IDEAS home Printed from https://ideas.repec.org/a/eee/tefoso/v184y2022ics0040162522005339.html
   My bibliography  Save this article

Stochastic frontier modelling of working capital efficiency across Europe

Author

Listed:
  • Afrifa, Godfred Adjapong
  • Tingbani, Ishmael
  • Adesina, Oluseyi Oluseun

Abstract

This paper adopts the stochastic frontier analysis (SFA) to model working capital efficiency (WCE) on a sample of 6170 European firms from 2009 to 2018. We find: (i) larger firms are more efficient with their working capital management (WCM) than smaller firms, (ii) higher cash holding contributes to WCE, (iii) high competition is less conducive to WCE than low competition, (iv) export and sales growth potential decrease WCE and (v) WCE increases with access to bank credit. In the analysis, a distinction is made between the “old” EU countries and the “new” EU countries. The results are sensitive to the year of admission into the EU. The results are robust to omitted variable bias, using a more novel approach.

Suggested Citation

  • Afrifa, Godfred Adjapong & Tingbani, Ishmael & Adesina, Oluseyi Oluseun, 2022. "Stochastic frontier modelling of working capital efficiency across Europe," Technological Forecasting and Social Change, Elsevier, vol. 184(C).
    • Handle: RePEc:eee:tefoso:v:184:y:2022:i:c:s0040162522005339
    DOI: 10.1016/j.techfore.2022.122012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0040162522005339
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.techfore.2022.122012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    2. Fabbri, Daniela & Menichini, Anna Maria C., 2010. "Trade credit, collateral liquidation, and borrowing constraints," Journal of Financial Economics, Elsevier, vol. 96(3), pages 413-432, June.
    3. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    4. Wang, Baolian, 2019. "The cash conversion cycle spread," Journal of Financial Economics, Elsevier, vol. 133(2), pages 472-497.
    5. Caglayan, Mustafa & Maioli, Sara & Mateut, Simona, 2012. "Inventories, sales uncertainty, and financial strength," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2512-2521.
    6. Emily Oster, 2019. "Unobservable Selection and Coefficient Stability: Theory and Evidence," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 37(2), pages 187-204, April.
    7. Cullinane, Kevin & Song, Dong-Wook & Gray, Richard, 2002. "A stochastic frontier model of the efficiency of major container terminals in Asia: assessing the influence of administrative and ownership structures," Transportation Research Part A: Policy and Practice, Elsevier, vol. 36(8), pages 743-762, October.
    8. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2015. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 333-359.
    9. Ferrando, Annalisa & Mulier, Klaas, 2013. "Do firms use the trade credit channel to manage growth?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3035-3046.
    10. Almaghrabi, Khadija S., 2022. "COVID-19 and the cost of bond debt: The role of corporate diversification," Finance Research Letters, Elsevier, vol. 46(PB).
    11. Lee, Neil & Sameen, Hiba & Cowling, Marc, 2015. "Access to finance for innovative SMEs since the financial crisis," Research Policy, Elsevier, vol. 44(2), pages 370-380.
    12. Luo, Xueming & Donthu, Naveen, 2005. "Assessing advertising media spending inefficiencies in generating sales," Journal of Business Research, Elsevier, vol. 58(1), pages 28-36, January.
    13. Carlos A. Molina & Lorenzo A. Preve, 2012. "An Empirical Analysis of the Effect of Financial Distress on Trade Credit," Financial Management, Financial Management Association International, vol. 41(1), pages 187-205, March.
    14. Box, Travis & Davis, Ryan & Hill, Matthew & Lawrey, Chris, 2018. "Operating performance and aggressive trade credit policies," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 192-208.
    15. Mariassunta Giannetti & Mike Burkart & Tore Ellingsen, 2011. "What You Sell Is What You Lend? Explaining Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1261-1298.
    16. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
    17. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-444, June.
    18. Afrifa, Godfred Adjapong & Gyapong, Ernest & Zalata, Alaa Mansour, 2019. "Buffer capital, loan portfolio quality and the performance of microfinance institutions: A global analysis," Journal of Financial Stability, Elsevier, vol. 44(C).
    19. Love, Inessa & Preve, Lorenzo A. & Sarria-Allende, Virginia, 2007. "Trade credit and bank credit: Evidence from recent financial crises," Journal of Financial Economics, Elsevier, vol. 83(2), pages 453-469, February.
