Exploring predictors of working capital management efficiency and their influence on firm performance: an integrated DEA-SEM approach

Abstract

PurposeThis study develops an integrated approach combining data envelopment analysis (DEA) and structural equation modeling (SEM) for estimating the working capital management (WCM) efficiency and evaluating the effects of diverse exogenous variables on the WCM efficiency and firms' performance.Design/methodology/approachDEA is applied for deriving WCM efficiency for 212 Indian manufacturing firms over a period from 2008 to 2019. Also, the effect of human capital (HC), structural capital (SC), cost of external financing (CEF), interest coverage (IC), leverage (LEV), net fixed asset ratio (NFA), asset turnover ratio (ATR) and productivity (PRD) on the WCM efficiency and firms' performance is examined using SEM.FindingsThe average mean efficiency scores ranging from 0.623 to 0.654 highlight the firms operating at around 60% of WCM efficiency only, which is a major concern for Indian manufacturing firms. Further, IC, LEV, NFA, ATR revealed direct effect on the WCM efficiency as well as indirect effect on firms' performance, whereas CEF had only a direct effect on WCM efficiency. HC, SC and PRD had no effects on WCM efficiency and firms' performance.Practical implicationsThe findings offer vital insights in guiding policy decisions for Indian manufacturing firms.Originality/valueThis study is the first to identify the endogenous nature of the relationship of HC, SC, CEF, IC altogether with firms' performance, compounded by the WCM efficiency, by applying a comprehensive methodology of DEA and SEM and provides an efficiency performance model for better decision-making.

The Impact of Working Capital Management on Firm Profitability: Empirical Evidence from the Polish Listed Firms

“…Moreover, both firm profitability and working capital are determined by multiple factors. From the perspective of potential endogeneity issue, the study of Seth et al (2020) is probably among the first that evaluates the impact of several exogenous variables on the WCM efficiency and firms' performance. Based on data envelopment analysis and structural equation modeling, the authors find that the following variables have a direct effect on WCM efficiency, and, therefore, on firms' performance: interest coverage, leverage, net fixed asset ratio, and asset turnover ratio.…”

Working capital management and business performance: evidence from Latin American companies

“…An increase in sales permits better management of commercial credit and inventories and helps firms avoid immobilisation of resources and price fluctuations (Mahmood et al, 2019). Seth et al (2021) and recognise that investments in working capital increase a company's negotiating power with its providers, allowing it to obtain larger discounts for bulk and down payments, thus increasing an organisation's value (Aktas et al, 2015;Deloof, 2003;Garc ıa-Teruel & Mart ınez-Solano, 2007). However, over-investment in working capital increases financing costs, reducing an organisation's value (Baños-Caballero et al, 2014;Chang, 2018;Zeidan & Shapir, 2017).…”

“…However, over-investment in working capital increases financing costs, reducing an organisation's value (Baños-Caballero et al, 2014;Chang, 2018;Zeidan & Shapir, 2017). Research has made it possible to assume the existence of an optimal level of investment in working capital (Aktas et al, 2015;Baños-Caballero et al, 2012;Khan & Ghazi, 2013), as studies have identified a non-linear relationship between investment in working capital and financial performance (Ding et al, 2013;Seth et al, 2021). This non-linear relationship suggests the existence of an optimum investment in working capital (Mahmood et al, 2019) Numerous studies have been conducted in developed economies to estimate the true relationship between investment in working capital and financial performance, but it is possible that these results cannot be extrapolated to emerging economies due to their different social, political, and economic contexts (Seth et al, 2021).…”

“…Research has made it possible to assume the existence of an optimal level of investment in working capital (Aktas et al, 2015;Baños-Caballero et al, 2012;Khan & Ghazi, 2013), as studies have identified a non-linear relationship between investment in working capital and financial performance (Ding et al, 2013;Seth et al, 2021). This non-linear relationship suggests the existence of an optimum investment in working capital (Mahmood et al, 2019) Numerous studies have been conducted in developed economies to estimate the true relationship between investment in working capital and financial performance, but it is possible that these results cannot be extrapolated to emerging economies due to their different social, political, and economic contexts (Seth et al, 2021). Mielcarz et al (2018) find evidence confirming that the existence of restrictions on financing markets in developing countries can significantly affect decisions about investment in and financing of working capital, as well as the fluctuations.…”

Assess the Impact of the COVID-19 Pandemic and Propose Solutions for Sustainable Development for Textile Enterprises: An Integrated Data Envelopment Analysis-Binary Logistic Model Approach

“…Lee et al (2017) used DEA models to measure the comparative performance of 18 Korean commercial banks in the presence of negative observations and examined the difference in performance among these banks. Seth et al (2021) used DEA models to explore the predictors of working capital management performance and their influence on firm performance. The results of this study evaluated the impact of various exogenous variables on the efficiency of working capital management and the performance of companies.…”