Impact of Working Capital Requirement on Profitability: A Sectoral Analysis

In this study, we aimed to be detected the long term co-integration relationship between , cash conversion cycle, leverage and asset turnover as the determinant of working capital requirements, Gross Domestic Product (GDP) and Consumer Price Index (CPI) as directly affecting factors of these determinants and return on assets for the 2003-2013 period of Borsa Istanbul ‘s selected four main sectors (metal, food, chemical, and textile). In the study, econometric techniques such as second-generation panel unit root, panel cointegration, long and short term coefficient estimation are used under cross-sectional dependence. The analysis results have proved that the effect of variables on profitability is different in short and long term. According to the Pooled Average Group Estimator results, the coefficients of the long-term cash conversion period, leverage ratio and gross domestic product are statistically significant. According to these results, the prolongation of cash conversion period has a negative effect on profitability; using leverage and increased gross domestic product have a positive impact on profitability. In addition, the Common Correlated Effects Mean Group applied to focus on the long-term relationship and it’s results show that the cash conversion period, leverage ratio and asset turnover rate coefficients are statistically significant.