Working capital management, corporate performance, and financial constraints

Baños-Caballero, Sonia; García‐Teruel, Pedro J.; Martínez‐Solano, Pedro

doi:10.1016/j.jbusres.2013.01.016

Cited by 423 publications

(512 citation statements)

References 46 publications

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“…Greater the interest coverage ratio, the fewer the problem the firm would have to face in repaying its debt. Thus, if a firm's interest coverage ratio is above the sample mean, it is considered as financially unconstrained (see, for example, Whited (1992) and Baños-Caballero et al (2014)). We also considered the mean value of the interest coverage ratio to divide the firm-year observations into financially constrained and unconstrained type.…”

Section: Financial Constraints Criteriamentioning

confidence: 99%

Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms

Rashid

Jabeen

2018

Financ Innov

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This paper uses a large panel of Pakistani non-financial firms over the period [2000][2001][2002][2003][2004][2005][2006][2007][2008][2009][2010][2011][2012][2013] to examine the role of financial constraints in establishing the relationship between cash flow and external financing. The results reveal that there exists a negative and significant relationship between external financing and cash flow. The finding of the substitutionary relation between internal funds availability and external financing has been viewed as evidence supporting the pecking order theory of capital structure. Yet, we show that this negative relationship is weak in case of financially constrained firms. We also analyze how credit multiplier affects external financing decisions of financially constrained and unconstrained firms. The results show that for financially unconstrained firms, the negative sensitively of external financing increases with asset tangibility. However, for financially constrained firms, the negative sensitivity of external financing to cash flow either decreases or turns positive as the tangibility of assets increases. This finding implies that financially constrained firms benefit more from investing in tangible assets because such assets not only help relax financial constraints but also having a potential to be a direct source of funds in periods of negative cash flow shocks.

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Section: Financial Constraints Criteriamentioning

confidence: 99%

Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms

Rashid

Jabeen

2018

Financ Innov

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“…As posited by [7], the level of inventory that a firm keeps impacts on the performance because, as argued by [31], it augments the ability to grow sales. Further, inventory improves the firm's performance owing to the fact that it will shield the company from emergency purchases.…”

Section: Inventory Holding Periodmentioning

confidence: 99%

“…Lack of efficient Trends in working capital management and its impact on firms' performance -An analysis of SMEs working capital management predisposes the business to bankruptcy even if the company has constantly had positive profitability in its operations [7] . A study conducted by [20] shows that weak working capital management and insufficient financing in the long-term are two chief precursors of failures in business enterprises.…”

Section: Introductionmentioning

confidence: 99%

Trends in working capital management and its impact on firms’ performance – An analysis of SMEs

Xiao-ting¹,

Chen²,

Yu³

2017

Research on Modern Higher Education

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This paper aims to explore the relationship between the performance of small and medium enterprises (SMEs) and working capital management. To make the research robust, accounting performance and measures of market related performance have been used to gauge the SMEs performance. This research utilizes secondary data obtained from the Alternative Investment Market concerning SMEs listed in the London Stock Exchange, to investigate the significance of working capital management towards the performance of SMEs. The working capital management components that were used in research are; account payable period APP, average collection period (ACP), return on assets (ROA) and inventory holding period (IHP). The analysis of data involved the use of regression analysis and extensive use of correlation analysis in order to establish the relationship between working capital management and SME performance. The study established that the use of WCM components such as cash conversion cycle, return on assets, cash conversion cycle and inventory holding period have a significant impact on the performance of SMEs. Further, it was established that when SMEs invested heavily in inventories and receivables, they amassed low profits while investment in current assets in relation to total assets lead to elevated profitability. Hence, it was concluded that there is a compelling relationship between WCM and SME performance.

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“…Again, Net Working Capital investment (NWC t ) expresses the absorption of financial resources through purchasing, transformation and selling (Hill et al, 2010;Baños-Caballero et al, 2014;Darun et al, 2015). NWC is given, in a time (t), as follows: …”

Section: Balance Sheet Analysis Approachmentioning

confidence: 99%

Profitability and Financial Sustainability Analysis in Italian Aquaculture Firms by Application of Economic and Financial Margins

Iotti¹,

Bonazzi²

2015

American Journal of Agricultural and Biological Sciences

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Agricultural Firms operating in the aquaculture sector in Italy are often characterized by high investment and high capital intensity. In fact, these companies need to develop structures and breeding systems to generate adequate cash flow to repay their investment in fixed assets. In addition, the biological cycle of breeding further extends the need for capital, in this case to finance working capital. There is therefore often a mismatch between the economic and financial cycles, wherein profit margins may differ from financial margins. In this way, such companies have an economic advantage but no sustainable financial cycle. In these cases, several crisis may force companies to default, especially when firns are unable to cover debt repayment. This difficulty is particularly present in Italy, where aquaculture firms are often Small and Medium Enterprises (SMEs) and therefore have greater difficulty than large companies accessing the capital market. Our research evaluates the cost effectiveness and financial sustainability of a sample of forty firms operating in the aquaculture sector in Italy, within a timespan of five years, through comparative analysis of the economic and financial margins. The analysis shows that such firms are capital intensive (TA/VP of median value is 1.16%). Financial debt emerges as the first source of capital then increasing companies' financial dependence through credit systems and borrowing costs. Firms have a particular absorption in the NWC cycle, with I_DAYS being 143.29 days, AR_DAYS being 72.75 and 145.51 AP_DAYS expressing financial operating cycle (I_DAYS + AR_DAYS -AP_DAYS) with a length of 70.53 days. Profit margins, even if they are correlated with financial margins, are lower on average. The research highlights that economic model worst explains FCFE (F = 0.011 and adjusted R 2 = 0.803), while the financial model best explains FCFE (F = 0.000 and adjusted R 2 = 0.922). Our research will be further developed through analyzing cooperatives, unincorporated partnerships and sole proprietorships. It may also be useful to undertake a comparative analysis of aquaculture firms operating in other countries of the Mediterranean basin.

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Working capital management, corporate performance, and financial constraints

Cited by 423 publications

References 46 publications

Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms

Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms

Trends in working capital management and its impact on firms’ performance – An analysis of SMEs

Profitability and Financial Sustainability Analysis in Italian Aquaculture Firms by Application of Economic and Financial Margins

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