Working capital management and firms’ profitability: evidence from emerging Asian countries

Abstract

Purpose Excessive working capital or paucity of the same can impair the profits and health of an organization. The purpose of this paper is to analyze the impact of working capital management (WCM) on the profitability of firms for a sample comprising of non-financial companies in countries of South East Asia, South Asia and East Asia. Design/methodology/approach Analytical modeling has been used to estimate the impact of WCM on profitability with the help of financial data of the companies listed in major indices of the target countries (India, Pakistan, Myanmar, Sri Lanka, Bangladesh, Singapore, Thailand, Malaysia, Indonesia, Vietnam, Hong Kong, Japan, China, South Korea and Taiwan). The mathematical model presented in the paper has been tested using two-step-generalized method of moments. Findings The study reveals a non-linear relationship between profitability of a firm and WCM for 11 economies of the Asia Pacific region. Research limitations/implications The results are subject to the differences in the market dynamics of different economies (countries). Moreover, the limitations of the specific statistical method used to verify the model apply to the model too. Practical implications The research can be used as a tool by the firms (global as well as local) to ameliorate their performance by understanding the effects of WCM on profitability in different global markets and adjusting their working capital accordingly. Originality/value The research on the impact of WCM on profitability of the firms of South East Asia, South Asia and East Asia is a new effort and tries to make the importance of WCM more luciferous.

Efficiency of Working Capital Management and Firm Value: Evidence From Chinese Listed Firms

“…These descriptive statistics demonstrate that the sample used in this research is comparable to those used in the previous studies on working capital of Chinese listed firms (e.g., Singhania and Mehta, 2017). Table 3 presents the Pearson correlation coefficients for the pairs of variables used in this study.…”

Supply chain finance, financial constraints and corporate performance: An explorative network analysis and future research agenda

“…For example, Baños-Caballero et al (2014) examined, in a sample of nonfinancial UK companies, the association between WCM and firm profitability and found an inverted Ushaped relationship, arguing that financially constrained firms have lower optimal working capital levels. Singhania and Mehta (2017) analyzed the impact of WCM on corporate performance in 11 economies of the Asia Pacific region and found that both excessive working capital and a shortage of working capital can impair the profitability and health of a company. Soykan and Ulucak (2016) obtained similar results for a sample of nonfinancial firms quoted in Borsa Istanbul for the period 2004-2009, concluding that companies should strive to possess close to the optimal level of working capital.…”

“…In order to eliminate the unobservable heterogeneity, researchers generally estimate models using panel data methodology. The potential problems of endogeneity are alleviated by using the generalized method of moments (GMM) (Singhania and Mehta, 2017). However, due to the dynamic nature of supply chain networks, it is arguably misleading to use these standard econometric approaches to isolate the performance impact of SCF-oriented WCM approaches.…”

Factors Influencing the Profitability of Heavy Vehicle Industry: A Case of Pakistan

“…The cash conversion cycle is an element that measures how many times a firm is required to finish the cycle for the acquisition of production, inventory, and sales of merchandise. Generally, the cash conversion cycle depicts the proficiency of working capital management of an organization (Singhania & Mehta, 2017;Bhatia & Srivastava, 2016;Altaf, 2016). Firms with short CCC are able to access quickly to the capital required for operation.…”