The Implications of Debt Financing on Working Capital Management Efficiency: Evidence From Mena Emerging Markets

Abstract

This proposed study aims to examine how debt financing affects the working capital management (WCM) efficiency of firms in eight selected MENA countries over the period 2016-2020. This study discusses different theories of debt financing which include the trade-off theory, the pecking order theory, the market timing theory, and the agency theory (i.e., the agency theory of debt, equity, and free cash flow). Particularly, the study addresses how short-term debt, long-term debt, and total debt influence WCM efficiency. We hypothesize that there are positive relationships between the short-term debt (measured by the current ratio), the long-term debt (measured by the long-term debt to total assets ratio), and the total debt (measured by the total debt to total assets ratio) toward WCM (measured by cash conversion cycle). Firm’s specific characteristics such as the firm type, the firm size, firm’s sales growth, and tangibility were used as control variables for WCM. To achieve the study objectives, a sample of 718 non-financial listed companies on stock exchanges in countries of Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, and UAE will be used over the period 2016-2020. Secondary quantitative data will be collected from the annual financial statements of firms. The multiple regression model will be used to test the study hypotheses. This proposed paper originally contributes to the extant literature in several ways. First, there were limited studies of WCM in the MENA context and the current study provided a new insight that has not been investigated before in the MENA region. Thus, it bridges the gap in the literature. However, the majority of extant WCM literature emphasized the relationship between efficient WCM and firms profitability. Moreover, this paper contributes to developing efficient WCM practices and strategies that improve the financial performance of listed companies in the MENA region

Does the Efficiency of a Firm’s Intellectual Capital and Working Capital Management Affect Its Performance?

“…The use of current liabilities is found to be less costly but highly risky as companies are forced to settle short-term debt soon. Alternatively, the use of long-term liabilities is less risky, as it allows more time to settle the debt but carries the cost of high interest expense (Alrahamneh et al, 2020 ).…”

Evaluating the Super-Efficiency of Working Capital Management Using Data Envelopment Analysis: Does COVID-19 Matter?

“…Additionally, the results show that UAE government's enforced measures to help firms during the COVID-19 crisis were efficient. These measures included loan deferrals, financial support programs, and other financial assistance that have helped many firms continue operating during the pandemic and have supported their WCM initiatives [19].…”

“…UAE government has implemented measures to help firms address these problems. These include loan deferrals, financial support programs, and other financial assistance that have helped many firms continue running during the pandemic and have supported their WCM initiatives [19]. Overall, COVID-19 has highlighted the importance of effective WCM for firms in UAE and has demonstrated the need for firms to be agile and responsive to changing market conditions.…”

The Impact of Firm Risk and the COVID-19 Crisis on Working Capital Management Strategies: Evidence from a Market Affected by Economic Uncertainty

“…As for the working capital financing strategy, when companies adopt an aggressive strategy and resort to short-term debt to finance their current assets, they expose themselves to more risk because they have a shorter time to settle them until the maturity date, although it is less expensive (Nazir and Afza 2009). Conversely, conservative companies tend to use long-term debt, which is less risky and allows them to have sufficient time to settle, despite incurring higher interest costs (Alrahamneh et al 2020;Ahmad et al 2022). According to the trade-off theory, companies try to optimize their working capital policies by weighing the costs and benefits (Ahmad et al 2022;Dash et al 2023;Kayani et al 2023).…”