potential of WCM (Aktas et al., 2015;Le, 2019). Hence, this study focuses on complete operational efficiency (OE) in terms of cost and profitability. ...
... In addition, there is a scarcity of previous empirical studies that assess the cost or risk management abilities associated with WCM (Aktas et al., 2015;Le, 2019). This study uses OM, a profitability measure linked to the operating cycle, while also considering the cost management potential of DWCM by employing the OER. ...
Purpose
Consumer goods firms often tie up inventory and accounts receivable resources, creating cost and liquidity issues. Dynamic working capital management (DWCM) can mitigate these concerns and enhance operational profitability. The study investigates DWCM's impact on operational efficiency (OE).
Design/methodology/approach
The empirical estimation uses pooled ordinary least squares (OLS), random effect and system generalized method moments (GMM) regression analysis of consumer goods firms in Scandinavia from 2005 to 2022 to present the results.
Findings
The findings indicate that DWCM has an inverse relationship with operating cost, while positively impacting operating profit. The final outcome demonstrates that DWCM enhances OE. Furthermore, the working capital ratio (WCR) consistently exceeds the cash conversion cycle (CCC) in all models, indicating that prudent management of cash in accounts receivable, inventory and accounts payable leads to higher cost savings and superior performance.
Practical implications
The results suggest that organizations that prioritize the management of the absolute cash committed to inventory, receivables and payables as much as the CCC experience improved OE.
Originality/value
This paper adds to the literature on how DWCM affects OE in the consumer goods sector. It also highlights the impact of time management and cash management in WCM on OE. Additionally, it analyzes how DWCM variables affect operating costs and profits, shedding light on their efficiency impact.
... Management must consider to what extent working capital must be owned before sacrificing profitability and company value. Further studies on optimal working capital thresholds must be developed (Le, 2019). ...
... Leverage cannot moderate the effect of net working capital on company merit in the healthcare sector in the health services and health equipment subsectors listed on the IDX in 2020-2021. This can be explained by referring to Altaf (2018); Le (2019) which showed that NWC negatively affects firm's value. As discussed above, investors value restrictive working capital policies more highly, and companies with too much working capital are undervalued. ...
The pandemic has caused a contraction in the global economy. Amidst the slowing of the economy, a sector still grows so-called healthcare. This is shown by the growth in the healthcare sector’s GDP during the pandemic, but the PBV data on these companies didn’t show a satisfactory result. This study assesses factors that might increase the firm’s value of healthcare companies, such as profitability, working capital, tangible assets, and institutional ownership moderated by leverage on the firm’s value. This research uses a panel data analysis technique with moderated regression analysis (MRA) in E-views 12, quarterly financial statements from 2020-2021 of nine companies in the subsector of health services and equipment from the healthcare sector. The empirical results show that tangible assets have a negative impact, and leverage positively impacts a firm’s value, while the other factors do not affect a firm’s value. Leverage can only moderate tangible assets to weaken the negative effect of tangible assets, while other factors can’t be moderated by leverage. This result shows that leverage must be optimised to maximize the firm’s value to reduce the negative effects of an investment in tangible assets.
... No (Le, 2019) A panel data collection of 497 companies covering the 2007 to 2016 era is used. Using the panel data approach that includes firm and the year fixed effect model regression analysis. ...
... credit sales, the inventory of their products is linked up, notes and bills are distributed and strong for profitability. The judgment sets out the work of previous authors (Chang, 2018;Ren et al., 2019;Le, 2019;Boisjoly et al., 2020;Iqbal et al., 2020). In addition, Tsagem (2020) does not seem the second. ...
... From a flow information perspective, a series of research reports found a positive nexus between working capital management (WCM) (proxied by CCC) and CFP (Moussa, 2018;Baños-Caballero et al., 2020;Lyngstadaas, 2020;Amponsah-Kwatiah and Asiamah, 2021). Conversely, some articles argue that overinvestment in WCM may cause adverse effects and negatively influence enterprise profitability (Le, 2019;Ren et al., 2019;Wang et al., 2020;Akgün and Karataş, 2021). Recent articles, however, argue a nonlinear nexus between investment in WCM and enterprise profitability (Laghari and Chengang, 2019;Mahmood et al., 2019;Anton and Nucu, 2021). ...
... Longterm, companies whose market-based performance is greater should strive for the maximum FR value to obtain enhanced CFP. Contrary to existing research that suggests a positive FF-CFP (CCC-CFP) nexus (Chun and Yanbo, 2016;Moussa, 2018;Al-Slehat, 2019;Bilyay-Erdogan, 2020;Baños-Caballero et al., 2020;Lyngstadaas, 2020;Amponsah-Kwatiah and Asiamah, 2021) or a negative FF-CFP (CCC-CFP) nexus (Agha and Faff, 2014;Le, 2019;Ren et al., 2019;Wang et al., 2020;Akgün and Karataş, 2021), this study proposes a concave-convex FR-CFP nexus during COVID-19 periods which is consistent with the TMGT effect and TLGT effect. ...
This study not only aims to elucidate the curvilinear nexus between financial resilience (FR) and corporate financial performance (CFP) by drawing on the ‘too much of a good thing (TMGT)’ and ‘too little of a good thing (TLGT)’ effect but also attempts to examine whether the nonlinear relationship explains the conflicts found in previous findings. Data were analyzed from Taiwan publicly listed manufacturing firms amid the COVID-19 epidemic. Quantile regression approach results evidence that relationship between FR and CFP is of a concave-convex pattern. Moreover, the environmentally sensitive and non-sensitive firms are linked to CFP differently. The nexus between FR and CFP is concave for the environmentally sensitive firms, whereas the FR-CFP nexus is concave-convex for the environmentally non-sensitive firms. Overall, Taiwan’s manufacturing firms should carefully evaluate how capital is allocated to FR to avoid under- or over-investment in FR.
... Therefore, working capital management is thus the remedy for a firm's ability to meet short-term commitments due for payment, and it is a condition that must be met in order for the entity's operations to continue (Bakare, 2023). Working capital management, according to Le, (2019), is concerned with the efficient use of cash required for the business' continuous activities in order to achieve its objectives. ...
... This research demonstrates that an increased account payable and discounts on early payments take precedence when a company's working capital falls below the desired level. The findings of this study are aligned with the study by Le (2019); Habib and Mourad (2022) and Bakare, Almustapha and Salman (2022) but contradict the study by Fahmida and Ye (2019). ...
Detrimental impact of various global financial crises on manufacturing enterprises' ability to meet their financial obligations as well as recover money from customers has rendered numerous businesses inoperable. This study examined working capital management and firms’ profitability in emerging market, Nigeria listed consumer goods companies for the period 2011-2021. Data were extracted from the financial statement of the sampled companies with the use of purposeful sampling technique. Using the GMM estimator technique, the finding revealed that account payable has positive and statistically significant effect on return on equity while cash conversion circle has negative and insignificant effect at 5% level of significant respectively. The study concluded that accounts payable was found to increase the likelihood of profitability. Therefore, governments should make efforts to provide adequate infrastructure, such as a constant and stable electricity supply, a good road network, and a rail system, to facilitate cost-effective production and the movement of goods.
... Firms with a longer CCC days require higher working capital, which raises financial costs and thus dimishes profitability. We expect that CCC will have a negative effect on profitability (Le, 2019;Alarussi and Gao, 2021;Chang, 2018;Fernández-López et al., 2020). ...
... The shorter CCC days means shorter inventory on hand, shorter days of receivable collections, and longer days to pay suppliers. These results have been supported by previous research by (Le, 2019;Alarussi and Gao, 2021;Chang, 2018) ...
This study aims to examine effect of liquidity on profitability of publicly listed retail companies on the Indonesian Stock Exchange (IDX). This study uses firm size and Working Capital Management (WCM) efficiency as control variables. The sample in this study consisted of 15 publicly listed retail companies in the period of 2014-2019. All variables are measured by a ratio scale. Profitability is proxied by return on assets. Data was analyzed with panel data regression using a fixed effect model. This study shows that liquidity has a positive and significant effect on profitability when measured using the current ratio. In addition, company size has a significant positive effect on profitability. A higher composition of current assets to current liability improves profitability. On the other hand, Cash Conversion Cycle (CCC) as a proxy of WCM efficiency has a significant negative correlation with profitability. This research findings contribute to understanding of the impact of liquidity, firm size and CCC on profitability in retail industry.
