Is there an optimal working capital management that minimizes European stock risk?

Abstract

This paper investigates the existence of an optimal point of the cash conversion cycle (CCC) and its components, which minimizes firms' stock risk. Methodology:This study applies fixed effect models to a sample of firms listed in Euronext exchanges, from 2011 to 2019. Stock risk is proxied by the standard deviation of stock returns. The quadratic function of the CCC and its components (days sales outstanding -DSO, days sales inventory -DSI, and days payable outstanding -DPO) is applied to capture an optimal point of the working capital management (WCM).Results: Results show the existence of a U-shaped relation between WCM and stock risk, suggesting the existence of an optimal CCC and DSI point that minimizes stock risk Originality: To the best of our knowledge, this is the first paper that explores the existence of an optimal CCC point and also an optimal point of its components (DSO, DSI, and DPO), which minimizes stock risk. This paper is also the first to assess the impact of WCM on stock risk of firms listed in European stock exchanges. The results are also relevant to managers, shareholders, and investors since they demonstrate that firms can minimize the risk of their stocks by practicing an optimal WCM.