Determinants of working capital requirement in listed firms: Empirical evidence using a dynamic system GMM

Abstract

Working capital management is a critical element in the survival of every firm. While the effective management of working capital leads to value creation in firms, ineffective management of working capital, on the other hand, does not only destroy value but can lead to the eventual solvency of the firm. The search for the factors that influence working capital management has, therefore, become a worthwhile exercise embarked upon by both managers and scholars. The main aim of this study is thus to empirically investigate the determinants of working capital requirement on the listed firms in Ghana. In examining the determinants of working capital requirements, 28 firms listed on the Ghana Stock Exchange were used for a time period of 8 years, spanning from 2007 to 2014. The study employed a dynamic panel system of General Methods of Moments (GMM) to test the hypotheses. This estimator has the ability to produce consistent and unbiased results when even there is an endogeneity in the model. This, therefore, makes our results more efficient and reliable. First, the study suggests that working capital in Ghanaian firms is determined by profitability, age, sales growth, GDP growth, operating cycles and leverage. Second, it is realized that while age, profitability and operating cycle strongly impacts positively on working capital, GDP growth, sales growth and leverage inversely correlate with working capital.

Moderating Effects of Firm Size and Leverage on the Working Capital Finance–Profitability Relationship: Evidence from China

“…However, they agreed that their results might vary when the leverage level of a firm changes. Nyeadi and Sare [37] reported that different leverage levels significantly affect profit. Firms with high leverage suffer from the higher cost of short-term debt [22,24].…”

“…Such firms mostly use internal sources to repay debt and have to rely on external debt for working capital [4]. Lenders have severe liquidity concerns with high-leverage firms because a significant portion of liquid assets is required to pay back debt charges [37]. High-leverage firms already suffer from heavy debt load and lenders are not willing to provide further loans with normal interest rates, so these firms have to pay premium interest rates on further debt.…”

Macroeconomic factors, working capital management, and firm performance—A static and dynamic panel analysis

“…Exchange rates directly affect their financial outcome as companies import their inputs or sell their trading inventory on the international market, resulting in a direct competitive impact on domestic and international markets. Falls in demand for foreign trade (Oseifuah, 2016).…”

Tata kelola perusahaan dan pengaruhnya terhadap struktur modal

“…Biaya agensi akan berkurang seiring dengan penurunan penggunaan utang dan risiko kebangkrutan (Jensen, 1986). Biaya agensi mengurangi konflik kepentingan antara manajemen dan pemegang saham dengan mengurangi penggunaan utang, sehingga mengurangi risiko gagal bayar (Nyeadi et al, 2017).…”