... In economic disastrous circumstances, the performance and survival of any organization largely depends upon proper and timely management of working capital (Ren et al., 2019;Simon et al., 2021). Tremendous amount of research work has been done on WCM and profitability in the normal economic conditions (Le, 2019); unfortunately, studies are very limited pertaining to management of working capital during economic crisis Covid-19 (Olowookere et al., 2021). ...
The goal of current study was to analyze profitability and working-capital-management of the multinational and local pharmaceutical companies of Pakistan during the pre, concurrent and post-COVID-19 era. Cross-sectional-survey was conducted from January-2016 to December-2023. Data was collected from multinational-pharmaceutical-companies (MPC) and national-pharmaceutical-companies (NPC). The data was collected by questionnaire; verified by annual-reports of companies and also from the Karachi-Stock-Exchange and analyzed by ordinary-least-square (OLS) regression-analysis. Despite the challenges of COVID-19 pandemic, MPC achieved its highest growth with 21% increase in 2021 versus 2020. Similarly, NPC attained its highest increase of 38% in 2022 versus 2021. Pearson-correlation-coefficient (r) and regression-coefficient (r2) in between era (2016 to 2023) and net-sales of MPC (r=0.972; r 2 =0.944; p=0.0014) and NPC (r=0.992; r 2 =0.984; p=0.0321); in between era (2016 to 2023) and gross-profit of MPC (r=0.682; r 2 =0.465; p=0.022) and NPC (r=0.963; r 2 =0.927; p=0.01); in between era (2016 to 2023) and % net-profit of MPC (r=0.054; r 2 =0.00291; p=0.082) and NPC (r=0.044; r 2 =0.00193; p=0.059); in between era (2016 to 2023) and % return-on-assets of MPC (r=0.216; r 2 =0.0466; p=0.051) and NPC (r=0.077; r 2 =0.0059; p=0.901). COVID-19 period has provided an opportunity for pharmaceuticals to enhance profitability. Working-capital-turnover and inventory-turnover have negative impact on profitability of both companies.
... Zariyawati et al. (2009) find a negative relationship between the cash conversion cycle (CCC) and firm profitability in Malaysia, suggesting that efficient WCM can lead to improved profitability. Pakistan, Charitou et al. (2010) in Cyprus, andLe (2019) in Vietnam. ...
This study contributes to the literature on the determinants of firm value in emerging capital markets by examining the role of working capital management (WCM) in the Egyptian context. Given the unique characteristics of emerging economies, such as underdeveloped financial systems, heightened economic volatility, and institutional deficiencies, the relationship between WCM and firm value is expected to differ significantly from that in developed markets. In this study we investigate the impact of WCM measured by four components (cash conversion, average collection period, average payment period, and inventory turnover) on the firm's profitability measured by gross operating margin, and on the market value measured by Tobin Q. Using a sample of non-financial firms and a robust estimation technique, the study results reveal a partially significant relationship between the WCM components and profitability. The results did not reveal a significant relationship between the WCM components and the market value.
... Companies use working capital like cash, inventory, accounts receivable, company securities, and other current assets to finance their short-term activities and ongoing operations (Le, 2019). Most manufacturing companies typically have these current assets constituting a large portion of their total asset, so paying great attention to the management is necessary. ...
Objective: This study aims to examine the impact of working capital management on profitability of go-public ASEAN-5 food and beverage companies. Design/Methods/Approach: This study employs multiple linear regression analysis on secondary financial data of go-public ASEAN-5 food and beverage companies from 2017-2022. The sample for the research is deliberately chosen through purposive sampling technique. Findings: The results indicate that the cash conversion cycle (CCC), receivable conversion period (RCP), and accounts payable period (APP) have a significant negative impact on profitability, proxied by return on assets (ROA), while the inventory conversion period (ICP) has a positive effect on profitability. Originality/Value: This study uniquely explores the food and beverage sector in the ASEAN-5 region with adding the dimension of crisis, COVID-19 pandemic. Practical/Policy implication: Based on the results, food and beverage sector managers should be more careful in making investment decisions regarding inventory, especially during a crisis. Also, maintaining good trade relations with suppliers through timely debt payment would be better.
... Conversely, the negative relationship put forward by [52] is opposed by [17]'s study, which found a concave relationship between working capital and performance. [26] [46] [47] found a U-shaped relationship. ...
... these findings align with a nuanced interpretation of the triple Bottom line (tBl) concept. While prioritizing social and environmental practices, our study reaffirms that robust financial performance remains a core factor shaping market perceptions of risk, and thus long-term sustainability (Aydoğmuş et al., 2022;Ferriswara et al., 2022;le, 2019;singla & prakash, 2023). this suggests companies demonstrating effective asset utilization amidst hazardous waste production are viewed with greater investor confidence, providing the resources needed to further support social and environmental initiatives for true long-term value creation. ...
This study investigates the impact of sustainability reporting (SR) and good corporate governance (GCG) on firm value in the Indonesian manufacturing sector, with a focus on financial performance (ROA) as a mediating variable. Theoretical frameworks underpin the rationale for considering financial performance as a pathway that captures the economic outcomes of SR and GCG practices. The study utilizes quantitative methods and secondary data sourced from reports of companies listed on the Indonesia Stock Exchange (IDX) between 2018 and 2022. Contrary to expectations, SR does not directly impact firm value, nor does financial performance mediate this relationship. However, financial performance significantly mediates the relationship between GCG and firm value, indicating that effective governance enhances firm valuation through improved financial health. Methodologically, variance inflation factor (VIF) analysis and partial least squares structural equation modeling (PLS-SEM) address potential concerns about multi-collinearity and redundancy, ensuring a clear differentiation between the operational impacts of SR and GCG and their financial implications. The study underscores the importance of integrating robust governance frameworks to enhance firm valuation. By clarifying the mediating role of financial performance, this research contributes to the discourse on corporate sustainability and governance in emerging markets, emphasizing strategic considerations for enhancing firm value.
... The need for efficient WCM in both crisis and normal periods has been demonstrated in previous studies in developing countries [26,27]. Since China is among the few countries that had successfully control COVID-19, we aim to fill this gap by examining the WC-financial performance relationship in China's agri-food sector during both COVID-19 and the financial crisis of 2008. ...
The objective of this study is to explore the impact of working capital management on firms’ financial performance in China’s agri-food sector from 2006 to 2021. In addition, we analyze whether this impact is the same during the 2008 financial crisis and the 2020 COVID-19 crisis. Working capital management is measured by working capital investment policy (measured by current assets to total assets ratio), working capital financing policy (measured by current liabilities to total assets ratio), cash conversion cycle, and net working capital ratio. The results reveal that current assets to total assets ratio and net working capital ratio positively influence financial performance measured through return on assets (ROA), while current liabilities to total assets ratio and cash conversion cycle negatively influence ROA. We also find that the relationship between working capital management and financial performance is more affected during COVID-19 than in the 2008 financial crisis. The findings might provide important implications for company managers to make optimal working capital management practices, depending on the economic environment.
... Thus, it is interesting to examine the relationship between financial bootstrapping and sufficient working capital. Meanwhile, external factors also play a role in providing working capital, including sources from government support (Le, 2019;Ren et al., 2019). During the COVID-19 pandemic, many countries launched various fiscal and monetary stimulus policies H 1 : Financial bootstrapping has a significant positive effect on working capital. ...
This study aims to investigate the effects of financial bootstrapping and government support on working capital, as well as the moderating role of entrepreneurial orientation towards the impact of working capital on financial performance. The study was conducted on 260 MSME owners in the food and beverage sector in Semarang, Surakarta, and Salatiga, in Central Java Province, Indonesia. By using a Partial Least Squares-Structural Equation Modeling (PLS-SEM) analysis, the determinant effects and consequences of working capital were determined. The findings of this study indicate that financial bootstrapping and government support are proven to have a significant positive effect on working capital. Working capital has a significant positive effect on financial performance, but entrepreneurial orientation is not confirmed to moderate the effect of working capital on financial performance.
... 45 The GROWTH of firms has an insignificant negative influence on the PBV, which are quite compatible with findings by many other researchers. 46 Off the control variables, the firm's SIZE shows a significant positive effect on the firm's value measured by PBV which signifies that the firm's value increases as the firms get larger in terms of total assets which is supported by the results of some scholars, 47 but, this result goes against the results found by some of the researchers. 48 The firm's AGE has a negative impact on the firm's value, indicating that the company's value could decrease as its business experience increases with age which is consistent with the findings of some previous studies, 49 and also contradicts some findings. ...
