Investment in working capital and financial constraints

Abstract

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 and financial performance in MENA region

“…Under ROA, the results are as expected and H1 is accepted, implying the presence of a non-linear relationship between working capital and ROA. This result is consistent with the literature (Baños-Caballero et al, 2014;Afrifa, 2016;Mun and Jang, 2015;Singhania and Mehta, 2017;Altaf and Shah, 2017;Laghari and Chengang, 2019;Wang et al, 2020) suggesting the possibility of working capital level optimization.…”

“…Conservative policy focus on allocating large funds in C/A financed by low short-term sources of C/L or aggressive policy where allocating small funds in C/A, which are financed by a large volume of short-term sources of finance, as pointed out by Altaf and Ahmad (2019) and Kayani, De Silva, and Gan (2019). The trade-off between using the conservative or aggressive strategies for WCM may result in a non-linear relationship (inverted U-Shape) between WC finance and firm financial performance as found by Baños-Caballero et al (2012); Mun and Jang (2015), Singhania and Mehta (2017); Altaf and Shah (2017), Laghari and Chengang (2019); Altaf and Ahmad (2019). They reported a concave relation between corporate profits and WCM.…”

“…If the financial manager achieves the balance between allocating investments in C/A and financing WC this decision is known as a WC policy (Altaf and Ahmad, 2019). Successful selection of WCM policy will directly lower/affect the firm's cost, risk, sustainability and increase profitability as pointed out by may authors (Peng and Zhou, 2019;Salehi, Mahdavi, Dari, and Tarighi, 2019;Laghari and Chengang, 2019).…”

Firm's Value Exploration: The Impact Of Intellectual Capital and Net Working Capital

“…The results of this research failed to support RBV that views company resources as strategic resources to increase firm value (Wernerfelt, 1984). These findings were in line with research conducted by Altaf (2018) and Kokodey et al (2020), but different from research by Afrifa (2016), Ahangar & Shah (2017), Altaf et al (2019), Wasiuzzaman (2015), and Laghari & Chengang (2019).…”

Is working capital management able to increase sustainable growth through asset utilization?

“…Next, we used total asset turnover as a measure of asset utilization. Further, we referred to previous studies (Padachi et al, 2012;Hien Tran et al, 2017;Laghari & Chengang, 2019) in using firm size, sales growth, and leverage as the control variables. The following explains the operationalization of these variables:…”