The moderating effects of strategy on the relation of working capital management with profitability

Purpose - This study aims to explore the moderating effects of strategy on the relationship between working capital management (WCM) and profitability. Design/methodology/approach - A data sample of 72,444 firm-year observations of US-listed firms during 2000–2020 was used. The research hypotheses were tested using a panel regression analysis and an appropriate research instrument that signifies a firm’s strategic positioning. Findings - The prospecting (defending) strategy has a decreasing (increasing) moderating effect on the relationship between WCM and profitability. The empirical findings are not affected by the level of earnings management, the presence of motives to meet earnings targets or the intensity of unreported intangible assets. Additionally, the reported empirical results remain robust within the context of propensity score matching regression analysis, in the presence of nonlinear effects of WCM on profitability, when alternative measures of WCM are used, and between firms with an increase or decrease in future profitability or different levels of efficiency on net WCM investments. Research limitations/implications - This study may stimulate future research exploring the moderating effects of various variables on the relationship between WCM and operating performance. Practical implications - The findings highlight the importance of strategy for improving the performance evaluation of WCM policies and the prediction accuracy of the consequences of a strategy on short-term operating performance. Originality/value - Prior empirical research has documented either a negative or positive relationship between WCM and profitability, which implies the presence of moderating effects of various factors. This study provides empirical evidence of the moderating effects of strategy on the relationship between WCM and profitability.