The present study analyzes the effect of financial structure on the value of the Dhaka Stock Exchange (DSE) listed cement manufacturing firms in Bangladesh. The study uses panel data collected from the audited financial statements over the fifteen years from 2006 to 2020 of five sample firms. Through the use of panel data econometric estimation model namely pooled OLS, fixed effects, and random effects model, the results revealed that most of the components of the financial structure have substantial effects on the firm's value indicators-the price-to-book value (PBV), and Tobin's Q. The found results illustrate that the short-term financing indicators-the quick ratio (QR) has a positive and significant relationship, while the cash conversion cycle (CCC) has a significant negative association with the firm's value. Among the long-term financing indicators, the long-term debt ratio (LTDR), and the interest coverage ratio (ICR) have a significant negative impact while the retained earnings ratio (RER) has a significant positive influence on the firm's value. The firm-specific characteristics-that have been employed as the control variables in this study-also have significant impacts on the value of the firm. The results show that the company size has a significant positive impact, but firm age has a negative significant impact on the firm value. It is suggested that managers should try to reduce the length of the CCC and * Assistant Professor of Finance and Banking, Varendra University, Rajshahi-6204, Bangladesh.
... Finally, as shown in Table 9, the NWC is more significant than 5.3% when the approximate coefficient is 0.0173, and the probability value is 0.0052 and statistically significant for all significance levels. Thus, Le (2019) reported a positive link between NWC and profitability. The results are consistent with our study, in which networking capital positively correlates with profitability, as measured by ROA. ...
Purpose: This study was aimed to identify optimal cash holding factors and how they impacted the profitability of Pakistani-listed enterprises.
... The results confirmed a strong negative relationship between net working capital and company value. (Le, 2019) conducted research on the influence of working capital management on company valuation, profitability and risk. It found a significant negative relationship between net working capital (NWC) and company valuation, profitability and risk. ...
p>The purpose of this study is to examine the effect of Profitability proxied by ROA, Working Capital Proxied by Debt Equity Ratio and Liquidity Proxied by current Ratio to the potential for Firm Value in the company. The sample used in this study is various manufacturing companies listed on the Indonesia Stock Exchange during the period 2017 to 2020. The sample selection method used was the purposive sampling method. Hypothesis testing is done using logistic regression. Based on the results of hypothesis testing it can be concluded that the Return On Asset variable is proven to have a significant positive effect on the likelihood of Firm Value, the Debt Equity Ratio Variable is proven to have a significant negative effect on the likelihood of Firm Value, as well as the Current Ratio variable also has a significant Positif effect on the likelihood of firm Value.</p
... The literature reports that working capital directly impacts the company's financial liquidity (Aktas et al., 2015;Kasahun, 2020;Lazaridis & Tryfonidis, 2006;Soda et al., 2022), profitability (Boțoc & Anton, 2017;Maheshwari, 2014;Mardones, 2022;Oladimeji & Aladejebi, 2020;Panda & Nanda, 2018) and costs (Moussa, 2018;Olagunju et al., 2020;Panigrahi, 2017). There are also authors who claim that working-capital decisions have a positive effect on the efficiency of enterprise-asset management (Banerjee & Guha Deb, 2023;Le, 2019;Lind et al., 2012;Olaoye & Okunade, 2020). The literature presents three main classical strategies for managing net working capital: conservative, moderate, and aggressive (Lind et al., 2012;Zimon, 2021). ...
This study explores the impact of adopting the quality management system according to the International Standardization for Organizations (ISO) standards called ISO 9001 on firms’ working capital management efficiency (WCME). This study analyzes Small- and Medium-Sized Enterprises (SMEs) in the Polish construction industry. Regression analysis, difference tests, and robustness checks were conducted to achieve the goals of this study. The regression analysis results confirm a limited positive relationship between firms implementing ISO 9001 and WCME. Additionally, the difference tests show no significant differences in WCME between firms that implemented ISO 9001 and those that did not. During the coronavirus pandemic, a sharp decrease in inventory management costs was observed in firms. Inventories did not linger in warehouses, so they did not generate unnecessary costs, but were quickly sold at high margins. The inventory turnover rates on different days were low. These results suggest that controlling stock levels and receivables during crises is essential because payment bottlenecks and delayed deliveries can occur quickly. The insights generated from this study demonstrate that Polish SMEs in the construction industry fail to realize optimum WCME. Therefore, policymakers in Poland must improve managers’ and shareholders’ awareness of the usefulness of working capital management (WCM).
... Thus, the hypothesis is rejected, indicating that a longer accounts receivable period is associated with improved financial performance. This is also supported by, [39], and, [40]. The F-statistic and its associated p-value are not provided (NA). ...
This study examines the impact of working capital management practices on the financial performance of consumer goods manufacturing firms listed on the Nigeria Stock Exchange. The analysis is based on a sample of 20 firms over a ten-year period from 2011 to 2020, utilizing a generalized method of moment (GMM) model. Four indicators of working capital management, including the cash conversion cycle (CCC), inventory turnover period (IVP), accounts payable period (APP), and accounts receivable period (ARP), are assessed, while return on assets (ROA) is used as the measure of financial performance. The findings reveal that a shorter cash conversion cycle and a higher inventory turnover period positively influence the firm’s financial performance. Conversely, a longer accounts payable period has a negative impact, while a longer accounts receivable period positively affects financial performance. These results highlight the importance of adopting effective working capital management practices for enhancing the financial performance of consumer goods manufacturing firms. The study’s conclusions provide valuable insights for firms, investors, and policymakers, emphasizing the significance of optimizing working capital management to drive financial success.
... Over the last decades, many researchers have responded to management's concerns about the ideal working capital and investigated its determinants. Most of these researchers have examined the connection between profitability and working capital (Le, 2019;Baños-Caballero & Martínez-Solano, 2014;Ahmed & zain, 2017;Randa, 2022). In this regard, Abdul et al. (2021) investigated the influence of working capital management on manufacturing firms' performance in Malaysia. ...
Working capital is the backbone of corporate financial management in relation to how it affects a firm's profitability, liquidity, and risks. This study's goal is to investigate the connections between firm attributes and financial ratios and the working capital of companies in Malaysia. This study examines the impact of seven variables on working capital, namely, firm size (measured by net sales), leverage (measured by debt ratio), equity capital, share price, dividend share, quick ratio is a measure of liquidity, whereas EPS is a measure of profitability. Cross-sectional data for 200 companies in Malaysia were manually collected from their annual reports for the year 2018. Both Ordinary Least Squares regression (OLS) and Two-stage Least Squares (2SLS) are used to examine the collected data and to solve any analytical problems such as endogeneity. The findings show that firm size, equity capital, and dividend share are positively and strongly related to working capital; leverage and share price, and profitability are negatively and significantly related to working capital, and liquidity does not show any significant relationship with working capital. Practically, these results can benefit managers in understanding the relationship between firm attributes and financial ratios and working capital in companies in Malaysia. They may also encourage investors to check the factors that influence working capital investment in companies. This study provides updated results on working capital in Malaysia, especially after the deterioration of the Malaysian currency to 49% of its value in 2013, which put pressure on company managers to choose the appropriate working capital for companies' financial health and operational success. Theoretically, this study supports each of trade-off theory, resource-based theory and pecking order theory. This study is also unique as it empirically examines new variables in the context of Malaysia, i.e., dividend share and shares price.
... This research contributes to the existing stores of studies by expanding a research model on WC that places a significant emphasis on profitability. Although profitability itself influences sustainable growth (Iqbal and Ahmad, 2021;Manaf et al., 2018), the majority of the earlier research solely concentrates on the effect of WC on profitability (Boisjoly et al., 2020;Le, 2019). This is because WC is the only factor that has been shown to have a direct correlation with profitability. ...
Purpose
This study aims to thoroughly examine and understand the relationship between working capital management (WCM) and the sustainable financial performance (FP) in the context of the New Zealand companies listed on stock exchange.
Design/methodology/approach
This study has applied various regression techniques to examine WCM and the sustainable FP relationship. The data set period is from 2009 to 2019. The results are robust upon various layers of robustness parameters. The system-generalized method of moments is applied for managing endogeneity issue.
Findings
The research reveals compelling evidence of a meaningful connection between WCM and sustainable FP indicators. The study specifically highlights the significant negative associations between the cash conversion cycle, average collection period and average age of inventory with the firm’s sustainable FP. Through robust analyses and various parameter adjustments, the study ensures the credibility and reliability of its conclusions, further reinforcing the impact of WCM on the financial health of New Zealand-listed firms.
