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The impact of working capital management on credit rating

Author

Listed:
  • Ala’a Adden Abuhommous

    (Mutah University)

  • Ahmad Salim Alsaraireh

    (Mutah University)

  • Huthaifa Alqaralleh

    (Mutah University)

Abstract

This study investigates the possible nonlinear relationship between working capital and credit rating. Furthermore, it examines the relationship between the three components of working capital (inventory, accounts receivable, and accounts payable) and a firm’s credit rating. Employing data for U.S listed firms for the period between 1985 and 2017, the results of our ordered probit model show a nonlinear relationship between working capital and its components and credit rating. Finally, we find that the deviation from the optimal working capital adversely affects the credit rating. The results of this study are of significant importance for policy makers, managers, decision makers, and credit-rating agencies, as they help highlight the importance of working capital management for a firm’s credit rating.

Suggested Citation

  • Ala’a Adden Abuhommous & Ahmad Salim Alsaraireh & Huthaifa Alqaralleh, 2022. "The impact of working capital management on credit rating," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-20, December.
    • Handle: RePEc:spr:fininn:v:8:y:2022:i:1:d:10.1186_s40854-022-00376-z
    DOI: 10.1186/s40854-022-00376-z
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    References listed on IDEAS

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    Cited by:

    1. S. Dhanalakshmi & K. Komalavalli, 2023. "An Overview of the Influence of Working Capital Management on Profitability," ComFin Research, Shanlax Journals, vol. 11(4), pages 39-42, October.
    2. Paulo Viegas Carvalho & Sayyed Sadaqat Hussain Shah & Abrish Zaheer & Mário Nuno Mata & António Morão Lourenço, 2022. "The Effect of Inventory Leanness on Firms’ Credit Ratings: The Case of Pakistan," Risks, MDPI, vol. 10(12), pages 1-15, November.
    3. LUKIĆ Radojko, 2023. "Influence of Net Working Capital on Trade Profitability in Serbia," European Journal of Interdisciplinary Studies, Bucharest Economic Academy, issue 01, March.

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    More about this item

    Keywords

    Credit rating; Working capital management; Finance; Investment; Trade credit;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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