IDEAS home Printed from https://ideas.repec.org/a/wsi/rpbfmp/v18y2015i04ns0219091515500241.html
   My bibliography  Save this article

Working Capital as a Determinant of Corporate Profitability

Author

Listed:
  • Ashwin Madhou

    (School of Economics, Finance and Marketing, RMIT University, Level 11, 445 Swanston Street, Melbourne, Victoria 3000, Australia)

  • Imad Moosa

    (School of Economics, Finance and Marketing, RMIT University, Level 11, 445 Swanston Street, Melbourne, Victoria 3000, Australia)

  • Vikash Ramiah

    (School of Commerce, University of South Australia, RM 3.42, 37-44 North Terrace, Adelaide 5000, Australia)

Abstract

This study examines the interaction of corporate profitability, working capital management and firm characteristics. Advanced quantitative techniques, such as dynamic panel estimation and median regression, are used to test the underlying relations. The findings indicate that both size and debt ratio are important determinants of corporate profitability and that profitable firms and losing firms tend to have different determinants of profitability. Several findings indicate that the effects of the components of working capital on profitability depend on firm characteristics such as the state of working capital (surplus/deficit) and where the firm lies in the profitability league.

Suggested Citation

  • Ashwin Madhou & Imad Moosa & Vikash Ramiah, 2015. "Working Capital as a Determinant of Corporate Profitability," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 18(04), pages 1-17, December.
    • Handle: RePEc:wsi:rpbfmp:v:18:y:2015:i:04:n:s0219091515500241
    DOI: 10.1142/S0219091515500241
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219091515500241
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219091515500241?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. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    2. James Ted Mcdonald, 1999. "The Determinants of Firm Profitability in Australian Manufacturing," The Economic Record, The Economic Society of Australia, vol. 75(2), pages 115-126, June.
    3. Round, David K, 1976. "Profitability and Concentration in Australian Manufacturing Industries, 1968-69 to 1972-73," The Economic Record, The Economic Society of Australia, vol. 52(138), pages 228-238, June.
    4. Simon Feeny & Mark Harris & Mark Rogers, 2005. "A dynamic panel analysis of the profitability of Australian tax entities," Empirical Economics, Springer, vol. 30(1), pages 209-233, January.
    5. Elisa Birch, 2006. "The public-private sector earnings gap; in Australia: a quantile regression approach," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 9(2), pages 99-123, June.
    6. Moshe Buchinsky, 1998. "Recent Advances in Quantile Regression Models: A Practical Guideline for Empirical Research," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 88-126.
    7. Jarrad Harford & Sattar A. Mansi & William F. Maxwell, 2012. "Corporate Governance and Firm Cash Holdings in the U.S," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 107-138, Springer.
    8. Jan Willem van den End, 2012. "Liquidity stress-tester: do Basel III and unconventional monetary policy work?," Applied Financial Economics, Taylor & Francis Journals, vol. 22(15), pages 1233-1257, August.
    9. 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.
    10. 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.
    11. Ming-Chang Cheng & Zuwei-Ching Tzeng, 2014. "Effect of Leverage on Firm Market Value and How Contextual Variables Influence this Relationship," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-63.
    12. Johnson, Robert & Soenen, Luc, 2003. "Indicators of Successful Companies," European Management Journal, Elsevier, vol. 21(3), pages 364-369, June.
    13. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    14. Bourke, Philip, 1989. "Concentration and other determinants of bank profitability in Europe, North America and Australia," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 65-79, March.
    15. Nicholas Dopuch & Chandra Seethamraju & Weihong Xu, 2010. "The pricing of accruals for profit and loss firms," Review of Quantitative Finance and Accounting, Springer, vol. 34(4), pages 505-516, May.
    16. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009, Elsevier.
    17. Williams, Barry, 2003. "Domestic and international determinants of bank profits: Foreign banks in Australia," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1185-1210, June.
    18. Dixon, Bruce L & Garcia, Philip & Anderson, Margot, 1987. "Usefulness of Pretests for Estimating Underlying Technologies Using Dual Profit Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 623-633, October.
    19. McDonald, James Ted, 1999. "The Determinants of Firm Profitability in Australian Manufacturing," The Economic Record, The Economic Society of Australia, vol. 75(229), pages 115-126, June.
    20. Williams, Barry, 1998. "A pooled study of the profits and size of foreign banks in Australia," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 211-231, September.
    21. 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.
    22. Michelle L. Barnes & Anthony W. Hughes, 2002. "A quantile regression analysis of the cross section of stock market returns," Working Papers 02-2, Federal Reserve Bank of Boston.
    23. 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.
    24. Pedro Juan García‐Teruel & Pedro Martínez‐Solano, 2007. "Effects of working capital management on SME profitability," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 3(2), pages 164-177, April.
    25. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
    26. 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.
    27. Seraina C. Anagnostopoulou, 2013. "Cash Holdings: Determining Factors and Impact on Future Operating Performance for Listed versus Unlisted Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(02), pages 1-47.
    28. Richard P. Rumelt, 1991. "How much does industry matter?," Strategic Management Journal, Wiley Blackwell, vol. 12(3), pages 167-185, March.
    29. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
    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. 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.
    2. Godfred Adjapong Afrifa & Ahmad Alshehabi & Ishmael Tingbani & Hussein Halabi, 2021. "Abnormal inventory and performance in manufacturing companies: evidence from the trade credit channel," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 581-617, February.
    3. Grzegorz Zimon & Hossein Tarighi, 2021. "Effects of the COVID-19 Global Crisis on the Working Capital Management Policy: Evidence from Poland," JRFM, MDPI, vol. 14(4), pages 1-17, April.
    4. Khairul Alom, 2018. "Liquidity and Profitability: A Co-Integration Study," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-20, June.
    5. Jaroslav Mazanec, 2022. "The Impact of Working Capital Management on Corporate Performance in Small–Medium Enterprises in the Visegrad Group," Mathematics, MDPI, vol. 10(6), pages 1-19, March.

