IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v11y2019i7p2029-d220251.html
   My bibliography  Save this article

Moderating Effects of Firm Size and Leverage on the Working Capital Finance–Profitability Relationship: Evidence from China

Author

Listed:
  • Faisal Mahmood

    (School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China)

  • Dongping Han

    (School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China)

  • Nazakat Ali

    (School of Management, Iqra University, Islamabad 44000, Pakistan)

  • Riaqa Mubeen

    (School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China)

  • Umeair Shahzad

    (School of Management, Ocean University, Qingdao 266100, China)

Abstract

We evaluated the moderating effects of firm size and leverage on the working capital finance (WCF)–profitability relationship among Chinese companies during 2000–2017. Applying the generalized method of moments (GMM) technique on panel data, we observed that firm size and leverage have strong moderating roles in the WCF–profitability relationship. We observed that small or low-leverage firms have an inverted U-shaped WCF–profitability relationship. However, this relationship is U-shaped for large or high-leverage firms. We report break-even points in these relationships that show the portion of short-term debt in working capital financing. The results reveal that the break-even point for all subgroups (small, large, low-leverage, and high-leverage firms) decreases compared to the break-even point of the full sample. This study shows how the break-even point of the WCF–profitability relationship shifts when a company expands or its leverage level changes. Managers can use this information for profit maximization.

