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, 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.

Working capital management and firm’s valuation, profitability and risk

2019 ◽  
Vol 15 (2) ◽  
pp. 191-204 ◽  
Author(s):  
Ben Le
Keyword(s):  
Firm Performance ◽  
Panel Data ◽  
Emerging Market ◽  
Firm Valuation ◽  
Capital Management ◽  
Working Capital ◽  
Data Set ◽  
Working Capital Management ◽  
Content Type ◽  
The Impact

PurposeThe purpose of this paper is to examine the effects of working capital management on firm valuation, profitability and risk.Design/methodology/approachThe 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.FindingsThe 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/valueThis 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.

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.

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.

Efficient working capital management, bond quality rating, and debt refinancing risk

2019 ◽  
Vol 45 (7) ◽  
pp. 869-885 ◽  
Author(s):  
Amarjit Gill ◽  
Afshin Amiraslany ◽  
John Obradovich ◽  
Neil Mathur
Keyword(s):  
Financial Management ◽  
Capital Management ◽  
Working Capital ◽  
Bond Quality ◽  
Working Capital Management ◽  
Content Type ◽  
Data Services ◽  
Management Consultants ◽  
Quality Ratings ◽  
The Impact

PurposeThe purpose of this paper is to investigate the impact of efficient working capital management (WCM) on a firm’s bond quality ratings (BQR) and debt refinancing risk (RFR).Design/methodology/approachTo fulfill its purpose, this study adopted a co-relational research design. Additionally, the COMPUSTAT of Wharton Research Data Services was used to collect data from American production firms for a period of five years (from 2013 to 2017).FindingsThe results of this study suggest that efficient WCM does, in fact, play a role in improving BQR of American production firms. Furthermore, the findings go on to suggest that efficient WCM plays a very little role in reducing RFR for American production firms.Research limitations/implicationsThis is a correlational study that investigated the presence of an association between efficient WCM and firms’ BQR and between efficient WCM and RFR. However, the two do not necessarily share a causal relationship. Moreover, the findings of this study may only be generalized to firms that are similar to those that were included in this research.Originality/valueThis study contributes to the literature on financial factors that improve a firm’s BQR. Firms should consider maintaining an optimal net working capital as it improves BQR. Moreover, the findings of this study may prove useful for financial managers, investors, financial management consultants and other stakeholders.

scholarly journals Global Financial Crisis, Working Capital Management, and Firm Performance: Evidence From an Islamic Market Index

SAGE Open ◽  
2021 ◽  
Vol 11 (2) ◽  
pp. 215824402110157
Author(s):  
Minhas Akbar ◽  
Ahsan Akbar ◽  
Muhammad Umar Draz
Keyword(s):  
Firm Performance ◽  
Financial Crisis ◽  
Global Financial Crisis ◽  
Generalized Method Of Moments ◽  
Market Performance ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Market Index ◽  
The Impact

This research investigates the impact of working capital management (WCM) on the profitability and market performance of firms that constitute an Islamic market index (Karachi Meezan Index [KMI-30]) in Pakistan during 2002–2013. The data have been divided into three parts, that is, preglobal (2002–2007), during (2007–2008), and postglobal financial crisis period (2008–2013), to examine the proposed relationship in different macroeconomic settings. Net trade cycle (NTC) and its components are used to measure the WCM efficiency, while NTC square is used to proxy the impact of excessive holdings of working capital on corporate performance. The econometric models are calculated in a generalized method of moments (GMMs)-based regression environment to ensure the robustness of empirical outcome. The results reveal that, as opposed to conventional businesses, KMI-30 firms are more ethical in their short-term financial management. Besides, such firms adopted a conservative WCM policy during the global financial crisis of 2007–2008. Furthermore, we confirm the presence of a concave relationship between working capital levels and firm performance as NTC is positively, whereas NTC square is negatively, related to firm performance. This article makes a significant contribution to the extant literature as it evaluates the impact of WCM on the profitability and market performance of Islamic market indexed firms under varying macroeconomic conditions.

Do working capital management practices influence investment and financing patterns of firms?

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahsan Akbar ◽  
Xinfeng Jiang ◽  
Minhas Akbar
Keyword(s):  
Capital Structure ◽  
Negative Relationship ◽  
Capital Management ◽  
Working Capital ◽  
Short Term ◽  
Working Capital Management ◽  
Content Type ◽  
Investment And Financing ◽  
The Impact

PurposeThe present study aims to investigate the impact of working capital management (WCM) practices on the investment and financing patterns of listed nonfinancial companies in Pakistan for a span of 10 years.Design/methodology/approachThe study is based on secondary financial data of 354 listed nonfinancial Pakistani firms during the period of 2005–2014. The two-step generalized method of moment (GMM) regression estimation technique is employed to ensure the robustness of results.FindingsEmpirical testing reveals that: excessive funds tied up in working capital have a negative impact on the investment portfolio of sample firms. Besides, a negative relationship between change in fixed assets and excess net working capital posits that, eventually, firms use idle resources tied up in short-lived assets to boost their investment activities. Furthermore, larger working capital levels were associated with higher leverage ratio which indicates that firms with inefficient WCM policies have to rely heavily on long-term debt to meet their short-term financing requirements. Additional results indicate that firms that take more time to sell inventory and convert receivables to cash, make more use of debt. Results of cash management models illustrate that cash-rich firms have lower leverage levels which signal the strong financial health and internal revenue generation capability of such firms.Originality/valueThere is a dearth of empirical studies that examine the implications of WCM decisions on a firm's capital structure. Besides, these studies are only confined to how a WCM policy influences the long-term investment activities of a firm. The research contributes to the extant literature by empirically revealing a link between the WCM practices and the firm's long-range investment and financing patterns. Hence, financial managers shall account for the impact of their short-term financial management decisions on the capital structure of the firm.

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.

Economic downturns and working capital management practices: a qualitative enquiry

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sunday Simon ◽  
Norfaiezah Sawandi ◽  
Satish Kumar ◽  
Magdi El-Bannany
Keyword(s):  
Interest Rates ◽  
Management Practices ◽  
Trade Credit ◽  
Capital Management ◽  
Working Capital ◽  
Working Capital Management ◽  
Content Type ◽  
Economic Downturns ◽  
Operational Activities ◽  
The Impact

Purpose This study aims to explore changes in working capital management (WCM) practices in response to economic downturns, especially during the coronavirus pandemic. Design/methodology/approach This study adopts an interpretative approach. This paper used semi-structured interviews with 2 finance directors and 13 top managers for data collection. This paper used thematic analysis for analysing the interview data. Findings The study findings suggest that the traditional ways of managing working capital may no longer be sufficient during a crisis. Instead, dynamic financing, trade credit policy and continuous staff training to develop new skills are alternative WCM practices to navigate the challenges of a crisis. Further, this paper finds that economic conditions, such as inflation rates, interest rates, exchange rates and government policy, negatively affect WCM. Practical implications The study findings highlight practical issues that may help firms meet their present and future financing needs, manage their day-to-day operational activities and enhance performance, both operational and financial. The study is beneficial for regulators in understanding a firm’s constraints during crises and respond appropriately. Originality/value This is the first study, to the best of the knowledge that uses a qualitative approach to investigate the impact of economic downturns on WCM practices of firms. Thus, this study offers new insights into the fundamentals of WCM practices during crises.

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