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How effective is the cash conversion cycle in improving firm performance? Evidence from BRICS

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  • Johan, Sofia
  • Kayani, Umar Nawaz
  • Naeem, Muhammad Abubakr
  • Karim, Sitara

Abstract

This research focuses on the cash conversion cycle as a crucial metric for evaluating short-term firm performance. Despite its importance, there has been limited investigation into the relationship between the cash conversion cycle and firm performance within the five major emerging markets, namely Brazil, Russia, India, China, and South Africa (BRICS) as a single region. To bridge this gap, our study examines this relationship using a comprehensive dataset spanning the period of 2009–2019. Employing a set of regression analyses namely, seemingly unrelated regression, system generalized method of moments, dynamic quantile regression, and difference-in-difference regression, we provide empirical evidence indicating an inverse association between cash conversion cycle and firm performance across all BRICS countries. Specifically, firms with longer cash conversion cycle periods exhibit lower profitability compared to those with shorter cash conversion cycle periods. Moreover, our analysis incorporates various control variables encompassing firm and country characteristics, which also display significant relationships with firm performance. These empirical findings are robust, aligned with existing theoretical frameworks, and support the cash conversion cycle theory. The outcomes of this study offer valuable insights for investors, policymakers, financial managers, and debt holders, contributing to their decision-making processes.

Suggested Citation

  • Johan, Sofia & Kayani, Umar Nawaz & Naeem, Muhammad Abubakr & Karim, Sitara, 2024. "How effective is the cash conversion cycle in improving firm performance? Evidence from BRICS," Emerging Markets Review, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:ememar:v:59:y:2024:i:c:s1566014124000098
    DOI: 10.1016/j.ememar.2024.101114
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    More about this item

    Keywords

    Working capital management; Cash conversion cycle; Firm performance; Emerging markets; Seemingly unrelated regression;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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