Suggested Citation

  • Faisal Mahmood & Dongping Han & Nazakat Ali & Riaqa Mubeen & Umeair Shahzad, 2019. "Moderating Effects of Firm Size and Leverage on the Working Capital Finance–Profitability Relationship: Evidence from China," Sustainability, MDPI, vol. 11(7), pages 1-14, April.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:7:p:2029-:d:220251
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/11/7/2029/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/11/7/2029/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Shaista Wasiuzzaman, 2015. "Working capital and firm value in an emerging market," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 11(1), pages 60-79, February.
    2. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn.
    3. Judith Jordan & Julian Lowe & Peter Taylor, 1998. "Strategy and Financial Policy in UK Small Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(1‐2), pages 1-27, January.
    4. Aloke (Al) Ghosh & Doocheol Moon, 2010. "Corporate Debt Financing and Earnings Quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5-6), pages 538-559.
    5. Masri, Hatem & Abdulla, Yomna, 2018. "A multiple objective stochastic programming model for working capital management," Technological Forecasting and Social Change, Elsevier, vol. 131(C), pages 141-146.
    6. Jayant R. Kale & Thomas H. Noe, 1990. "Risky Debt Maturity Choice In A Sequential Game Equilibrium," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 155-166, June.
    7. Ding, Sai & Guariglia, Alessandra & Knight, John, 2013. "Investment and financing constraints in China: Does working capital management make a difference?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1490-1507.
    8. Barclay, Michael J & Smith, Clifford W, Jr, 1995. "The Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 50(2), pages 609-631, June.
    9. Aloke (Al) Ghosh & Doocheol Moon, 2010. "Corporate Debt Financing and Earnings Quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5‐6), pages 538-559, June.
    10. Dalci, Ilhan & Ozyapici, Hasan, 2018. "Working capital management policy in health care: The effect of leverage," Health Policy, Elsevier, vol. 122(11), pages 1266-1272.
    11. Jie Gao & Jiancai Wang, 2017. "Is Working Capital Information Useful for Financial Analysts? Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(5), pages 1135-1151, May.
    12. Jayant R. Kale & Thomas H. Noe, 1990. "Risky Debt Maturity Choice In A Sequential Game Equilibrium," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 13(2), pages 155-166, June.
    13. Bana Abuzayed, 2012. "Working capital management and firms’ performance in emerging markets: the case of Jordan," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 8(2), pages 155-179, March.
    14. de Almeida, Juliano Ribeiro & Eid, William, 2014. "Access to finance, working capital management and company value: Evidences from Brazilian companies listed on BM&FBOVESPA," Journal of Business Research, Elsevier, vol. 67(5), pages 924-934.
    15. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    16. Mohammad Tahir & Melati Anuar, 2016. "The determinants of working capital management and firms performance of textile sector in pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(2), pages 605-618, March.
    17. Claudiu Boțoc & Sorin Gabriel Anton, 2017. "Is profitability driven by working capital management? evidence for high-growth firms from emerging Europe," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 18(6), pages 1135-1155, November.
    18. 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.
    19. Joseph Dery Nyeadi & Yakubu Awudu Sare & Godfred Aawaar, 2018. "Determinants of working capital requirement in listed firms: Empirical evidence using a dynamic system GMM," Cogent Economics & Finance, Taylor & Francis Journals, vol. 6(1), pages 1558713-155, January.
    20. Wei Jiang & Meiting Lu & Yaowen Shan & Tingting Zhu, 2016. "Evidence of Avoiding Working Capital Deficits in Australia," Australian Accounting Review, CPA Australia, vol. 26(1), pages 107-118, March.
    21. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1‐2), pages 175-198, January.
    22. Enqvist, Julius & Graham, Michael & Nikkinen, Jussi, 2014. "The impact of working capital management on firm profitability in different business cycles: Evidence from Finland," Research in International Business and Finance, Elsevier, vol. 32(C), pages 36-49.
    23. Thorsten Knauer & Arnt Wöhrmann, 2013. "Working capital management and firm profitability," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 24(1), pages 77-87, May.
    24. Maria Amélia Pais & Paulo Miguel Gama, 2015. "Working capital management and SMEs profitability: Portuguese evidence," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 11(3), pages 341-358, June.
    25. Jun, Sang-Gyung & Jen, Frank C, 2003. "Trade-Off Model of Debt Maturity Structure," Review of Quantitative Finance and Accounting, Springer, vol. 20(1), pages 5-34, January.
    26. 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.
    27. Aydin Ozkan, 2001. "Determinants of Capital Structure and Adjustment to Long Run Target: Evidence From UK Company Panel Data," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(1-2), pages 175-198.
    28. Omo Aregbeyen, 2013. "The effects of working capital management on the profitability of Nigerian manufacturing firms," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(3), pages 520-534, June.
    29. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    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. Sorin Gabriel Anton & Anca Elena Afloarei Nucu, 2020. "The Impact of Working Capital Management on Firm Profitability: Empirical Evidence from the Polish Listed Firms," JRFM, MDPI, vol. 14(1), pages 1-14, December.
    2. Anton, Sorin Gabriel & Nucu, Anca Elena Afloarei, 2022. "On the role of institutional factors in shaping working capital management policies: Empirical evidence from European listed firms," Economic Systems, Elsevier, vol. 46(2).
    3. Na Wang & Atta Ullah & Xiaofeng Lin & Taiming Zhang & Jie Mao, 2022. "Dynamic Influence of Urbanization on Inclusive Green Growth in Belt and Road Countries: The Moderating Role of Governance," Sustainability, MDPI, vol. 14(18), pages 1-18, September.
    4. Umeair Shahzad & Fukai Luo & Jing Liu, 2023. "Debt financing and technology investment Kuznets curve: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 751-765, January.
    5. Conrado Diego García-Gómez & Ender Demir & Ming-Hsiang Chen & José María Díez-Esteban, 2022. "Understanding the effects of economic policy uncertainty on US tourism firms’ performance," Tourism Economics, , vol. 28(5), pages 1174-1192, August.
    6. Ahmed Mohamed Habib & Nahia Mourad, 2022. "Analyzing the Efficiency of Working Capital Management: a New Approach Based on DEA-Malmquist Technology," SN Operations Research Forum, Springer, vol. 3(3), pages 1-20, September.
    7. Umeair Shahzad & Fukai Luo & Jing Liu & Mahmood Faisal & Hafeez Ullah, 2022. "The most consistent and reliable predictors of corporate financial choices in Pakistan: New evidence using BIC estimation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 237-257, January.
    8. Mohammad Sofie Abdul Hasan & Adler Haymans Manurung & Bahtiar Usman, 2020. "Determinants of Bank Profitability with Size as Moderating Variable," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(3), pages 1-7.
    9. Sainan Zhao & Yichao Zhang & Huma Iftikhar & Atta Ullah & Jie Mao & Tiantian Wang, 2022. "Dynamic Influence of Digital and Technological Advancement on Sustainable Economic Growth in Belt and Road Initiative (BRI) Countries," Sustainability, MDPI, vol. 14(23), pages 1-16, November.
    10. Faisal Mahmood & Zahoor Ahmed & Nazim Hussain & Younes Ben Zaied, 2024. "Macroeconomic factors and financing strategies in working capital: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 35-57, January.

