Investment in working capital and financial constraints

2019 ◽  
Vol 15 (2) ◽  
pp. 164-190 ◽  
Author(s):  
Fahmida Laghari ◽  
Ye Chengang
Keyword(s):  
Financial Constraints ◽  
Corporate Performance ◽  
Unobserved Heterogeneity ◽  
Generalized Method Of Moments ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
Financial Firms ◽  
The Relationship

Purpose The purpose of this paper is to investigate the relationship between working capital management and corporate performance with financial constraints. Design/methodology/approach This study uses large panel sample of Chinese listed firms over the period 2005–2015 using system generalized method of moments (GMM) estimator that controls unobserved heterogeneity of individual firms well and GMM methodology is robust to address endogeneity issues. Findings Empirical evidence finds inverted U-shaped relationship between working capital and corporate performance and exhibits similar evidence for financially constrained firms. Evidence shows impact of high sales and discounts on early payments at low level of working capital and dominance of opportunity cost and cost of external finance at high level of working capital. The findings of the results show that optimal working capital level of financially constrained firms is relatively lower due to high cost of external capital and debt rationing. The results also indicate that on average NET is significantly lower for firms with Tobin’s Q>1 than firms with Tobin’s Q=1, and suggest that aggressive working capital management is significantly and positively associated with higher corporate values. Originality/value This paper is among few that complement the existing literature by providing evidence that inverted U-shaped relationship between working capital management and corporate performance also exists in the context of Chinese listed non-financial firms. Exclusively, the relationship of working capital and corporate performance with linkage of financial constraints is scant in the context of Chinese listed non-financial firms.

Working capital management, firm performance and financial constraints

2017 ◽  
Vol 9 (3) ◽  
pp. 206-219 ◽  
Author(s):  
Nufazil Altaf ◽  
Farooq Shah
Keyword(s):  
Firm Performance ◽  
Method Of Moments ◽  
Financial Constraints ◽  
Generalized Method Of Moments ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
The Impact ◽  
The Relationship

Purpose The purpose of this paper is to examine the relationship between working capital management and firm performance for a sample of 437 non-financial Indian companies. In addition, this paper examines the impact of financial constraints on working capital management-performance relationship. Design/methodology/approach This study is based on secondary financial data of 437 non-financial Indian companies obtained from CAPITALINE database, pertaining to a period of ten years. This study employs the two-step generalized method of moments (GMM) technique to arrive at results. Findings Results of the study confirm the inverted U-shape relationship between working capital management and firm performance. In addition, the authors also found that the firms that are likely to be more financially constrained have lower optimal working levels. Originality/value Unlike prior studies, which found a linear relationship between working capital management and firm performance, this study provides newer evidence for an inverted U-shaped relation between investment in working capital and firm performance in India. In addition, this study also tests the impact of financial constraints on this relationship. In contrast to the prior studies, this study uses GMM to control the potential problems of endogeneity.

Association between the availability of financial resources and working capital management with stock surplus returns in Iran

2019 ◽  
Vol 14 (2) ◽  
pp. 343-361 ◽  
Author(s):  
Mahdi Salehi ◽  
Nadia Mahdavi ◽  
Saeed Zarif Agahi Dari ◽  
Hossein Tarighi
Keyword(s):  
Stock Returns ◽  
Firm Value ◽  
Financial Constraints ◽  
Cash Holdings ◽  
Financial Resources ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
The Relationship

Purpose The purpose of this paper is to investigate the relationship between access to financial resources, working capital with surplus stock returns and value of the company in Iran. Design/methodology/approach The study population consists of 728 observations and 91 firms listed on the Tehran stock exchange during an eight-year period between 2009 and 2016. The statistical model used in this study is a multivariate regression model; further, the statistical technique used to test the hypotheses is panel data. Findings The results saw a negative and significant linkage between changes in cash and stock’ excess returns, whereas no meaningful association between changes in working capital and stock surplus returns was seen. In other words, an Iranian rial (Iran’s currency) invested in working capital worth less on average than a rial held in cash. Furthermore, the authors realized that in an inflationary economy, firms mainly pay more dividends so as to illustrate better their financial position and also to attract more investors’ trust. The results also indicated that the final value of working capital in the companies that are faced with financial constraints is more than companies that are not faced with financial constraints. Subsequently, after the elimination of the effects of inflation on stock returns, it was found there is not any significant association between the stock’s real return and firm value. Practical implications This is one of the most comprehensive research works in Iran that simultaneously surveys the impacts of access to finance and working capital on firm value. This research warns corporate managers to pay more attention to the importance of keeping cash to finance and manage working capital for profitability and sustainability of their company’s operations. Surely, by understanding the relationship between cash holdings, working capital management and stock surplus return, investors will be able to make appropriate decisions about the optimal choice of funds. Originality/value What really will fascinate other scholars about this paper is the time period of the study because there were unprecedented sanctions against Iran market and many manufacturing industries were in financial strain. Without hesitation, the paper will make aware investors and stakeholders of this fact that cash holdings will be a good way in reducing the corporate financial problems in emerging markets, particularly those markets face financial sanctions like Iran.

