Determinants and consequences of working capital management
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Date
01/07/2015Item status
Restricted AccessEmbargo end date
31/12/2100Author
Supatanakornkij, Sasithorn
Metadata
Abstract
Well-managed working capital plays an important role in running a sound and
successful business as it has a direct influence on liquidity and profitability. Working
capital management (WCM) has recently received an increased focus from businesses
and been regarded as a key managerial intervention to maintain solvency, especially
during the global financial crisis when external financing was less available (PwC,
2012). This thesis contains a comprehensive analysis of the determinants and
consequences of WCM.
For the determinants of WCM, the results suggest that the nature of a firm’s WCM is
determined by a combination of firm characteristics, economic condition, and country-level
variables. Sources of financing, firm size, and levels of profitability and
investment in long-term assets play a vital role in the management of working capital.
The financial downturn has also put increased pressure on firms to operate with a lower
level of working capital. In addition, country-level variables (i.e., legal environment
and culture) have a significant influence on determining a firm’s WCM as well as its
determinants.
For the consequences of WCM, the findings highlight the importance of higher
efficiency in WCM in terms of its potential contribution in enhancing profitability. In
particular, firms operating with lower accounts receivable, inventory, and accounts
payable periods are associated with higher profitability. Firms can also enhance their
profitability further by ensuring a proper “fit” among these components of working
capital. Finally, achieving higher efficiency in inventory management can be a source
of profitability improvements during the financial crisis.
Overall, the thesis contributes to the accounting and finance literature in two distinct
ways: research design and new findings. A more extensive data set (in terms of
countries coverage and time frame), new estimation technique (i.e., dynamic panel
generalised method of moments (GMM) estimation to produce more consistent and
reliable results), and substantive robustness tests (conspicuous by their absence in prior
studies) were applied and result in several new empirical findings. First, a firm’s WCM
is influenced not only by internal factors but also external factors such as country
setting, legal environment and culture. Second, a comprehensive measure of WCM
(i.e., cash conversion cycle (CCC)) does not represent a useful surrogate for the effects
of WCM on corporate profitability. Instead, an examination of the individual
components of CCC gives more pronounced and valid results. Third, by managing
working capital correctly, firms can enhance their profitability even further, at
different levels, and through different components of profitability (including profit
margin and asset productivity).