Is Working Capital Management Value-Enhancing? Evidence from Firm Performance and Investments

Abstract

This paper examines the value effect of working capital management (WCM) for a large sample of US firms over the period 1982-2011. Taking into account omitted variables and reverse causality, we show that the decrease in working capital across time leads to increasing performance. This relationship is driven by firms that have substantial cash unnecessarily tied up in working capital. Importantly, we also show that corporate investment is the channel through which improvement in WCM translates into superior performance. Finally, the value effect of WCM is attenuated during the financial crisis, due to the contraction of the investment opportunity set. JEL classification: G31, G32Keywords: Working capital management, Performance, Investment, Reverse causality, Risk *Corresponding author. Tel.: +49 261 6509 224. E-mail addresses: nihat.aktas@whu.edu (N. Aktas), ettore.croci@unicatt.it (E. Croci), d.petmezas@surrey.ac.uk (D. Petmezas). AcknowledgementWe thank Yakov Amihud, Hubert de la Bruslerie, Lorenzo Caprio, Riccardo Calcagno, Andrey Golubov, Ulrich Hofbaur, Alexander Kempf, François Larmande, Oguzhan Ozbas, Alain Schatt, Oktay Tas, Nickolaos Travlos, and seminar participants at the University of Cologne, University of Lausanne, and Istanbul Technical University for their comments and suggestions. We are grateful to Rongbing Huang and Inessa Love for sharing with us their codes for estimating the long-differencing technique and the PVAR model, respectively. All remaining errors are our own. 1

Working Capital Management and Firm Value: The Role of Firm Innovativeness

“…Though, previous studies (e.g., Aktas et al, 2015;Autukaite & Molay, 2013;Kieschnick et al, 2013;Wang, 2002;Wasiuzzaman, 2015) have focus on the impact of WCM and its components (i.e. account receivables, account payables and inventory holding) on firm value, however, there is need for more studies to concentrate on large firms due to their vulnerabilities of managing working capital in recent years and because most large firms have a tendency of having a large amount of cash invested in working capital, and considerable amounts of short-term payables, as a basis of financing (Deloof, 2003).…”

“…While some studies found a negative relationship between WCM and firm value (e.g., Aktas et al, 2015;Autukaite & Molay, 2013;De Almeida & Eid jr, 2014;Kieschnick et al, 2008;Kieschnick et al, 2013;Lifland, 2011;Mohamad & Saad, 2010;Wasiuzzaman, 2015), others found a positive relationship (e.g., Abuzayed, 2012;Ali & Ali, 2012;Lyroudi & Lazaridis, 2000;Rimo & Panbunyuen, 2010). Varying explanation has been given by different researchers on the direction of the relationship between WCM and firm value.…”

“…Varying explanation has been given by different researchers on the direction of the relationship between WCM and firm value. While some studies (e.g., Aktas et al, 2015;Autukaite & Molay, 2013;De Almeida & Eid jr, 2014;Lifland, 2011;Wasiuzzaman, 2015) argue that the reduction in WCM increases firm value, other studies (e.g., Abuzayed, 2012;Ali & Ali, 2012;Lyroudi & Lazaridis, 2000;Rimo & Panbunyuen, 2010) also argue that higher working capital increases firm value.…”

Financing of Working Capital Requirement and Profitability: Evidence from Borsa Istanbul Chemical, Petroleum, Rubber, and Plastic Sector

“…The results of the study show that firms have an optimal working capital level and divergence from this level harms to the stock and operating performance of the firms. The authors also documented that working capital management increases corporate performance through corporate investment channel [14].…”

Strategic Adjustment Capacity, Sustained Competitive Advantage, and Firm Performance: An Evolutionary Perspective on Bird Flocking and Firm Competition

“…However, holding too much cash suggests that this part of the resources is not involved in the profit-making of firms to generate corresponding performance [50]. As a result, the fourth hypothesis is made for CHR as follows:…”