Working Capital Management Policies in Indian Listed Firms: A State-Wise Analysis

Abstract

The main aim of this paper is to evaluate the impact of working capital policies on firms’ profitability. The study uses a panel data set of 829 manufacturing firms for the period from 2011 to 2017. Data is extracted from Prowess IQ database. An empirical model is used for testing research hypotheses. The results show that all firms across Indian states follow conservative financing and investment policy. The conservative investment policy positively affects return on assets, whereas the conservative financing policy negatively affects return on assets and therefore firms’ financial sustainability. Regulators, policymakers, investors, and financial managers in Indian manufacturing companies are advised to follow a conservative investment and financing policy, which is effective and efficient in boosting firms’ profitability for attaining financial sustainability. Therefore, manufacturing firms should invest more in current assets, because they need to expand both inventories and trade credit to their customers. Moreover, financial managers are advised to favor a low level of debt in financing assets. Apart from previous literature, which was either descriptive or based on a small sample size, the present study makes a novel and significant contribution by bridging an existing gap through applying a panel fixed- and random-effect model for a large sample: 829 firms. Furthermore, the business environment in India is somewhat different from that of other countries around the globe, which makes investigating working capital policies in the Indian contexts an interesting endeavor.

Working Capital Management and Performance of Telecommunication Companies in ASEAN-4: The Role of Financial Development

“…A company's liquidity level can be measured by the amount of working capital owned by the company, including the measurement of efficiency and short-term financial health. There is much literature that analyzes working capital both in terms of working capital management and in terms of working capital policy, which influences company performance with research samples from various countries, including Indonesia (Basyith et al, 2021;Firmansyah et al, 2018;Sunardi et al, 2021), Malaysia (Bashir & Regupathi, 2021;S et al, 2017;Zariyawati et al, 2016), Singapore (Mansoori & Joriah Muhammad, 2012), Vietnam (Hoang, 2015), ASEAN-5 (Setianto et al, 2022), India (Bhatia & Srivastava, 2016;Chand Garg, 2022;Farhan et al, 2021), Pakistan (Hussain et al, 2021;Nazir & Afza, 2009), Sri Lanka (Bandara & Bandara, 2015), South Africa (Mandipa & Sibindi, 2022), Poland (Jaworski & Czerwonka, 2021;Zimon & Tarighi, 2021), the United States (Syeda, 2021;Ujah et al, 2020), and Australia and New Zealand (Kayani et al, 2020).…”

“…Working Capital Policy (Without Moderation) ROAit = α + β1 WCIP it+ β2 WCFP it + β3Sizeit + β4Capex it + εit …Model 2a Furthermore, in terms of working capital policy, the average investment value (WCIP) is 0.19; this value is smaller than 0.5, which indicates that the company applies a restricted investment policy in its working capital investment policy (Adam et al, 2017;Farhan et al, 2021).…”

“…Furthermore, working capital policy is usually proxied by the Working Capital Investment Policy (WCIP) and Working Capital Financing Policy (WCFP) variables. The Working Capital Investment Policy is calculated by comparing its current assets with the company's total assets, and the Working Capital Financing Policy is calculated by comparing the value of short-term debt with the company's total assets (Adam et al, 2017;Bandara & Bandara, 2015;Basyith et al, 2021;Farhan et al, 2021;Sunardi et al, 2021;Temtime, 2016;Vuković & Jakšić, 2019).…”

Mechanism analysis of influencing factors on financing efficiency of strategic emerging industries under the “dual carbon” background: evidence from China

“…Factors such as finance, energy, human capital and technology have significant effects on the growth of manufacturing industry in the short and long run (Arjun et al 2020 ). Empirical data based on India from 2011 to 2017 show that companies in Indian states mainly adopt conservative financing and investment strategies, which have a positive effect on the return on assets, but a negative effect on the financial sustainability of the industry (Farhan et al 2021 ). In the binary closed-loop supply chain composed of risk-averse suppliers and risk-neutral oems, three financing modes, partial trade credit, full trade credit and pure bank credit, can be formed (Zhang and Chen 2020 ).…”

Working capital management efficiency: a study of certified firms from the EFQM excellence model

“…Abbadi & R. Abbadi, 2013). On the other hand, some scholars used WC as an independent variable (Thi & Phung, 2021;Rey-Ares et al, 2021;Senan et al, 2021;Farhan et al, 2021;Chauhan, 2021;Fernández-López et al, 2020;Pham et al, 2020;Högerle et al, 2020). Numerous researchers employed components of WC, which are days sales outstanding, cash conversion cycle, days inventory outstanding, and days payable outstanding, to examine the relationship between WCM and firm profitability (Banerjee et al, 2021;Yousaf et al, 2021;Högerle et al, 2020;Goel & Sharma, 2015).…”