Practical implications
This study provides future directions for researchers to explore the dynamic relationship between WCM and a firm sustainable FP because it is still a demanding and challenging area. Future research may care to explore the optimal way to reduce the cash conversion cycle, average collection period and average age of inventory for New Zealand firms. The current study does provide insights to NZ financial managers, which is useful for improving sustainable FP by efficiently managing WCM.
Originality/value
WCM is problematic and constitutes a notable challenge; it requires further research, especially in small economies such as New Zealand. Hence, it is an updated and fresh attempt based on a larger data set to measure the empirical relationship between WCM and the sustainable performance of New Zealand-listed firms. Furthermore, the current study uses dynamic panel data estimation techniques in addition to multiple regression techniques.
... The WC association is not exclusively basic for firms with fewer cash-related assets but is also productive when firms are growing their speculations during financial recovery periods (Le, 2019). Consequently, bosses should utilize suitable WC systems to address cash-related issues during emergencies. ...
Purpose-The paper aims to investigate the empirical impact of working capital management (WCM) on firm performance (FP) in the emerging markets of Africa. This paper also aims to investigate this relationship during the global financial crisis of 2008 (GFC, 2008). Design/methodology/approach-The sample of this study comprises two leading emerging markets in Africa (Egypt and South Africa) based on the MSCI world market classification list for the period 2007-2020. The study employs various regression techniques such as fixed effect and system generalized method of moments. In addition to baseline regressions, the authors applied various preliminary tests and, finally robustness measures. Besides the dependent, independent variables, the study uses firm-level and country macroeconomic-level explanatory variables. Findings-The study's results indicate that (1) WCM and FP exhibit a direct relationship and (2) the WCM components such as cash conversion cycle, average collection period and the average age of inventory, have a significant inverse relationship, whereas the average payment period has a direct relationship with FP. The robustness results are assessed based on the selection of an alternative proxy for FP measurement, controlling for industry, country, year effect and the exclusion of the GFC 2008. Practical implications-This study has various implications in terms of theoretical, societal and practical application for practitioners, managers, investors and regulators. In terms of theoretical implications, this is the first study that contributes to the existing body of knowledge in corporate finance and managerial accounting in relation to the examination of this relationship in the African region. Finally, practitioners, including regulators, can benefit from the study's findings while devising investment policies for investors in the region. More specifically, the financial sector conduct authority (FSCA) in South Africa and the financial regulatory authority (FRA) in Egypt can consider these findings to devise financial policies that aim to foster the FP. Social implications-Society benefits from the study's findings too. The efficient management of the WCM components will raise firm profits and investment opportunities for the society in Egypt and South Africa. A firm with good performance levels will increase salaries and will provide compensation to their employees in terms of bonuses. These compensations are one of the sources for achieving FP, which is evident from existing literature as well in the case of corporate governance studies. These compensations have psychological impacts as well. As society has its basic needs and goods, compensation levels will be tilted less toward societal ethical issues. Originality/value-This study has various distinguishing features, which prior studies mostly lack, as most of these studies are on an individual country dataset, shorter periods, mixed results, lesser explanatory variables and no country-related control variables. The authors addressed all these challenges and provided robust results based on various measurement alternatives for the African markets. The study's results confirm a direct relationship between WCM and FP for South Africa and Egypt reflecting the emerging markets in Africa.
... Moreover, high liquidity also guarantees the company to make very profitable investments that demand immediate payments [76]. In contrast, some authors, such as [77], show that the bigger the current assets of a firm, the lower its profitability and risk of working capital. In other words, a more liquid firm will generate lower profitability but bear a lower working capital risk than do firms with a less liquid working capital. ...
Literature suggests two contradictory views regarding the impacts of fintech lending on banks. The competition-instability proponents believe that fintech lending expansion erodes bank market and threatens banks as traditional intermediaries, thereby intensifying bank risk-taking and potentially disturbing financial stability. In contrast, the competition-stability proponents believe fintech lending reduces asymmetric information in the credit market, thus reducing bank risk-taking and increasing bank resilience to a systematic shock. This paper aims to examine the impacts of fintech lending expansion on bank-risk taking, i.e., credit channeling activity and bank risk. This study utilizes the OLS, random effects, fixed effects, and two-step GMM regressions to test the conjectures. Consistent with the competition-stability hypothesis, our evidence indicates that shadow banking increases as banks actively seek channels to diversify their risks but are less likely to use fintech lending as a credit channel. This paper also corroborates the notion that fintech lending expansion encourages banks to diversify their risks. Pertaining to the relationship between fintech lending and bank risk, our results suggest that fintech lending expansion encourages banks to work more efficiently to improve their credit quality rather than to intensify bank risk-taking. These findings also indicate that synergy between fintech lending and banks would increase bank credit quality. This paper also examines the reasonable credit limits for fintech lending firms based on MSMEs’ characteristics. Employing the threshold regression, we find that IDR5 billion is the maximum credit provision to induce the profitability of MSMEs whereas IDR6 billion is the maximum credit provision to minimize the default risk of MSMEs.
... Efficient working capital management is an important area that can be improved through managerial efficiency . Working capital management (WCM) is concerned with the company's management of receivables, inventories, and accounts payable that affect company value and profitability (Le, 2019). ...
The aim of this study is to analyze the impact of working capital management and intellectual capital on the performance of food and beverage companies listed on the Indonesia Stock Exchange (IDX) before and during the Covid-19 pandemic. This study utilizes panel data consisting of financial information from 21 sample companies in the food and beverage sector obtained from the official website of the Indonesia Stock Exchange from 2017 to 2022. The analysis method employed is panel data regression analysis using the statistical software Stata 17. The measurement of firm performance includes profitability ratios proxied by return on assets (ROA) and return on equity (ROE), while firm value is proxied by Tobin's Q. The measurement for the working capital management (WCM) variables consists of days of inventory outstanding (DIO), days of sales outstanding (DSO), and days of payable outstanding (DPO). On the other hand, the measurement for the intellectual capital (IC) variables consists of human capital efficiency (HCE), structural capital efficiency (SCE), and capital employed efficiency (CEE).
... Using a correlation analysis, the study found that inventory conversion cycle is directly related to the net profits of the company. Le (2019) examined the effect of WCM on a firm's profitability of 497 non-financial firms using a panel data methodology that includes firm and year fixed effects regression and concluded that there is a significant negative relationship between net working capital and firm valuation, profitability and risk. Yusuf (2019) investigated the influence of WCM practices on the firm profitability of the Turkish firms for a period of five years (2012-2016) and observed firm profitability has a positive and negative association with accounts receivable period (ARP) and ICP variables. ...
This study investigates the effect of working capital management (WCM) on the profitability of a sample of Indian steel companies. The analysis is based on financial data from BSE Dollex 200 steel sector firms from 2011 to 2020. The effects of WCM were determined using panel data analysis, pooled ordinary least squares (OLS), fixed effect model (FEM), and random effect model (REM). This study revealed that Inventory Conversion Period, Cash Conversion Cycle, and Accounts Payable Period significantly negatively impact the profitability of firms in the Indian steel industry.
Purpose
This paper aims to explore the relationship between the economic value added (EVA) and the working capital efficiency (WCE) of the listed firms in India.
Design/methodology/approach
This paper uses annual data of 401 listed companies for the period 2012–2019. Furthermore, the dynamic panel data regression model was used to investigate the relationship between the variables of interest.
Findings
The results reveal that the net trade cycle (NTC) is significantly and negatively associated with listed firms’ economic value in India, indicating that a shorter NTC generates higher EVA for Indian firms. The authors further explore the association between individual components of the NTC with EVA. The authors also found that an inverse, and significant relationship exists between EVA and the individual components of the NTC. The findings also reported a meaningful relationship between EVA and control variables except for leverage and age. For listed firms, the results suggest that sales growth and firm size are crucial factors driving firms’ EVA.
Practical implications
Higher WCE enhances shareholder value creation, forming positive stakeholders’ expectations toward the company.
Originality/value
Over the years, many studies have been conducted to determine the relationship between WCE and traditional measures of firms’ profitability. However, hardly any study finds out the impact of WCE on the value-based measures of firms’ performance. This study fills the gap in the existing literature by analyzing the impact of WCE on firms’ EVA.
