IDEAS home Printed from https://ideas.repec.org/a/eee/jbrese/v67y2014i3p332-338.html
   My bibliography  Save this article

Working capital management, corporate performance, and financial constraints

Author

Listed:
  • Baños-Caballero, Sonia
  • García-Teruel, Pedro J.
  • Martínez-Solano, Pedro

Abstract

This paper examines the linkage between working capital management and corporate performance for a sample of non-financial UK companies. In contrast to previous studies, the findings provide strong support for an inverted U-shaped relation between investment in working capital and firm performance, which implies the existence of an optimal level of investment in working capital that balances costs and benefits and maximizes a firm's value. The results suggest that managers should avoid negative effects on firm performance because of lost sales and lost discounts for early payments or additional financing expenses. The paper also analyzes whether the optimal working capital level is sensitive to alternative measures of financial constraints. The findings show that this optimum is lower for firms more likely to be financially constrained.

Suggested Citation

  • Baños-Caballero, Sonia & García-Teruel, Pedro J. & Martínez-Solano, Pedro, 2014. "Working capital management, corporate performance, and financial constraints," Journal of Business Research, Elsevier, vol. 67(3), pages 332-338.
    • Handle: RePEc:eee:jbrese:v:67:y:2014:i:3:p:332-338
    DOI: 10.1016/j.jbusres.2013.01.016
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148296313000180
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbusres.2013.01.016?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. 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.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Bruce M. Burton & A. Alasdair Lonie & David M. Power, 1999. "The Stock Market Reaction to Investment Announcements: The Case of Individual Capital Expenditure Projects," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(5‐6), pages 681-708, June.
    5. Barbara Summers & Nicholas Wilson, 2000. "Trade Credit Management and the Decision to Use Factoring: An Empirical Study," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(1&2), pages 37-68.
    6. Smith, Janet Kiholm, 1987. "Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-872, September.
    7. Blinder, Alan S & Maccini, Louis J, 1991. "The Resurgence of Inventory Research: What Have We Learned?," Journal of Economic Surveys, Wiley Blackwell, vol. 5(4), pages 291-328.
    8. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    9. Himmelberg, Charles P. & Hubbard, R. Glenn & Palia, Darius, 1999. "Understanding the determinants of managerial ownership and the link between ownership and performance," Journal of Financial Economics, Elsevier, vol. 53(3), pages 353-384, September.
    10. Thomsen, Steen & Pedersen, Torben & Kvist, Hans Kurt, 2006. "Blockholder ownership: Effects on firm value in market and control based governance systems," Journal of Corporate Finance, Elsevier, vol. 12(2), pages 246-269, January.
    11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    12. Barbara Summers & Nicholas Wilson, 2000. "Trade Credit Management and the Decision to Use Factoring: An Empirical Study," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(1‐2), pages 37-68, January.
    13. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, August.
    14. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    15. Lee, Yul W. & Stowe, John D., 1993. "Product Risk, Asymmetric Information, and Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(2), pages 285-300, June.
    16. Nathalie Moyen, 2004. "Investment-Cash Flow Sensitivities: Constrained versus Unconstrained Firms," Journal of Finance, American Finance Association, vol. 59(5), pages 2061-2092, October.
    17. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    18. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    19. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    20. Brennan, Michael J & Maksimovic, Vojislav & Zechner, Josef, 1988. " Vendor Financing," Journal of Finance, American Finance Association, vol. 43(5), pages 1127-1141, December.
    21. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-199, May.
    22. Reinhard H. Schmidt & Marcel Tyrell, 1997. "Financial Systems, Corporate Finance and Corporate Governance," European Financial Management, European Financial Management Association, vol. 3(3), pages 333-361, November.
    23. 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.
    24. Perfect, Steven B. & Wiles, Kenneth W., 1994. "Alternative constructions of Tobin's q: An empirical comparison," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 313-341, July.
    25. 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.
    26. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    27. Wu, Hsueh-Liang, 2011. "Can minority state ownership influence firm value? Universal and contingency views of its governance effects," Journal of Business Research, Elsevier, vol. 64(8), pages 839-845, August.
    28. Wilbur G. Lewellen & John J. McConnell & Jonathan A. Scott, 1980. "Capital Market Influences On Trade Credit Policies," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 3(2), pages 105-113, June.
