Working capital management and firms’ performance in emerging markets: the case of Jordan

Abstract

PurposeThe purpose of this paper is to examine the effect of working capital management on firms’ performance for a sample of firms listed on a small emerging market, namely Amman Stock Exchange.Design/methodology/approachThe paper includes a conceptual as well as empirical analysis, in which data from a sample of listed firms for the period from 2000 to 2008 are analyzed to examine if more efficient working capital management improves firms’ accounting profitability and firms’ value. Cash conversion cycles as well as its components are used as measures of working capital management skills. In this study, two performance measures are used: one accounting and one market measure, believing that wealth maximization is shareholders’ main concern. To bring up more robust results, this study used more than one estimation technique, including panel data analysis, fixed and random effects, and generalized methods of moments.FindingsUsing robust estimation techniques this study found that profitability is affected positively with the cash conversion cycle. This indicates that more profitable firms are less motivated to manage their working capital. In addition, financial markets failed to penalize managers for inefficient working capital management in emerging markets.Originality/valueThe paper's originality and value lies in suggesting that policy makers in emerging markets need to motivate and encourage managers and shareholders to pay more attention to working capital through improving investors’ awareness and improving information transparency.

Working Capital Management and Firm Value: The Role of Firm Innovativeness

“…Varying explanation has been given by different researchers on the direction of the relationship between WCM and firm value. While some studies (e.g., Aktas et al, 2015;Autukaite & Molay, 2013;De Almeida & Eid jr, 2014;Lifland, 2011;Wasiuzzaman, 2015) argue that the reduction in WCM increases firm value, other studies (e.g., Abuzayed, 2012;Ali & Ali, 2012;Lyroudi & Lazaridis, 2000;Rimo & Panbunyuen, 2010) also argue that higher working capital increases firm value.…”

“…While some studies found a negative relationship between WCM and firm value (e.g., Aktas et al, 2015;Autukaite & Molay, 2013;De Almeida & Eid jr, 2014;Kieschnick et al, 2008;Kieschnick et al, 2013;Lifland, 2011;Mohamad & Saad, 2010;Wasiuzzaman, 2015), others found a positive relationship (e.g., Abuzayed, 2012;Ali & Ali, 2012;Lyroudi & Lazaridis, 2000;Rimo & Panbunyuen, 2010). Varying explanation has been given by different researchers on the direction of the relationship between WCM and firm value.…”

“…Meanwhile, Abuzayed (2012) argue that the plausible reason for positive relationship is that investors in stock market do not base their firm selection on firms with efficient and effective working capital, and also ignores liquidity as a crucial factor in evaluating firm value. He also stressed that a positive relationship shows that firms that are more profitable are less driven to manage working capital efficiently; the letdown of the financial market to penalize these firms for managing working capital inefficiently leads to such positive relationship.…”

Corporate Governance and Cash Conversion Cycle: Evidence from Listed Companies in Sri Lanka

“…In this connection OECD (2006) indicates that the corporations' working capital was affected by the inclusive financial crises meanwhile these companies confronted growing in their debtors collection period and inventories transformation period due to the falling in the demand for their products, which replicated negatively their working capital and hence their liquidity (Abuzayed, 2012). Particularly, Garcia-Teruel and Martinez-Solano (2007) identify that cash conversion cycle (hereafter CCC), which considered as a key factor in WCM, refers to -the average number of days between the date when the firm must start paying its suppliers and the date when it begins to collect payments from its customers‖.…”

A Conceptual Study of Trade Credit Management on SME’s

“…Sales growth is negatively related to working capital management before and after the crisis periods. (Abuzayed, 2012) The financial crises of 2008 and recession brought focus of industries towards the investments in short term assets and resources which have a maturity of less than one year. This flamed the importance of working capital management at companies all over the world.…”