Since agriculture is an important sector of the Russian economy, the problem of lack of capital in this industry is still relevant. The article shows that the effective functioning of agricultural enterprises in modern conditions of a dynamic and rapidly changing business environment in the long term depends on the development of new and more advanced approaches to investment planning. The problem of the study is related to the absence or imperfection of strategic management of investment policy at many enterprises in the agricultural sector, which leads to their difficult financial situation, slows down their development and reduces competitiveness. The main purpose of the presented research is to form proposals for improving the strategic planning model by developing and implementing investment strategies of enterprises of the agro-industrial complex (hereinafter referred to as AIC). In the course of the study, a review of domestic and foreign literature has been conducted reflecting the issues of the investment planning. Within the framework of the modern approach to the problem, the following research methods are used in the article: literature analysis, classification, comparative analysis, description, observation, and statistical method. Special attention in the methodology is paid to the digital transformation of the investment activity of the AIC in Russia and the world. The author substantiates that the modern strategy of attracting investments in the AIC enterprises should radically differ from previous approaches and be implemented with consideration to the development of the information technology market. It is necessary that this approach facilitates the transition of the Russian AIC to the formats of “Agriculture 4.0” and “Agriculture 5.0”.
This study investigates the role of corporate innovation in moderating the impact of working capital management on profitability for a Chinese high‐tech manufacturing industry. Using a two‐way fixed effect model and subgroup analysis, we found that net working capital (NWC) negatively impacted corporate profitability, while corporate innovation magnified the inverse association between the NWC and profitability. This moderating effect was stronger in non‐state‐owned enterprises (SOEs) than in SOEs, and different company sizes exhibited varying effects. This study enhances our understanding of the role of corporate innovation financial management and provides valuable insights for innovation research in emerging economies.
Purpose: To examine the impact of the cash conversion cycle, asset turnover, and capital expenditure on firm value, using profitability as the mediating factor.
Methodology/approach: Using a sample consisting of 61 non-cyclical consumer goods listed firms in Indonesia from 2016 to 2021, a structural equation modeling is employed to analyze the direct, indirect, and total effects of the vari-ables being studied on firm value.
Findings: The cash conversion cycle does not have signi-ficant direct or total effects on firm value, but it has a negative and significant indirect effect on firm value through profitability. Asset turnover and capital expen-ditures directly significantly affect firm value in different directions, but they both have positive and significant total effects on firm value. Profitability fully mediates the effect of the cash conversion cycle on firm value, and partially mediates the effect of capital expenditures on firm value.
Practical implications: To ensure value creation, firms are suggested to monitor the cash conversion cycle, enhance asset turnover, and ensure the profitability of capital expenditures.
Originality/value: Providing empirical evidence on the mediating role of profitability in analyzing the effect of the cash conversion cycle, asset turnover, and capital expenditures on firm value.
The present study aims to investigate the impact of the COVID-19 crisis and firm risk on working capital management policies among manufacturing firms listed on the Tehran Stock Exchange (TSE). The study sample consists of 1200 observations and 200 companies listed on the TSE over a six-year period from 2016 to 2021; furthermore, the statistical method used to test the hypotheses is ordinary least squares (OLS). The results show that the COVID-19 pandemic has led managers to increase current assets to total assets ratio (CATAR), current ratio (CR), quick ratio (QR), net working capital (NWC), cash to current assets (CTCA) ratio, while it has caused a decrease in operational cycle (OC), days account receivables (DAR), and current liabilities to total assets ratio (CLTAR). Furthermore, we find that the higher the company’s risk, the more managers are motivated to embrace the working capital investment policy, net working capital, cash to current assets ratio, and cash conversion efficiency (CCE). In general, our findings indicate that during times of crisis, Iranian companies tend to adopt conservative working capital policies to ensure sufficient liquidity to respond appropriately to unforeseen events. In this study, the theory of liquidity preference aligns with the observed behavior of firms in response to the COVID-19 crisis and firm risk, where the emphasis on liquidity and short-term financial stability becomes paramount.
Purpose
The objective of this paper is to investigate the effect of working capital efficiency (WCE) and its components on the composite financial performance of a sample of Indian firms.
Design/methodology/approach
Our sample includes 796 non-financial listed firms from 2015–16 to 2021–22. Sample firms’ profitability, liquidity, solvency, cash flow management, and financial and operational leverage have been used to classify them into companies with high composite financial performance (HCFP) and with low composite financial performance (LCFP) by using K-Means Clustering technique. A composite financial performance score (CFPS) of 1 has been assigned to HCFP and 0 to LCFP. We have used logistic regression models with fixed effect to estimate the effect of cash conversion cycle (CCC) and its components, i.e. inventory days, accounts receivable days and accounts payable days on CFPS in the presence of control variables such as growth, leverage, firm size, and age.
Findings
The study finds that CCC and inventory days are inversely associated with CFPS. This finding shows that the firms’ WCE leads to superior financial performance on a composite basis.
Research limitations/implications
The research findings are based on samples drawn from the population of the listed Indian non-financial companies. Since the operation, financial practices, working capital policies, and management styles of firms vary greatly among nations, the results of this study should be extended to firms in other countries after taking into account the degree of resemblance to the sample firms.
Practical implications
The findings of this study hold significant value for industry practitioners, as they provide guidance in determining the optimal allocation of funds for working capital and devising strategies for effectively managing inventory levels, credit sales, and vendor payments in order to increase the overall value of the company. This study aims to help investors in building their investment portfolios by identifying companies with superior composite financial performance. Investors can enhance the construction of their investment portfolios by strategically selecting companies that demonstrate superior overall performance.
Social implications
The results of our study will help companies improve their WCM strategies to enhance their overall value, and their significance increases manifold during economic downturns. Business firms that perform well by efficiently managing their working capital have a multiplier effect on the economy and society at large in the form of GDP contribution, labor income, taxes to the government, investment in capital assets, and payments to suppliers.
Originality/value
To understand the impact of WCE on firms’ performance, the extant working capital literature focuses on some specific characteristics such as profitability, valuation, solvency, and liquidity. The limitation of employing a single parameter is its inability to present the comprehensive performance evaluation of firms. This study is among the earliest studies that focus on the holistic evaluation of WCE's impact on the composite performance of a company.
Purpose
This study aims to assess the efficiency of managing working capital in 1,388 Indian manufacturing firms from 2008 to 2019 and investigate the effects of firm-specific and macro-level determinants on working capital management (WCM) efficiency.
Design/methodology/approach
The current study accommodates a slack-based measure (SBM) in data envelopment analysis (DEA) for computing WCM efficiency. Further, we implement a panel data fixed-effects model that controls for heterogeneity across firms in determining the relationships of selected variables with WCM efficiency.
Findings
The results highlight that manufacturing firms operate at around 50 percent efficiency, which is constant throughout the study period. Furthermore, among the selected variables, yield, earnings, age, size, ability to create internal resources, interest rate and gross domestic product (GDP) significantly affect WCM efficiency.
Originality/value
Instead of the traditional models used for assessing efficiency, the SBM-DEA model is unit-invariant and monotone for slacks, implying that it can handle zero and negative data, which overcomes the incapability of prior DEA models. Hence, this provides accurate efficiency scores for robust analysis. Additionally, this paper provides a holistic working capital model recognizing firm-specific and macro-level determinants for a more explicit estimation of the relationship between WCM efficiency and the selected determinants.
Purpose
Optimal application and commitment toward financial management practices enhance organization performance. This study aims to assess the influence of financial management practices on organizational performance of small- and medium-scale enterprises.
Design/methodology/approach
Data were collected from 45 small-sized and 72 medium-sized firms. Data supported the hypothesized relationships. Construct reliability and validity were established through confirmatory factor analysis. The conceptual model and hypotheses were evaluated by using structural equation modeling.
Findings
The results indicate that working capital significantly influenced organizational performance. Capital budget management significantly influenced organizational performance. A non-significant influence of asset management on organizational performance was observed.
Research limitations/implications
The generalizability of the findings will be constrained due to the research’s SMEs focus and cross-sectional data.
Practical implications
The study’s findings will serve as valuable pointers for stakeholders and decision-makers of SMEs in the development of well-articulated and proactive financial management systems to ensure competitiveness, sustainability, viability and financial competences.
Originality/value
The study adds to the corpus of literature by evidencing empirically that financial management practices significantly influenced SMEs’ performance.