    29. Smirlock, Michael & Gilligan, Thomas & Marshall, William, 1984. "Tobin's q and the Structure-Performance Relationship," American Economic Review, American Economic Association, vol. 74(5), pages 1051-1060, December.
    30. Chung, Kee H. & Wright, Peter & Charoenwong, Charlie, 1998. "Investment opportunities and market reaction to capital expenditure decisions," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 41-60, January.
    31. Agrawal, Anup & Knoeber, Charles R., 1996. "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 377-397, September.
    32. Florackis, Chrisostomos & Kostakis, Alexandros & Ozkan, Aydin, 2009. "Managerial ownership and performance," Journal of Business Research, Elsevier, vol. 62(12), pages 1350-1357, December.
    33. Whited, Toni M, 1992. "Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-1460, September.
    34. Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(2), pages 209-225, June.
    35. Michael Faulkender & Rong Wang, 2006. "Corporate Financial Policy and the Value of Cash," Journal of Finance, American Finance Association, vol. 61(4), pages 1957-1990, August.
    36. 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.
    37. Vicente Cuñat, 2007. "Trade Credit: Suppliers as Debt Collectors and Insurance Providers," The Review of Financial Studies, Society for Financial Studies, vol. 20(2), pages 491-527.
    38. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1994. "Inventory (Dis)Investment, Internal Finance Fluctuations, and the Business Cycle," Macroeconomics 9401001, University Library of Munich, Germany.
    39. Bruce M. Burton & A. Alasdair Lonie & David M. Power, 1999. "The Stock Market Reaction to Investment Announcements: The Case of Individual Capital Expenditure Projects," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(5&6), pages 681-708.
    40. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    41. McConnell, John J. & Muscarella, Chris J., 1985. "Corporate capital expenditure decisions and the market value of the firm," Journal of Financial Economics, Elsevier, vol. 14(3), pages 399-422, September.
    42. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    43. Wang, Yung-Jang, 2002. "Liquidity management, operating performance, and corporate value: evidence from Japan and Taiwan," Journal of Multinational Financial Management, Elsevier, vol. 12(2), pages 159-169, April.
    44. Chee K. Ng & Janet Kiholm Smith & Richard L. Smith, 1999. "Evidence on the Determinants of Credit Terms Used in Interfirm Trade," Journal of Finance, American Finance Association, vol. 54(3), pages 1109-1129, June.
    45. Schiff, Michael & Lieber, Zvi, 1974. "A Model for the Integration of Credit and Inventory Management," Journal of Finance, American Finance Association, vol. 29(1), pages 133-140, March.
    46. Emery, Gary W., 1984. "A Pure Financial Explanation for Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(3), pages 271-285, September.
    47. Ben-Hsien Bao & Da-Hsien Bao, 2004. "Change in Inventory and Firm Valuation," Review of Quantitative Finance and Accounting, Springer, vol. 22(1), pages 53-71, January.
    48. 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.
    49. Benjamin S. Wilner, 2000. "The Exploitation of Relationships in Financial Distress: The Case of Trade Credit," Journal of Finance, American Finance Association, vol. 55(1), pages 153-178, February.
    50. Anup Agrawal & Charles R. Knoeber, "undated". "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
    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. Chen, Catherine Huirong & Choy, Siu Kai & Tan, Yongxian, 2022. "The cash conversion cycle spread: International evidence," Journal of Banking & Finance, Elsevier, vol. 140(C).
    2. Samuel Jebaraj Benjamin, 2019. "The Effect of Financial Constraints on Audit Fees," Capital Markets Review, Malaysian Finance Association, vol. 27(2), pages 59-87.
    3. Mahdi Salehi & Grzegorz Zimon & Arash Arianpoor & Fatemeh Eidi Gholezoo, 2022. "The Impact of Investment Efficiency on Firm Value and Moderating Role of Institutional Ownership and Board Independence," JRFM, MDPI, vol. 15(4), pages 1-13, April.
    4. repec:prg:jnlpep:v:preprint:id:681:p:1-17 is not listed on IDEAS
    5. Kartal Demirgunes, 2016. "The Effect of Liquidity on Financial Performance: Evidence from Turkish Retail Industry," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(4), pages 63-79, April.
    6. Dr. Pradip Kumar Das, 2022. "A Study on Financing Pattern of Working Capital in IT Sector Companies in India," Journal of Entrepreneurship and Business Innovation, Macrothink Institute, Journal of Entrepreneurship and Business Innovation, vol. 9(2), pages 1-32, December.
    7. Ilhan Dalci & Cem Tanova & Hasan Ozyapici & Murad A. Bein, 2019. "The Moderating Impact of Firm Size on the Relationship between Working Capital Management and Profitability," Prague Economic Papers, Prague University of Economics and Business, vol. 2019(3), pages 296-312.
    8. Mehmet Erkan Soykan & Recep Ulucak, 2016. "Is There a Non-linear Relationship between Net Trade Cycle and Corporate Performance in Turkey?," International Business Research, Canadian Center of Science and Education, vol. 9(6), pages 95-101, June.
    9. 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.