    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. 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.
    2. Nina Ponikvar & Maks Tajnikar, 2011. "Are the Determinants of Markup Size Industry-Specific? The Case of Slovenian Manufacturing Firms," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(2), pages 229-244, June.
    3. 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.
    4. Sabien Dobbelaere & Jacques Mairesse, 2013. "Panel data estimates of the production function and product and labor market imperfections," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(1), pages 1-46, January.
    5. Weiß, Christian, 2010. "The Ownership Concentration of Firms: Three Essays on the Determinants and Effects," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 30247, July.
    6. Natália Barbosa & Helen Louri, 2005. "Corporate Performance: Does Ownership Matter? A Comparison of Foreign- and Domestic-Owned Firms in Greece and Portugal," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 27(1), pages 73-102, August.
    7. 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.
    8. Bhattacharjeean, Arnab & Majumdar, Sumit K., 2011. "How much does industry matter in an emerging market economy?," SIRE Discussion Papers 2011-51, Scottish Institute for Research in Economics (SIRE).
    9. Fernandes, Gláucia & Mendes, Layla dos Santos & Leite, Rodrigo de Oliveira, 2021. "Cash holdings and profitability of banks in developed and emerging markets," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 880-895.
    10. Shikha Bhatia & Aman Srivastava, 2016. "Working Capital Management and Firm Performance in Emerging Economies: Evidence from India," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 41(2), pages 71-87, May.
    11. Sanjeev Kumar & K. S. Ranjani, 2018. "Dividend Behaviour of Indian-listed Manufacturing and Service Sector Firms," Global Business Review, International Management Institute, vol. 20(1), pages 179-193, February.
    12. Nida Shah, 2016. "The Impact of Working Capital Management on Firms Profitability in Different Business Cycles: Evidence from Pakistan," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 1(1), pages 58-70, March.
    13. Manthos D. Delis & K. Christos Staikouras & Panagiotis T. Varlagas, 2008. "On the Measurement of Market Power in the Banking Industry," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(7‐8), pages 1023-1047, September.
    14. Marcelo Resende, 2009. "Concentration and market size: lower bound estimates for the Brazilian industry," Economics Bulletin, AccessEcon, vol. 29(3), pages 2465-2471.
    15. Godfred Adjapong Afrifa & Ahmad Alshehabi & Ishmael Tingbani & Hussein Halabi, 2021. "Abnormal inventory and performance in manufacturing companies: evidence from the trade credit channel," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 581-617, February.
    16. 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.
    17. Ibrahim Abidemi Odusanya & Olumuyiwa Ganiyu Yinusa & Bamidele M. Ilo, 2018. "Determinants of Firm Profitability in Nigeria: Evidence from Dynamic Panel Models," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 68(1), pages 43-58, January-M.
    18. Catherine A. Durham, 1991. "The Empirical Analysis of Oligopsony in Agricultural Markets: Residual Supply Estimation in California's Processing Tomato Market," Food Marketing Policy Center Research Reports 015, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    19. Chauhan, Gaurav Singh, 2019. "Are working capital decisions truly short-term in nature?," Journal of Business Research, Elsevier, vol. 99(C), pages 238-253.
    20. Abdul Rashid & Maryam Ashfaq, 2017. "Financial Constraints And Corporate Cash Holdings: An Empirical Analysis Using Firm Level Data," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 1-26, June.

    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:wsi:rpbfmp:v:18:y:2015:i:04:n:s0219091515500241. 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: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/rpbfmp/rpbfmp.shtml .

    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.