In today's dynamic and competitive business landscape, the effective management of working capital has emerged as a critical factor for the success and sustainability of organizations. Literature review has shown that working capital management can be an effective survival tool in a tough macroeconomic environment where businesses can enhance their ability to meet short-term obligations, improve cash flow, and ultimately achieve long-term success. As businesses strive to maintain financial stability and optimize operational efficiency, tactical working capital management has taken center stage. This research sheds light on the importance of working capital management and how it affects companies. The study goes on to demonstrate that working capital management may influence the performance of a firm and therefore its strategic management can enhance business sustainability.
The objective of this paper is to examine the factors of intellectual capital, financial leverage, institutional ownership, and working capital management (WCM) on firm value and the role of profitability as a mediator in influencing firm value. The research analysis unit focuses on the conventional banking sector on the Indonesia Stock Exchange. The panel data was taken from 28 commercial banks for five years (2016–2020), with 140 observations and data is analyzed using path analysis. Based upon the result of hypothesis testing, the study concludes that the positive correlation between profitability and firm value. Furthermore, intellectual capital, financial leverage, institutional ownership, and WCM also positively affect firm value and profitability. Based on data analysis using path analysis by comparing the path coefficient substructure, the results show that profitability acts as a mediator the effect of intellectual capital, financial leverage, institutional ownership, and WCM on firm value.
The study examines on the determinants of working capital management. The study came about following a necessity of managing working capital for efficient running of firm’s day- to-day operations. By taking samples of 10 manufacturing firms listed in Dar es Salaam stock exchange period of 2012-2023. It is found that there are positive and significant effects of firm size, profitability and cash conversion cycle on working capital, while leverage and capital expenditure revealed to be positive and insignificant determinant of working capital management. Morefurther, firm growth and cash flows found to be negative and significant determinant of working capital. It is from those results of analysis, this study recommends the financial managers to efficiently focus much on managing firm size, profitability and gross domestic product while less effort being subjected to firm leverage and capital expenditures to sales management.
This paper investigates the factors and effects of trade credit, as an alternative source of capital, by employing a generalized method of moments instrumenting for endogeneity based on a panel data set of public maritime shipping companies and compatible companies in other industries. Our study shows that the magnitude of trade credit is affected by profitability, financial leverage, company size, cost of capital, financial distress, institutional ownership, corporate power, corporate liquidity, asset intensity, and corporate growth. It also suggests that trade credit affects financial performance, equity value, and risk. These empirical findings yield important implications for principal financial officers, as discussed herein.
Purpose - The object of the research presented in this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms. Design/methodology/approach - The authors have collected a panel of 8,872 small to medium-sized enterprises (SMEs) covering the period 1996-2002. The authors tested the effects of working capital management on SME profitability using the panel data methodology. Findings - The results, which are robust to the presence of endogeneity, demonstrate that managers can create value by reducing their inventories and the number of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle also improves the firm's profitability. Originality/value - This work contributes to the literature in two ways. First, no previous such evidence exists for the case of SMEs. Second, unlike previous studies, in the current work robust test have been conducted for the possible presence of endogeneity problems. The aim is to ensure that the relationships found in the analysis carried out are due to the effects of the cash conversion cycle on corporate profitability and not vice versa.
Working capital management is one of the essential determinants of firms’ market value because it directly affects profitability. And, working capital management is also extremely crucial from the point of firms’ sustainability. Hence, firms should establish a fine balance between profitability and risk when it comes to managing working capital. This paper mainly aims to provide some empirical evidence on the effects of working capital management on the profitability of selected companies in the Istanbul Stock Exchange for the period of 2005-2008. The panel data methods are employed in order to analyze the mentioned effects.
Purpose
– The purpose of this paper is to examine the relationship between working capital efficiency and firm value and the influence of financing constraints on this relationship.
Design/methodology/approach
– Data from 192 firms spanning a period of ten years (1999-2008) are used for this purpose and analyzed using the ordinary least squares regression technique.
Findings
– The study finds that improvements in working capital efficiency through reduction in working capital investment results in higher firm value. However, this relationship is influenced by the financing constraints faced by a firm. For financially constrained firms, working capital efficiency significantly increases firm value but it is found to be insignificant for unconstrained firms.
Originality/value
– To the author’s knowledge, this is the first study on the value of working capital in Malaysia or in any emerging market. Most studies on working capital valuation concentrate on developed countries and that too are only a handful. Hence this study contributes to the scarce literature on the valuation of working capital. This study also uses the model by Fama and French (1998) to evaluate the relationship between working capital and firm value, which has hardly been used in studies on working capital valuation.
Abstract
In Vietnam, we find strong evidence that foreign investors invest more in stocks that are traded less frequently, stocks of firms listed on the Hochiminh stock exchange, firms with low past returns and firms that are listed longer on the exchanges. The coefficients on firm size and firm age since IPO are consistently positive and robust. Although average firm size is higher for state owned enterprises (SOEs) and foreign investors strongly prefer investing in large firms, they show strong preference for investing in non-SOEs. Risk factors such as government ownership stakes, systematic risk and price volatility negatively influence foreign ownership %. Their effects are less pronounced on the stocks that trade on the more developed stock exchange market, Hochiminh.
Although trade credit has long been an important source of financing for corporations, it is one of the least understood methods of doing business. One possible reason for misconceptions about trade credit is that it is not primarily financial in nature, but instead reflects production and marketing decisions. In this paper, we consider trade credit as a way that firms can guarantee product quality, rather than as a means of financing less creditworthy firms. In this context, we seek, and provide, possible explanations for observed phenomena such as relatively shorter (or no) trade credit terms for consumer and food products and relatively longer terms for heavy industrial equipment.
This paper analyzes the relation between working capital management and profitability for small and medium-sized enterprises
(SMEs) by controlling for unobservable heterogeneity and possible endogeneity. Unlike previous studies, we examine a non-linear
relation between these two variables. Our results show that there is a non-monotonic (concave) relationship between working
capital level and firm profitability, which indicates that SMEs have an optimal working capital level that maximizes their
profitability. In addition, a robustness check of our results confirms that firms’ profitability decreases as they move away
from their optimal level.
This study empirically examines the relation between profitability and liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia. Using correlation and regression analysis the study found significant negative relation between the firm’s profitability and its liquidity level, as measured by current ratio. This relationship is more evident in firms with high current ratios and longer cash conversion cycles. At the industry level, however, the study found that the cash conversion cycle or the cash gap is of more importance as a measure of liquidity than current ratio that affects profitability. The size variable is also found to have significant effect on profitability at the industry level. Finally, the results are stable over the period under study.
Working Capital Management has its effect on liquidity as well on profitability of the firm. In this research, we have selected a sample of 94 Pakistani firms listed on Karachi Stock Exchange for a period of 6 years from 1999 – 2004, we have studied the effect of different variables of working capital management including the Average collection period, Inventory turnover in days, Average payment period, Cash conversion cycle and Current ratio on the Net operating profitability of Pakistani firms. Debt ratio, size of the firm (measured in terms of natural logarithm of sales) and financial assets to total assets ratio have been used as control variables. Pearson's correlation, and regression analysis (Pooled least square and general least square with cross section weight models) are used for analysis. The results show that there is a strong negative relationship between variables of the working capital management and profitability of the firm. It means that as the cash conversion cycle increases it will lead to decreasing profitability of the firm, and managers can create a positive value for the shareholders by reducing the cash conversion cycle to a possible minimum level. We find that there is a significant negative relationship between liquidity and profitability. We also find that there is a positive relationship between size of the firm and its profitability. There is also a significant negative relationship between debt used by the firm and its profitability.
This study contrasts the effect of cash holding on firm value for a sample of US industrial firms during 2001–2007. The study tests empirically for the existence of an optimal cash level that maximizes firm value. Second, the study analyses whether or not deviations from the optimum cash level reduce firm value. The results show a concave relation between cash holding and firm value, verifying the existence of an optimum level of cash holding. Additionally consistent with the initial analysis, deviations above and below optimal cash holding decreases the firm value.
This article presents new tests for finance constraints on investment by emphasizing the often-neglected role of working capital as both a use and a source of funds. The coefficient of endogenous working capital investment is negative in a fixed-investment regression, as expected if working capital competes with fixed investment for a limited pool of finance. This finding addresses a criticism of previous research on finance constraints, that cash flows may simply proxy shifts in investment demand. In addition, previous studies may have underestimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital.
