Financial constraints and speed of working capital adjustment

Abstract

PurposeThe study examines the existence of target level of working capital and the speed of adjustment toward the target for eight manufacturing sectors of Indian economy. In addition, this study examines the impact of financial constraints on the speed of adjustment.Design/methodology/approachThis study is based on secondary financial data of 1936 Indian manufacturing companies from eight sectors for a period of 18 years (2000–2018). This study employs two-step GMM techniques to arrive at results.FindingsResults of the study confirm that firms do have target working capital, but the speed of adjustment from the current level of working capital to the target working capital is slow, and the speed of adjustment varies across sub-sectors. Moreover, we found that firms that are likely to be less constrained adjust their working capital quickly compared to firms facing high financial constraints.Originality/valueThis study contributes to working capital management literature by examining the speed with which the firms move toward their target and also the impact of financial constraints on the speed of adjustment across eight manufacturing sectors of Indian economy. Further, the study examines the impact of financial constraints on the speed of adjustment.

Financial condition, working capital policy and profitability: evidence from Indian companies

“…But such negative association becomes significantly weaker if a company manages its WC efficiently, and it also enhances value of the share despite the financial constraint condition. Ahangar (2020) further extended the earlier findings by evidencing the fact that less JIBR 15,3 constrained companies do manage their WC quickly compared to constrained companies. Akgün and Karatas (2021) also evidenced the fact that in case of external turbulence like financial crisis 2008, WCM affects profitability position significantly.…”

“…Furthermore, the extant literature in the Indian context has focused on different aspects of the financial condition such as financial constraints and investments in R&D (Sasidharan et al, 2015), investment-cash flow sensitivity under financial constraints in group-affiliated Indian firms (George et al, 2011), ease in financial constraint under financial liberalization (Ghosh, 2006), financial constraint and stock return (Sinha and Sawaliya, 2021), financial constraint and investment decision (Kumar and Ranjani, 2018). However, very limited attention has been given to the relationship between financial condition and WCM, like financial constraint and WC (Ahangar and Shah, 2017;Chauhan and Banerjee, 2018), financial constraint and speed of WC (Ahangar, 2020) and financial constraints and WC finance (Altaf and Ahmad, 2019). So, the above empirical pieces of evidence highlight that there is an absence of comprehensive study on the interplay among financial constraint, WCM policy and profitability in the context of emerging countries and more specifically in the context of India.…”

“…(Laeven, 2003; Shen and Wang, 2005; Lin and Bo, 2012; Ding et al , 2013; Lima Crisóstomo et al , 2014; Rashid and Ashfaq, 2017). More explicitly, concerning emerging countries like India, only a few pieces of literature are available (Ghosh, 2006; George et al , 2011; Sasidharan et al , 2015; Chauhan and Banerjee, 2018; Kumar and Ranjani, 2018; Altaf and Ahmad, 2019; Ahangar, 2020; Sinha and Sawaliya, 2021). Hence, at first, this study adds to the scant literature on financial conditions in emerging countries, more specifically in India.…”

Mandatory corporate social responsibility and provision of trade credit: Evidence from India

“…Further, we use firm size (size) measured as a “natural logarithm of total assets” as one of the control variables. It is argued that large sized firms have better credit standing and thereby easier access to funds when compared to small firms (Ahangar, 2020; Altaf & Ahmad, 2019; Altaf & Shah, 2018). By this way large firms are in better position to supply trade credit.…”

“…The data for this study came from the Prowess database of the “Centre for Monitoring of Indian Economy” (CMIE). This database is the most comprehensive database of Indian corporations, and it is commonly used by researchers to do firm‐level analyses on Indian firms (Ahangar, 2020; Manchiraju & Rajgopal, 2017). As mentioned earlier that CSR expenditure was made mandatory by Indian Companies Act 2013, we therefore started from the financial year 2014 to 2019.…”