How does working capital management affect the profitability of Indian companies?

2018 ◽  
Vol 15 (3) ◽  
pp. 347-366 ◽  
Author(s):  
Nufazil Altaf ◽  
Farooq Ahmad Shah
Keyword(s):  
Method Of Moments ◽  
Design Methodology ◽  
Generalized Method Of Moments ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
Firm Profitability ◽  
Potential Problems ◽  
The Relationship

Purpose The purpose of this paper is to examine the relationship between working capital management (WCM) and firm profitability for a sample of 437 non-financial Indian companies. Design/methodology/approach The study is based on secondary financial data obtained from Capitaline database, pertaining to a period of ten years. This study employs two-step generalized method of moments (GMM) techniques to arrive at results. Findings The results of the study confirm the inverted U-shape relationship between WCM and firm profitability. In addition, the authors also found that the firms should complete its CCC on an average by 63 days. Originality/value Unlike prior studies that found a linear relationship between WCM and firm profitability. This study provides newer evidence for an inverted U-shaped relation between investment in working capital and firm profitability in India. In addition, this study uses GMM to control the potential problems of endogeneity.

Working capital management, corporate performance, and financial constraints

2014 ◽  
Vol 67 (3) ◽  
pp. 332-338 ◽  
Author(s):  
Sonia Baños-Caballero ◽  
Pedro J. García-Teruel ◽  
Pedro Martínez-Solano
Keyword(s):  
Financial Constraints ◽  
Corporate Performance ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management

Financial constraints and optimal working capital – evidence from an emerging market

2018 ◽  
Vol 14 (1) ◽  
pp. 37-53 ◽  
Author(s):  
Gaurav S. Chauhan ◽  
Pradip Banerjee
Keyword(s):  
Financial Constraints ◽  
Emerging Market ◽  
Manufacturing Firms ◽  
Capital Management ◽  
Working Capital ◽  
Partial Adjustment ◽  
Working Capital Management ◽  
Content Type ◽  
Cash Conversion Cycle ◽  
Systematic Feature

Purpose The purpose of this paper is to investigate the existence of an optimal or target level of working capital for the Indian manufacturing firms, and whether firms intensely follow the target or not. Design/methodology/approach The paper uses cash conversion cycle as a measure of net working capital and employs partial-adjustment dynamic panel models to test its target-following behavior. Findings The empirical results show that there is no evidence of systematic target-following behavior of working capital for the Indian manufacturing firms. The results hold true even after dividing the sample into four groups depending on the sign and magnitude of deviation. The results further show that lack of target-following tendency is not quite influenced by varying firm-specific characteristics and, therefore, seems to be a systematic feature across firms in India. Research limitations/implications Scarcity of such working capital management studies across emerging economies, facing several financial constraints, limits the comparison of findings. Future studies should be conducted to confirm the results. Practical implications The findings imply that even though an optimal working capital might exist, emerging market firms may not be able to actively pursue it on account of several financial constraints and managerial considerations. Originality/value The study contributes to the scant existing literature on the target-following behavior of working capital management in the Indian manufacturing firms, representing a typical emerging market facing several financial constraints.

Working capital management and firms’ profitability: evidence from emerging Asian countries

2017 ◽  
Vol 6 (1) ◽  
pp. 80-97 ◽  
Author(s):  
Monica Singhania ◽  
Piyush Mehta
Keyword(s):  
East Asia ◽  
South Asia ◽  
Generalized Method Of Moments ◽  
Asia Pacific ◽  
South East Asia ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
The Impact

Purpose Excessive working capital or paucity of the same can impair the profits and health of an organization. The purpose of this paper is to analyze the impact of working capital management (WCM) on the profitability of firms for a sample comprising of non-financial companies in countries of South East Asia, South Asia and East Asia. Design/methodology/approach Analytical modeling has been used to estimate the impact of WCM on profitability with the help of financial data of the companies listed in major indices of the target countries (India, Pakistan, Myanmar, Sri Lanka, Bangladesh, Singapore, Thailand, Malaysia, Indonesia, Vietnam, Hong Kong, Japan, China, South Korea and Taiwan). The mathematical model presented in the paper has been tested using two-step-generalized method of moments. Findings The study reveals a non-linear relationship between profitability of a firm and WCM for 11 economies of the Asia Pacific region. Research limitations/implications The results are subject to the differences in the market dynamics of different economies (countries). Moreover, the limitations of the specific statistical method used to verify the model apply to the model too. Practical implications The research can be used as a tool by the firms (global as well as local) to ameliorate their performance by understanding the effects of WCM on profitability in different global markets and adjusting their working capital accordingly. Originality/value The research on the impact of WCM on profitability of the firms of South East Asia, South Asia and East Asia is a new effort and tries to make the importance of WCM more luciferous.