This paper presents evidence on cash holdings for Japanese firms listed on the Tokyo Stock Exchange, focusing on the impact of corporate governance factors in cash holdings and the implication of cash holdings to firm value. We find that insider ownership and bank relations of firms play a significant role in determining cash holdings. Our results indicate that foreign stockholders select profitable firms to invest, and these firms have higher levels of cash. We document evidence that cash holdings lead to agency problems and impact firm value negatively, and governance characteristics affect the negative relation between cash holdings and firm value.
Purpose
The object of the research presented in this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium‐sized Spanish firms.
Design/methodology/approach
The authors have collected a panel of 8,872 small to medium‐sized enterprises (SMEs) covering the period 1996‐2002. The authors tested the effects of working capital management on SME profitability using the panel data methodology.
Findings
The results, which are robust to the presence of endogeneity, demonstrate that managers can create value by reducing their inventories and the number of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle also improves the firm's profitability.
Originality/value
This work contributes to the literature in two ways. First, no previous such evidence exists for the case of SMEs. Second, unlike previous studies, in the current work robust test have been conducted for the possible presence of endogeneity problems. The aim is to ensure that the relationships found in the analysis carried out are due to the effects of the cash conversion cycle on corporate profitability and not vice versa.
This article uses managerial control rights data for over 5000 firms from 31 countries to examine the net costs and benefits
of cash holdings. We find that when external country-level shareholder protection is weak, firm values are lower when controlling
managers hold more cash. Further, when external shareholder protection is weak we find that firm values are higher when controlling
managers pay dividends. Only when external shareholder protection is strong do we find that cash held by controlling managers
is unrelated to firm value, consistent with generally prevailing U.S. and international evidence.
funds from the financial institutions in an economy to the their greatest use. Non- financial firms act in this way because they may have a comparative advantage in exploiting informal means of ensuring that their borrowers to repay. These considerations suggest that to optimally exploit their advantage in providing trade credit to some classes of borrowers, firms should, when this is efficient, obtain external financing from financial intermediaries and markets. Thus, the existence of a large banking system is consistent with these considerations. Using firm- level data for 39 countries, we compute payables and receivables turnovers and examine how they differ across financial systems. We find that the development of a country's banking system and legal infrastructure predicts the use of trade credit. Firms' use of bank debt relative to trade credit is higher in countries with efficient legal systems. However, firms in countries with larger and privately owned banking systems offer more financing to their customers, and take more financing from them. Our findings suggest that the provision of trade credit is complementary to the development of financial intermediaries and should not be viewed as a substitute by policymakers. 1.
This paper examines the role of the corporate objective function in corporate productivity and efficiency, social welfare, and the accountability of managers and directors. The author argues that because it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single-valued objective function. Two hundred years of work in economics and finance implies that, in the absence of externalities and monopoly, social welfare is maximized when each firm in an economy maximizes its total market value. 2001 Morgan Stanley.
The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.
We provide the first empirical study of the relationship between corporate working capital management and shareholders' wealth. Examining US corporations from 1990 through 2006, we find evidence that: the incremental dollar invested in net operating working capital is worth less than the incremental dollar held in cash for the average firm; the valuation of the incremental dollar invested in net operating working capital is significantly influenced by a firm's future sales expectations, its debt load, its financial constraints, and its bankruptcy risk; and the value of the incremental dollar extended in credit to one's customers has a greater effect on shareholders' wealth than the incremental dollar invested in inventories for the average firm. © 2013 The Authors 2013. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: [email protected]
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We examine the value effect of working capital management (WCM) for a large sample of US firms between 1982–2011. Our results indicate (i) the existence of an optimal level of working capital policy; and (ii) firms that converge to that optimal level (either by increasing or decreasing their investment in working capital) improve their stock and operating performance. We also document that corporate investment is the channel through which efficient WCM translates into superior firm performance. In particular, efficient WCM allows firms to redeploy underutilized corporate resources to higher-valued use, such as the funding of cash acquisitions.
This paper examines the linkage between working capital management and corporate performance for a sample of non-financial UK companies. In contrast to previous studies, the findings provide strong support for an inverted U-shaped relation between investment in working capital and firm performance, which implies the existence of an optimal level of investment in working capital that balances costs and benefits and maximizes a firm's value. The results suggest that managers should avoid negative effects on firm performance because of lost sales and lost discounts for early payments or additional financing expenses. The paper also analyzes whether the optimal working capital level is sensitive to alternative measures of financial constraints. The findings show that this optimum is lower for firms more likely to be financially constrained.
In this paper we investigate the relationship of corporate profitability and working capital management. We used a sample of 131 companies listed in the Athens Stock Exchange (ASE) for the period of 2001-2004. The purpose of this paper is to establish a relationship that is statistically significant between profitability, the cash conversion cycle and its components for listed firms in the ASE. The results of our research showed that there is statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. Moreover managers can create profits for their companies by handling correctly the cash conversion cycle and keeping each different component (accounts receivables, accounts payables, inventory) to an optimum level.
Purpose
– The purpose of this paper is to examine the interaction between corporate governance, ownership structure, cash holdings, and firm value on the Ghana Stock Exchange.
Design/methodology/approach
– A multiple regression approach using the seemingly unrelated regression to mitigate the problems of multicollinearity between the cash‐holding variable and other control variables is adopted.
Findings
– Board size is found to be positively and statistically significantly related to share price among the corporate governance variables. However, a significant relationship between inside ownership and share price is not found. The results also indicate that additional units of cash holdings do not have a statistically significant influence on share price. Finally, leverage and income volatility are found to be significant determinants of share price.
Originality/value
– This is the first of its kind in the country that considers the impact of corporate governance, ownership structure, and firm value on the Ghana Stock Exchange (GSE).
We estimate that the average value of a dollar invested in the U.S. corporate sector is 1.68. We use cross-section regressions to study how value is related to dividends and debt. The regressions can potentially identify tax effects, but they cannot disentangle other factors, including bankruptcy costs, agency costs, and asymmetric information. Simple tax stories say value is negatively related to dividends and positively related to debt, but we find the opposite. We infer that dividends and debt convey information about profitability that obscures any tax effects.
This study constructs a firm-level measure of large foreign ownership (LFO) and investigates its impact on stock return volatility in 31 emerging markets. We find a negative relationship between LFO and volatility, even after controlling for potential endogeneity and the impact of major domestic shareholders. This suggests a stabilizing role of LFO in emerging markets, which is consistent with previous suggestions in the literature on the strong commitments and potential monitoring role of large foreign shareholders. Overall, our study highlights the importance of recognizing the heterogeneity among foreign investors and the benefits of large foreign shareholders to emerging stock markets.
This paper examines the role of the corporate objective function in corporate productivity and efficiency, social welfare, and the accountability of managers and directors. The author argues that because it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single‐valued objective function. Two hundred years of work in economics and finance implies that, in the absence of externalities and monopoly, social welfare is maximized when each firm in an economy maximizes its total market value.
The main contender to value maximization as the corporate objective is stakeholder theory, which argues that managers should make decisions so as to take account of the interests of all stakeholders in a firm, including not only financial claimants, but also employees, customers, communities, and governmental officials. Because the advocates of stakeholder theory refuse to specify how to make the necessary tradeoffs among these competing interests, they leave managers with a theory that makes it impossible for them to make purposeful decisions. With no clear way to keep score, stakeholder theory effectively makes managers unaccountable for their actions (which helps explain the theory's popularity among many managers).
But if value creation is the overarching corporate goal, the process of creating value involves much more than simply holding up value maximization as the organizational objective. As a statement of corporate purpose or vision, value maximization is not likely to tap into the energy and enthusiasm of employees and managers. Thus, in addition to setting up value maximization as the corporate scorecard, top management must provide a corporate vision, strategy, and tactics that will unite all the firm's constituencies in its efforts to compete and add value for investors.
In clarifying the proper relation between value maximization and stakeholder theory, the author introduces a somewhat new corporate objective called “enlightened value maximization.” Enlightened value maximization uses much of the structure of stakeholder theory—notably the need to consider the interests of all corporate stakeholders—while continuing to posit maximization of long‐run firm value as the criterion for making the necessary tradeoffs among stakeholders.
The paper comes to similar conclusions about the Balanced Scorecard, which is described as the managerial equivalent of stakeholder theory. Although the Balanced Scorecard can add value by helping managers better understand the drivers of shareholder value, it should not be used as a performance measurement and incentive compensation system because it fails to provide a single valued score, a clear way of distinguishing superior from substandard performance.