    20. McGuinness, Gerard & Hogan, Teresa & Powell, Ronan, 2018. "European trade credit use and SME survival," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 81-103.
    21. Adams, Renée B. & Ferreira, Daniel, 2009. "Women in the boardroom and their impact on governance and performance," Journal of Financial Economics, Elsevier, vol. 94(2), pages 291-309, November.
    22. Lee, Changjun & Shin, Hyunha & Kim, Keungoui & Kogler, Dieter F., 2022. "The effects of regional capacity in knowledge recombination on production efficiency," Technological Forecasting and Social Change, Elsevier, vol. 180(C).
    23. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-374, October.
    24. Mateut, Simona & Mizen, Paul & Ziane, Ydriss, 2015. "Inventory composition and trade credit," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 434-446.
    25. Martina Engemann & Katharina Eck & Monika Schnitzer, 2014. "Trade Credits and Bank Credits in International Trade: Substitutes or Complements?," The World Economy, Wiley Blackwell, vol. 37(11), pages 1507-1540, November.
    26. Grzegorz Zimon & Hossein Tarighi, 2021. "Effects of the COVID-19 Global Crisis on the Working Capital Management Policy: Evidence from Poland," JRFM, MDPI, vol. 14(4), pages 1-17, April.
    27. Leora Klapper & Luc Laeven & Raghuram Rajan, 2012. "Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 838-867.
    28. Wang, Ye & Yin, Sirui, 2018. "CEO educational background and acquisition targets selection," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 238-259.
    29. Fabbri, Daniela & Klapper, Leora F., 2016. "Bargaining power and trade credit," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 66-80.
    30. Katrien Kestens & Philippe Van Cauwenberge & Heidi Vander Bauwhede, 2012. "Trade credit and company performance during the 2008 financial crisis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 52(4), pages 1125-1151, December.
    31. Banerjee, Pradip & Dutta, Shantanu & Zhu, Pengcheng, 2021. "Multidimensionality of text based financial constraints and working capital management," International Review of Financial Analysis, Elsevier, vol. 77(C).
    32. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-332.
    33. Rahaman, Mohammad M., 2011. "Access to financing and firm growth," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 709-723, March.
    34. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
    35. Page, John Jr., 1984. "Firm size and technical efficiency : Applications of production frontiers to Indian survey data," Journal of Development Economics, Elsevier, vol. 16(1-2), pages 129-152.
    36. Hanousek, Jan & Kočenda, Evžen & Shamshur, Anastasiya, 2015. "Corporate efficiency in Europe," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 24-40.
    37. Nancy Huygebaert & Linda Gucht & Cynthia Hulle, 2007. "The choice between bank debt and trade credits in business start-ups," Small Business Economics, Springer, vol. 29(4), pages 453-453, December.
    38. Nancy Huyghebaert & Linda Gucht & Cynthia Hulle, 2007. "The Choice between Bank Debt and Trace Credit in Business Start-ups," Small Business Economics, Springer, vol. 29(4), pages 435-452, December.
    39. Robert Kieschnick & Mark Laplante & Rabih Moussawi, 2013. "Working Capital Management and Shareholders' Wealth," Review of Finance, European Finance Association, vol. 17(5), pages 1827-1852.
    40. Chen, Shenglan & Ma, Hui & Wu, Qiang, 2019. "Bank credit and trade credit: Evidence from natural experiments," Journal of Banking & Finance, Elsevier, vol. 108(C).
    41. Boisjoly, Russell P. & Conine, Thomas E. & McDonald, Michael B., 2020. "Working capital management: Financial and valuation impacts," Journal of Business Research, Elsevier, vol. 108(C), pages 1-8.
    42. Afrifa, Godfred Adjapong & Gyapong, Ernest & Monem, Reza M., 2018. "Product differentiation, market dynamics and the value relevance of trade payables: Evidence from UK listed firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 235-253.
    43. Preve, Lorenzo & Sarria-Allende, Virginia, 2010. "Working Capital Management," OUP Catalogue, Oxford University Press, number 9780199737413, Decembrie.
    44. Jyrki Niskanen & Mervi Niskanen, 2006. "The Determinants of Corporate Trade Credit Policies in a Bank‐dominated Financial Environment: the Case of Finnish Small Firms," European Financial Management, European Financial Management Association, vol. 12(1), pages 81-102, January.
