Strategic working capital management in response to a performance shock: evidence from the NOxBudget Trading Program

Purpose - This paper examines how manufacturing firms impacted by the nitrogen oxides (NOx) Budget Trading Program (NBP) strategically managed working capital to release funds for increased costs and mitigate the negative impact on firm performance. Design/methodology/approach - The study uses a panel data set including 11,302 manufacturing firm-year observations listed on the US exchanges during the period 2000–2008. The authors use Tobin's Q to proxy for firm performance, and cash holding, cash conversion cycle (CCC), days sales outstanding (DSO), days sales inventory (DSI) and days payable outstanding (DPO) for working capital management (WCM). The empirical analysis is conducted using both ordinary least squares (OLS) and propensity score matching (PSM) regressions. Findings - The authors find that firms respond to the higher utility costs imposed by the NBP by decreasing CCC, DSO and DSI. This active WCM response partially mitigated the impact of increased compliance costs on performance for firms affected by the NBP. Results are robust in PSM regressions. Research limitations/implications - Climate change is a global issue that has attracted increasing attention in recent years. This study shows how firms can adjust short-term financing strategies to address the costs of compliance with climate change regulation. Originality/value - The paper contributes to the emerging literature on corporate finance and climate policy actions. The authors use the unique experimental setting of the NBP to examine the regulatory impact on corporate financial management. The authors demonstrate how firms used active WCM to mitigate the negative performance impact of regulatory compliance with the NBP, providing novel insight on the implication of compliance with climate change legislation.