Efficiency of Working Capital Management and Firm Value: Evidence From Chinese Listed Firms

Abstract

This paper examines the relationship between the efficiency of working capital management (WCM) and the firm value, focusing on a large panel of Chinese listed companies. WCM which involves a trade-off between profitability and risk is a very important element of the financial management of the firm. The net trade cycle (NTC) and its components are used to measure efficiency of WCM, while the firm value is measured by the Tobin's Q ratio. The study makes use of the panel data methodology to estimate the regression models. This study reports that the net trade cycle is negatively associated with firm value. More specially, the study finds that firm value is adversely affected by the number of days accounts receivable and inventories, indicating that working capital provides a real opportunity for financial executives to release cash and improve firms' value. The findings of this study are consistent with the idea that managers can enhance firm value by efficiently managing the investment in working capital. JEL Classification: D22, G31, G32Despite the widespread acceptance of the view that efficiency of WCM affects firm value, only a very limited number of empirical studies have focused on the value effect of WCM (Baños-Caballero, Garcí a-Teruel, & Martí nez-Solano, 2014). Hence, this study investigates the value effect of WCM using a large panel of listed Chinese

Do generous trade credit terms provide a competitive edge?

“…Hence, trade credit may boost sales growth and fuel suppliers' expansion. The downsides of growing receivables reside in the implicit and explicit costs of the less liquid working capital (Vijayakumaran, 2019). These costs include irrecoverable debts, discounts for early settlements, costs of securitization and factoring (Liu et al, 2018), administrative overheads related to receivables management, and alternative cost of capital (Decaire, 2019) tied in customer dues (Boisjoly et al, 2020).…”

Research on Evaluation of Working Capital Management Efficiency of Electric Power Listed Companies

“…Ratnam Vijayakumaran analysis found that the company's profitability and working capital have a nonlinear inverted U-shaped relationship, and there is an optimal working capital management level [1].Ding Wei emphasized that the capital management of enterprises should pay attention to the overall awareness, learn from the experience of developed countries, and treat the entire group as a whole to do a unified financial management plan [2]. Cheng Xin sheng believes that companies should establish supply chain alliances and carry out in-depth cooperation in various ways, which is conducive to improving the efficiency of working capital management [3].…”

Cash Conversion Cycle and Value of Listed Oil and Gas Companies in Nigeria

“…In another similar study, Vijayakumaran (2019) examined the efficiency of WCM on the value of listed Chinese firms from 2004 to 2013. The data was obtained from the Chinese stock market accounting database as well as sino-fin.…”

“…The study found that TQ is negatively affected by NTC, DSO, DIO and DPO. The study by Vijayakumaran (2019) is on firm value but considers only TQ as a dependent variable against the two dependent variables (SP and TQ) that are considered in this study. More so, the scope of the study stopped at 2013, while this study extend the scope to 2019 which is additional six years.…”

“…Moreover, there is a mixed finding on the relationship of CCC to value. While some researchers found a negative relationship of CCC to value (Tobias et al, 2020;Vijayakumaran, 2019), others found a positive relationship (Ademola & Kemisola, 2014;Vural et al, 2012).…”