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Working capital management and firm’s valuation, profitability and risk: Evidence from a developing market

Ben Le (College of Business and Public Management, Kean University, Union, New Jersey, USA)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 7 March 2019

Issue publication date: 20 March 2019

7948

Abstract

Purpose

The purpose of this paper is to examine the effects of working capital management on firm valuation, profitability and risk.

Design/methodology/approach

The paper uses a panel data set of 497 firms covering the period 2007 to 2016. The authors test the effects of working capital management on firm valuation, profitability and risk using the panel data methodology that includes firm and year fixed effects regressions.

Findings

The authors find a significantly negative relationship between net working capital (NWC) and firm valuation, profitability and risk. The results suggest that, in managing working capital, firm managers must make a trade-off between their objectives for profitability and risk control. Working-capital management is of particular importance in firms with less access to capital; it is also important when firms are expanding their investments during periods of economic recovery.

Originality/value

This paper contributes to the literature in several ways. First, to my knowledge, it provides the most comprehensive investigation, to date, on the relationship between working capital management and firm valuation, profitability and risk in an emerging market. Second, this study documents the existence of an optimal level of NWC in an emerging market. Third, firm performance, as measured in both market and accounting value, can be improved with efficient working capital management. Finally, the study includes the impact of the business cycle in an analysis of the effects of working capital management on firm performance.

Keywords

Citation

Le, B. (2019), "Working capital management and firm’s valuation, profitability and risk: Evidence from a developing market", International Journal of Managerial Finance, Vol. 15 No. 2, pp. 191-204. https://doi.org/10.1108/IJMF-01-2018-0012

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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