Working capital financing, firm performance and financial constraints

Abstract

Purpose The purpose of this paper is to examine the relationship between working capital financing and firm performance for a sample of 437 non-financial Indian companies. In addition, this study examines the impact of financial constraints on working capital financing–performance relationship. Design/methodology/approach The study is based on secondary financial data of 437 non-financial Indian companies obtained from Capitaline database, pertaining to a period of 10 years (2007–2016). This study employs two-step generalized method of moments techniques to arrive at results. Findings Results of the study confirm the inverted U-shape relationship between working capital financing and firm performance. In addition, the authors also found that the firms that are likely to be less financially constrained can finance greater proportion of working capital using short-term debt. Originality/value This study contributes to the scant existing literature by testing the impact of financial constraints on the relationship between working capital financing and firm performance, representing a typical emerging market in India.

Firm's Value Exploration: The Impact Of Intellectual Capital and Net Working Capital

“…Companies with Q value of more than 1 have high potential for growth (Tobin, 1969) and good management performance in managing company assets (Lee & Tompkins, 1999). Tobin's Q was employed as a proxy for firm value as in previous research (Altaf & Ahmad, 2019;Anifowose et al, 2017;Berezinets et al, 2016;Sardo & Serrasqueiro, 2017). Tobin's Q is calculated as follows (Lindenberg & Ross, 1981;Wolfe & Aidar Sauaia, 2003):…”

“…+ MVE = Stock price at the end of April after financial year-end of company (Deswanto & Siregar, 2018) multiplied with outstanding shares (market capitalization) (Loh et al, 2017;Xu et al, 2007) D = Book value of total debts (current liabilities + long-term liabilities) TA = Book value of total assets This research also control for other variables: 1) Age, the longer the companies sampled have been established, it has the more time to convert HC to SC (Nimtrakoon, 2015;Berraies, 2019). 2) Leverage is measured by the ratio of total debts to total assets (Altaf & Ahmad, 2019;Ginesti et al, 2018;Sardo & Serrasqueiro, 2017).…”

“…3) Growth shows the companys' growth that be measeured by the sales on current year divided by sales on the previous year (Ahangar & Shah, 2017;Altaf & Ahmad, 2019).…”

“…In addition, companies that could manage NWC efficiently could increase firm value and reduce future financial constraints (Dhole et al, 2019). Further research conducted on the non-financial industry in India obtained a result in the form of an inverted U, which meant that the NWC would affect firm value at a certain point (Ahangar & Shah, 2017;Altaf & Ahmad, 2019). The results of previous research suggest that when a company finances its working capital needs with lower short-term debt, the performance will increase so that the firm value also increases (Altaf & Ahmad, 2019).…”

“…Further research conducted on the non-financial industry in India obtained a result in the form of an inverted U, which meant that the NWC would affect firm value at a certain point (Ahangar & Shah, 2017;Altaf & Ahmad, 2019). The results of previous research suggest that when a company finances its working capital needs with lower short-term debt, the performance will increase so that the firm value also increases (Altaf & Ahmad, 2019). Referring to previous research, it is indicated that the existence of the NWC is considered important by investors in assessing companies and thus, companies must be able to manage NWC efficiently so as not to reduce firm value.…”