    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. Chang, Chong-Chuo, 2018. "Cash conversion cycle and corporate performance: Global evidence," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 568-581.
    2. Sonia Baños-Caballero & Pedro García-Teruel & Pedro Martínez-Solano, 2012. "How does working capital management affect the profitability of Spanish SMEs?," Small Business Economics, Springer, vol. 39(2), pages 517-529, September.
    3. Afrifa, Godfred & Tingbani, Ishmael, 2017. "Working Capital Management, Cash Flow and SMEs’ Performance," MPRA Paper 82894, University Library of Munich, Germany, revised Oct 2017.
    4. 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.
    5. Cristina Martínez-Sola & Pedro García-Teruel & Pedro Martínez-Solano, 2014. "Trade credit and SME profitability," Small Business Economics, Springer, vol. 42(3), pages 561-577, March.
    6. Cristina Martínez Sola & Pedro J. García-Teruel & Pedro Martínez Solano, 2012. "Trade credit policy and firm value," Working Papers. Serie EC 2012-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    7. 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.
    8. Wetzel, Philipp & Hofmann, Erik, 2019. "Supply chain finance, financial constraints and corporate performance: An explorative network analysis and future research agenda," International Journal of Production Economics, Elsevier, vol. 216(C), pages 364-383.
    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. Hari P. Adhikari & Marcin W. Krolikowski & James Malm & Nilesh B. Sah, 2021. "Working capital (mis)management – impact of executive age," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 727-761, March.
    11. Sonia Baños‐Caballero & Pedro J. García‐Teruel & Pedro Martínez‐Solano, 2010. "Working capital management in SMEs," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(3), pages 511-527, September.
    12. Cristina Martínez-Sola & Pedro J. García-Teruel & Pedro Martínez-Solano, 2013. "Trade credit policy and firm value," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(3), pages 791-808, September.
    13. Tarek Ibrahim Eldomiaty & Mohamed Hashem Rashwan & Mohamed Bahaa El Din & Waleed Tayel, 2016. "Firm, industry and economic determinants of working capital at risk," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 1-29, December.
    14. Franzoni, Francesco, 2009. "Underinvestment vs. overinvestment: Evidence from price reactions to pension contributions," Journal of Financial Economics, Elsevier, vol. 92(3), pages 491-518, June.
    15. Paweł Mielcarz & Dmytro Osiichuk & Paweł Wnuczak, 2018. "Working Capital Management through the Business Cycle: Evidence from the Corporate Sector in Poland," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 12(2), June.
    16. 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.
    17. Schauer, Catharina & Elsas, Ralf & Breitkopf, Nikolas, 2019. "A new measure of financial constraints applicable to private and public firms," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 270-295.
    18. Nguyen An Thanh Hong & Nguyen Tuan Van, 2018. "Working Capital Management and Corporate Profitability: Empirical Evidence from Vietnam," Foundations of Management, Sciendo, vol. 10(1), pages 195-195, September.
    19. 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.
    20. Seifert, Daniel & Seifert, Ralf W. & Protopappa-Sieke, Margarita, 2013. "A review of trade credit literature: Opportunities for research in operations," European Journal of Operational Research, Elsevier, vol. 231(2), pages 245-256.

    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:jbrese:v:67:y:2014:i:3:p:332-338. 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.elsevier.com/locate/jbusres .

    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.