    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. Ala’a Adden Abuhommous & Tareq Mashoka, 2018. "A dynamic approach to accounts receivable: the case of Jordanian firms," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 8(2), pages 171-191, June.
    2. Pedro J. García‐Teruel & Pedro Martínez‐Solano & Juan Pedro Sánchez‐Ballesta, 2009. "Accruals quality and corporate cash holdings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(1), pages 95-115, March.
    3. Pedro J. García‐Teruel & Pedro Martínez‐Solano, 2008. "On the Determinants of SME Cash Holdings: Evidence from Spain," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(1‐2), pages 127-149, January.
    4. Abudu Braimah & Yinping Mu & Isaac Quaye & Alhassan Abubakar Ibrahim, 2021. "Working Capital Management and SMEs Profitability in Emerging Economies: The Ghanaian Case," SAGE Open, , vol. 11(1), pages 21582440219, February.
    5. Mustafa Caglayan & Abdul Rashid, 2010. "The response of firms' leverage to uncertainty: Evidence from UK public versus non-public firms," Working Papers 2010019, The University of Sheffield, Department of Economics, revised Oct 2010.
    6. Sonia Baños-Caballero & Pedro J. García-Teruel & Pedro Martínez-Solano, 2016. "Financing of working capital requirement, financial flexibility and SME performance," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 17(6), pages 1189-1204, November.
    7. Sharif N. Ahkam & Khairul Alom, 2019. "Liquidity, Level of Working Capital Investment, and Performance in an Emerging Economy," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(3), pages 307-328, December.
    8. Pedro J. García‐Teruel & Pedro Martínez‐Solano & Juan P. Sánchez‐Ballesta, 2010. "Accruals Quality and Debt Maturity Structure," Abacus, Accounting Foundation, University of Sydney, vol. 46(2), pages 188-210, June.
    9. Mustafa Caglayan & Abdul Rashid, 2014. "The Response Of Firms' Leverage To Risk: Evidence From Uk Public Versus Nonpublic Manufacturing Firms," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 341-363, January.
    10. Orman, Cüneyt & Bülent, Köksal, 2015. "Structure of Debt Maturity across the Firm Type Spectrum," MPRA Paper 64860, University Library of Munich, Germany.
    11. José López-Gracia & Francisco Sogorb-Mira, 2008. "Testing trade-off and pecking order theories financing SMEs," Small Business Economics, Springer, vol. 31(2), pages 117-136, August.
    12. Dongyang Zhang, 2017. "Is working capital management value-enhancing through alleviating financial constraints? Evidence from Chinese non-listed firms," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 15(4), pages 373-406, October.
    13. Kim, Sang-Joon & Bae, John & Oh, Hannah, 2019. "Financing strategically: The moderation effect of marketing activities on the bifurcated relationship between debt level and firm valuation of small and medium enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 663-681.
    14. Chauhan, Gaurav Singh, 2019. "Are working capital decisions truly short-term in nature?," Journal of Business Research, Elsevier, vol. 99(C), pages 238-253.
    15. Mohamed Soufeljil & Asma Sghaier & Zouhayer Mighri & Hanène Kheireddine, 2017. "The financial structure of the Tunisian listed businesses: an application on panel data," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 7(1), pages 1-25, December.
    16. Zhang, Dongyang & Liu, Deqiang, 2017. "Determinants of the capital structure of Chinese non-listed enterprises: Is TFP efficient?," Economic Systems, Elsevier, vol. 41(2), pages 179-202.
    17. Abdul-Rahman Khokhar, 2019. "Working Capital Investment: A Comparative Study - Canada Versus the United States," Multinational Finance Journal, Multinational Finance Journal, vol. 23(1-2), pages 65-102, March - J.
    18. 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.
    19. G. Oka Warmana & I. Ketut Rahyuda & Ida Bagus Anom Purbawangsa & Ni Luh Gede Sri Artini, 2020. "Investigating Capital Structure Speed of Adjustment (SOA) of Indonesian Companies for Corporate Value," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 21(3), pages 215-231, September.
    20. Akbar, Saeed & Rehman, Shafiq ur & Liu, Jia & Shah, Syed Zulfiqar Ali, 2017. "Credit supply constraints and financial policies of listed companies during the 2007–2009 financial crisis," Research in International Business and Finance, Elsevier, vol. 42(C), pages 559-571.

    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:gam:jsusta:v:11:y:2019:i:7:p:2029-:d:220251. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.