Working capital management and firm profitability: a meta-analysis

2017 ◽  
Vol 9 (1) ◽  
pp. 34-47 ◽  
Author(s):  
Harsh Pratap Singh ◽  
Satish Kumar ◽  
Sisira Colombage
Keyword(s):  
Meta Analysis ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
Negatively Associated ◽  
Cash Conversion Cycle ◽  
Prior Literature ◽  
Narrative Literature Review ◽  
The Relationship

Purpose The purpose of this study is to quantitatively aggregate the findings of prior literature on the effect of working capital management (WCM) on corporate profitability using the meta-analysis technique developed by Hunter et al. (1982). Design/methodology/approach A set of 46 research articles that directly studied the relationship between WCM, and profitability was analyzed for the purpose. In addition to overall meta-analysis, a detailed subgroup study was also conducted to test whether the differences in results are due to moderating effects related to different profitability proxies, economic development of a specific country and size of the firms under study. Findings The findings of this meta-analysis confirm that WCM is negatively associated with profitability, which means an aggressive WCM policy leads to higher profitability. Overall, and in all the subgroup studies, the cash conversion cycle was found to be negatively associated with profitability. Originality/value Unlike narrative literature review papers, this meta-analysis provides quantitatively aggregate evidence on the relationship of WCM and firms’ profitability. To the best of authors’ knowledge, no previous meta-analysis paper is published on the topic.

Working capital management, board structure and Tobin's q ratio of Thai listed firms

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nongnit Chancharat ◽  
Chamaiporn Kumpamool
Keyword(s):  
Board Of Directors ◽  
Capital Investment ◽  
Generalized Method Of Moments ◽  
Board Structure ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
Listed Firms ◽  
Capital Financing

PurposeThis study investigates whether the integration between working capital management (WCM) and the structure of a firm's board of directors impacts its Tobin's q ratio. The sample set consists of 319 Thai listed firms with 3,190 firm-year observations from 2010 to 2019.Design/methodology/approachThe two-step generalized method of moments (two-step GMM) model is employed to address endogeneity.FindingsThe empirical results show that having both (1) a high level of net working capital holdings, a long period of net trade cycles or using an aggressive policy in working capital investment and (2) a more diverse board of directors decrease a firm's Tobin's q ratio. Conversely, when a firm's managers employ an aggressive policy for their working capital financing and the board structure of their firms is highly diverse, the firm's Tobin's q ratio increases. This indicates the appropriateness of some WCM policies is dependent on the characteristics of a firm's board of directors. Thus, the different integration between WCM and board structure may elicit dissimilar outcomes for a firm's Tobin's q ratio.Originality/valueTo their knowledge, the authors are the first to investigate the influence of the integration between WCM and board characteristics on Tobin's q ratio.

Working capital management, firm performance and nature of business

2020 ◽  
Vol 70 (1) ◽  
pp. 179-200
Author(s):  
Kumar Sanjay Sawarni ◽  
Sivasankaran Narayanasamy ◽  
Kanagaraj Ayyalusamy
Keyword(s):  
Firm Performance ◽  
Firm Value ◽  
Regression Models ◽  
Age And Growth ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
The Impact ◽  
The Relationship

PurposeThis paper aims to investigate the impact of the efficiency of working capital management (WCM) on the performance of a sample of Indian companies and explore how the nature of the firm's business influences the significance and direction of this impact.Design/methodology/approachThe data for this study were collected for the period of 2012–2018 for 414 non-financial firms listed on the Bombay Stock exchange. Fixed-effect regression models were run by taking Tobin's Q and return on equity (ROE) as dependent variables, and net trade cycle (NTC) and its components as explanatory variables in the presence of liquidity, leverage, size, age and growth as control variables. Sample firms were segregated into manufacturing, trading and service groups, and regression models were used for all the groups to understand the effect of the nature of a firm's business.FindingsWCM efficiency has a significant impact on the performance of the sample firms. Non-financial Indian firms deliver better financial performance by maintaining lower NTC. Like NTC, its components also impact firm value and profitability. The results report that the significance of the relationship varies depending upon the nature of the firm's business.Originality/valueThe previous research studies had not used a sample of large number of Indian firms. Unlike previous studies, this study reports the influence of the nature of business on the relationship between WCM and firm performance. Further, this paper also examines how the individual components of working capital influence the performance of Indian firms.

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