This study examines the relationship between profitability measures and management of ongoing liquidity needs for a large
cross-section of firms over a twenty-year period. Long-run equilibrium relationships between the cash conversion cycle, a
measure of ongoing liquidity management, and alternative measures of profitability are tested using both nonparametric and
multiple regression analysis. Industry and size differences are controlled. While there are exceptions to the general finding
for specific firms and for specific industries, the paper offers strong evidence that aggressive working-capital policies
enhance profitability.
This study examines the relationship between liquidity management and operating performance, and that between liquidity management and corporate value for firms in Japan and Taiwan. We observe that the cash conversion cycle (CCC)–returns on assets (ROA) and CCC–returns on equity (ROE) relationships are commonly negative and sensitive to industry factors. Both Japanese and Taiwanese firms with q>1 have significantly lower CCC than firms with q⩽1. In addition, Japanese firms with q>1 have significantly higher ROA and ROE than firms with q⩽1. Overall, the findings indicate that aggressive liquidity management enhances operating performance and is usually associated with higher corporate values for both countries in spite of differences in structural characteristics or in financial system of a firm.
Using governance metrics based on antitakeover provisions and inside ownership, we find that firms with weaker corporate governance structures actually have smaller cash reserves. When distributing cash to shareholders, firms with weaker governance structures choose to repurchase instead of increasing dividends, avoiding future payout commitments. The combination of excess cash and weak shareholder rights leads to increases in capital expenditures and acquisitions. Firms with low shareholder rights and excess cash have lower profitability and valuations. However, there is only limited evidence that the presence of excess cash alters the overall relation between governance and profitability. In the US, weakly controlled managers choose to spend cash quickly on acquisitions and capital expenditures, rather than hoard it.
We evaluate the performance changes of 634 state-owned enterprises (SOEs) listed on China's two exchanges upon share issuing privatisation (SIP) in the period 1994–1998. We find that SIP is effective in improving SOEs’ earnings ability, real sales, and workers’ productivity but is not successful in improving profit returns and leverage after privatisation. We also find state ownership having negative impacts on firm performance and legal-person ownership having positive impacts on firm performance after SIP, which suggests that legal persons behave differently from the state government. Surprisingly, foreign ownership does not show uniformly strong, positive impacts on firm performance.
We provide empirical evidence of a strong causal relation between managerial compensation and investment policy, debt policy, and firm risk. Controlling for CEO pay-performance sensitivity (delta) and the feedback effects of firm policy and risk on the managerial compensation scheme, we find that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in R&D, less investment in PPE, more focus, and higher leverage. We also find that riskier policy choices generally lead to compensation structures with higher vega and lower delta. Stock-return volatility has a positive effect on both vega and delta.
Firms with higher board independence, smaller boards, and lower expected managerial entrenchment, have lower cash holdings. We find that the positive association between cash holdings and managerial entrenchment is mitigated by stronger board structures. Specifically, in firms with higher expected managerial entrenchment, those with higher proportion of outside director on the board and smaller board size have lower cash holdings. We also find that firm value is negatively associated with cash levels. The negative association between firm value and cash holdings is more pronounced in firms with (i) lower proportion of outside directors, (ii) larger boards and (iii) higher expected managerial entrenchment. For firms with both high cash holdings and high expected managerial entrenchment, investors additionally discount the valuation of firms with lower proportion of outside directors and those with larger boards.
A study of more than 600 retail outlets in Health Care finds that stock-outs are far more costly than most companies imagine.
This paper examines the importance of agglomeration economies and institutions vis-a-vis initial conditions and factor endowments in explaining the locational choice of foreign investors. Using a unique panel data set for 25 transition economies between 1990 and 1998, we find that the main determinants are institutions, agglomeration, and trade openness. We find important differences between the Eastern European and Baltic countries, on the one hand, and the CIS countries on the other: in the latter group, natural resources and infrastructure matter, while agglomeration matters only for the former group.
Recent empirical and theoretical research on business inventories is surveyed and critically evaluated. While most inventory research has had macroeconomic motivations, the authors focus on its microtheoretic basis and on potential conflicts between theory and evidence. The paper asks two principal questions. First, how can inventories, which are allegedly used by firms to stabilize production, nonetheless be a destabilizing factor at the macroeconomic level? Second, why, if firms are following the production-smoothing model, is production more variable than sales in many industries? They suggest that the so-called (S,s) model may help answer both questions. Copyright 1991 by Blackwell Publishers Ltd
The relation between working capital management and corporate profitability is investigated for a sample of 1009 large Belgian non-financial firms for the 1992-1996 period. Trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories, and the cash conversion cycle is used as a comprehensive measure of working capital management. The results suggest that managers can increase corporate profitability by reducing the number of days accounts receivable and inventories. Less profitable firms wait longer to pay their bills.
Agency theories predict that the value of corporate cash holdings is less in countries with poor investor protection because of the greater ability of controlling shareholders to extract private benefits from cash holdings in such countries. Using various specifications of the valuation regressions of Fama and French (1998) , we find that the relation between cash holdings and firm value is much weaker in countries with poor investor protection than in other countries. In further support of the importance of agency theories, the relation between dividends and firm value is weaker in countries with stronger investor protection. Copyright 2006 by The American Finance Association.
This paper shows that, even in the presence of a perfectly competit ive banking industry, it is optimal for firms with market power to en gage in vendor financing if credit customers have lower reservation prices than cash customers, or if adverse selection makes it infeasible to write credit contracts which separate customers according to their credit risk. The authors analyze how the advantage of vendor financing depends on the relative size of the cash and credit markets, the heterogeneity of credit customers, and in the number of firms in the industry. Copyright 1988 by American Finance Association.
The relation between working capital management and corporate profitablity is investigated for a sample of 1,009 large Belgian non-financial firms for the 1992-1996 period. Trade credit policy and inventory policy are measured by number of days accounts receivable, accounts payable and inventories, and the cash conversion cycle is used as a comprehensice measure of working capital management. The results suggest that managers can increase corporate profitablity by reducing the number of days accounts receivable and inventories. Less profitable firms wait longer to pay their bills. Copyright Blackwell Publishers Ltd 2003.
The average cash to assets ratio for U.S. industrial firms increases by 129% from 1980 to 2004. Because of this increase in the average cash ratio, firms at the end of the sample period can pay back all of their debt obligations with their cash holdings, so that the average firm has no leverage when leverage is measured by net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms, but is more pronounced for firms that do not pay dividends. The average cash ratio increases over the sample period because firms change: their cash flow becomes riskier, they hold fewer inventories and accounts receivable, and are increasingly R&D intensive. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio.
We examine the cross-sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi-quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases. Copyright 2006 by The American Finance Association.
Trade credit has been shown to be an important source of short-term finance for smaller firms but small firms are also suppliers of trade credit. There is little empirical evidence on the credit granting decisions of small firms. Previous empirical work (Petersen and Rajan, 1997; and Ng, Smith and Smith, 1999) has focused on credit granting and investment in accounts receivable in larger firms. In this paper we look at the influences on credit granting for the smallest firms, using a sample of firms with an average of 10 employees. As in previous studies we find that product and demand characteristics influence credit terms. Moreover, we find evidence that firm size affects credit extension choices directly by setting limits on the possibilities for economies of scale, but it also impacts indirectly by affecting the firm's access to finance and its bargaining strength "vis-à-vis" suppliers. The dominant position of larger customers in bargaining with small suppliers constrains the impact of other factors on the firm's choice of credit terms. Small firms are also under pressure to conform to industry norms, although lack of resources can be a limiting factor. Constrained firms may make use of two-part terms in an attempt to improve their cashflow. Copyright Blackwell Publishers Ltd 2002.
Optimising Working Capital: The Latest Solutions
- N Havoutis
Havoutis, N. (2003), Optimising Working Capital: The Latest Solutions, JP Morgan, New York,
NY.
The availability of cheap debt has reduced companies' incentive to improve working capital management
- E Teach
Teach E., (2015), Barely working: "The availability of cheap debt has reduced companies'
incentive to improve working capital management", CFO. Source: http://ww2.cfo.com/cashmanagement/2015/06/barely-working-capital/
- Wöhrmann A.
Barely working: ‘the availability of cheap debt has reduced companies’ incentive to improve working capital management
- E Teach
Teach, E. (2015), "Barely working: 'the availability of cheap debt has reduced companies' incentive to
improve working capital management", CFO, available at: http://ww2.cfo.com/cashmanagement/2015/06/barely-working-capital/