    45. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    46. Marcelo Olivares & Gérard P. Cachon, 2009. "Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets," Management Science, INFORMS, vol. 55(9), pages 1586-1604, September.
    47. Carlos A. Molina & Lorenzo A. Preve, 2009. "Trade Receivables Policy of Distressed Firms and Its Effect on the Costs of Financial Distress," Financial Management, Financial Management Association International, vol. 38(3), pages 663-686, September.
    48. Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 201-211.
    49. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    50. Shah, Attaullah & Shah, Hamid Ali & Smith, Jason M. & Labianca, Giuseppe (Joe), 2017. "Judicial efficiency and capital structure: An international study," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 255-274.
    51. Goto, Shingo & Xiao, Gang & Xu, Yan, 2015. "As told by the supplier: Trade credit and the cross section of stock returns," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 296-309.
    52. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    53. Ben-Nasr, Hamdi, 2016. "State and foreign ownership and the value of working capital management," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 217-240.
    54. Aktas, Nihat & Croci, Ettore & Petmezas, Dimitris, 2015. "Is working capital management value-enhancing? Evidence from firm performance and investments," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 98-113.
    55. Christina Atanasova, 2007. "Access to Institutional Finance and the Use of Trade Credit," Financial Management, Financial Management Association International, vol. 36(1), pages 49-67, March.
    56. Chauhan, Gaurav Singh, 2019. "Are working capital decisions truly short-term in nature?," Journal of Business Research, Elsevier, vol. 99(C), pages 238-253.
    57. George W. Blazenko & Kirk Vandezande, 2003. "The product differentiation hypothesis for corporate trade credit," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 457-469.
    58. Matthew D. Hill & G. Wayne Kelly & Michael J. Highfield, 2010. "Net Operating Working Capital Behavior: A First Look," Financial Management, Financial Management Association International, vol. 39(2), pages 783-805, June.
    59. Nancy Huyghebaert & Linda Gucht & Cynthia Hulle, 2007. "The choice between bank debt and trade credit in business start-ups," Small Business Economics, Springer, vol. 29(4), pages 455-455, December.
    60. Abdulla, Yomna & Dang, Viet Anh & Khurshed, Arif, 2017. "Stock market listing and the use of trade credit: Evidence from public and private firms," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 391-410.
    61. Matthew D. Hill & G. Wayne Kelly & G. Brandon Lockhart, 2012. "Shareholder Returns from Supplying Trade Credit," Financial Management, Financial Management Association International, vol. 41(1), pages 255-280, March.
    62. Ji, Qiang & Zhang, Dayong & Zhao, Yuqian, 2020. "Searching for safe-haven assets during the COVID-19 pandemic," International Review of Financial Analysis, Elsevier, vol. 71(C).
    63. Julan Du & Yi Lu & Zhigang Tao, 2012. "Bank loans vs. trade credit," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 20(3), pages 457-480, July.
    64. Zeidan, Rodrigo & Shapir, Offer Moshe, 2017. "Cash conversion cycle and value-enhancing operations: Theory and evidence for a free lunch," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 203-219.
    65. Pedro J. García†Teruel & Pedro Martínez†Solano, 2010. "A Dynamic Approach to Accounts Receivable: a Study of Spanish SMEs," European Financial Management, European Financial Management Association, vol. 16(3), pages 400-421, June.
    66. Klaus Schaeck & Martin Cihák, 2012. "Banking Competition and Capital Ratios," European Financial Management, European Financial Management Association, vol. 18(5), pages 836-866, November.
    67. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    68. Pirttilä, M. & Virolainen, V.M. & Lind, L. & Kärri, T., 2020. "Working capital management in the Russian automotive industry supply chain," International Journal of Production Economics, Elsevier, vol. 221(C).
    69. Pla-Barber, José & Alegre, Joaquín, 2007. "Analysing the link between export intensity, innovation and firm size in a science-based industry," International Business Review, Elsevier, vol. 16(3), pages 275-293, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tarkom, Augustine & Ujah, Nacasius U., 2023. "Global policy uncertainty and working capital management: Does national culture matter?," Technological Forecasting and Social Change, Elsevier, vol. 196(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Afrifa, Godfred Adjapong & Gyapong, Ernest & Monem, Reza M., 2018. "Product differentiation, market dynamics and the value relevance of trade payables: Evidence from UK listed firms," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 235-253.
