Financial Frictions and Trade Dynamics

PurposeThis study investigates the relationship between working capital investment (WCI) and firm value for Indian manufacturing firms using excess net working capital (NWC) and Tobin's Q as a measure of WCI and firm value, respectively. The study also examines whether firms use the cash released from excess investment in working capital to make long-term investments.Design/methodology/approachThe sample comprises 834 Bombay Stock Exchange (BSE) listed Indian manufacturing firms whose data from April 2010 to March 2020 are analyzed using a fixed-effect panel regression analysis approach.FindingsThe empirical results show that excess NWC influences firm value negatively and significantly. However, the nature of the relationship becomes nonlinear upon dividing the sample into positive excess NWC and negative excess NWC. The findings from the study also reveal that firms redistribute cash freed from positive excess NWC for long-term investments to improve their value without impacting the corresponding risk.Practical implicationsOverall, the results suggest that firms with positive excess NWC can enhance their valuations by building adequate long-term investments from surplus WCI funds.Originality/valueTo the authors’ best knowledge, studies on this issue have primarily focused on developed economies. No study seems to have been done on this subject in the emerging South Asian economies. The present study is the first to bridge the research gap by investigating the relationship between excess WCI and firm value for manufacturing firms in India. Moreover, it examines whether a positive excess NWC reduction translates into corporate investments (CI).

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Financial Frictions and Trade Dynamics

Cited by 2 publications

References 33 publications

Trade and firm financing

Trade and firm financing

The effect of working capital investment on firm value and long-term investment: evidence from Indian manufacturing sector

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