    2. Abdulla, Yomna & Dang, Viet Anh & Khurshed, Arif, 2020. "Suppliers' listing status and trade credit provision," Journal of Corporate Finance, Elsevier, vol. 60(C).
    3. Abdulla, Yomna & Dang, Viet Anh & Khurshed, Arif, 2017. "Stock market listing and the use of trade credit: Evidence from public and private firms," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 391-410.
    4. Ishmael Tingbani & Godfred Adjapong Afrifa & Venancio Tauringana & Collins Ntim, 2024. "Trade credit and corporate growth," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 206-228, January.
    5. Woo Sung Kim, 2016. "Determinants of Corporate Trade Credit: An Empirical Study on Korean Firms," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 414-419.
    6. Gyimah, Daniel & Machokoto, Michael & Sikochi, Anywhere (Siko), 2020. "Peer influence on trade credit," Journal of Corporate Finance, Elsevier, vol. 64(C).
    7. Burney, Robert B. & James, Hui Liang & Wang, Hongxia, 2021. "Working capital management and CEO age," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    8. Hoang, Cong Huan & Ly, Kim Cuong & Xiao, Qin & Zhang, Xuan, 2023. "Does national culture impact trade credit provision of SMEs?," Economic Modelling, Elsevier, vol. 124(C).
    9. Banerjee, Pradip & Dutta, Shantanu & Zhu, Pengcheng, 2021. "Multidimensionality of text based financial constraints and working capital management," International Review of Financial Analysis, Elsevier, vol. 77(C).
    10. Godfred Adjapong Afrifa & Ahmad Alshehabi & Ishmael Tingbani & Hussein Halabi, 2021. "Abnormal inventory and performance in manufacturing companies: evidence from the trade credit channel," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 581-617, February.
    11. H. Kent Baker & Debidutta Pattnaik & Satish Kumar, 2022. "Trade credit and firm profitability: Empirical evidence from India," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 3934-3953, October.
    12. Cao, Zhangfan & Chen, Steven Xianglong & Lee, Edward, 2022. "Does business strategy influence interfirm financing? Evidence from trade credit," Journal of Business Research, Elsevier, vol. 141(C), pages 495-511.
    13. Cathcart, Lara & Dufour, Alfonso & Rossi, Ludovico & Varotto, Simone, 2020. "The differential impact of leverage on the default risk of small and large firms," Journal of Corporate Finance, Elsevier, vol. 60(C).
    14. Hasan, Mostafa Monzur & Habib, Ahsan, 2019. "Social capital and trade credit," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 158-174.
    15. Chen, Xiaomeng Charlene & Jones, Stewart & Hasan, Mostafa Monzur & Zhao, Ruoyun & Alam, Nurul, 2023. "Does strategic deviation influence firms’ use of supplier finance?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    16. Michael Machokoto & Daniel Gyimah & Boulis Maher Ibrahim, 2022. "The evolution of trade credit: new evidence from developed versus developing countries," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 857-912, October.
    17. Altunok, Fatih & Mitchell, Karlyn & Pearce, Douglas K., 2020. "The trade credit channel and monetary policy transmission: Empirical evidence from U.S. panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 226-250.
    18. Mabel D. Costa & Ahsan Habib, 2021. "Trade credit and cost stickiness," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 1139-1179, March.
    19. Dbouk, Wassim & Moussawi-Haidar, Lama & Jaber, Mohamad Y., 2020. "The effect of economic uncertainty on inventory and working capital for manufacturing firms," International Journal of Production Economics, Elsevier, vol. 230(C).
    20. Tsuruta, Daisuke & Uchida, Hirofumi, 2019. "The real driver of trade credit," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).

    More about this item

    Keywords

    Working capital efficiency; Working capital management; Determinants of WCE; Inventory; Trade receivables; Trade payables; Stochastic frontier analysis;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:tefoso:v:184:y:2022:i:c:s0040162522005339. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.sciencedirect.com/science/journal/00401625 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.