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Investment in working capital and financial constraints: Empirical evidence on corporate performance

Fahmida Laghari (School of Accounting, Xijing University, Xi’an City, Shaanxi Province, China)
Ye Chengang (Business School, Centre for International Business Ethics (CIBE), University of International Business and Economics (UIBE), Beijing, China)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 7 March 2019

Issue publication date: 20 March 2019

4645

Abstract

Purpose

The purpose of this paper is to investigate the relationship between working capital management and corporate performance with financial constraints.

Design/methodology/approach

This study uses large panel sample of Chinese listed firms over the period 2005–2015 using system generalized method of moments (GMM) estimator that controls unobserved heterogeneity of individual firms well and GMM methodology is robust to address endogeneity issues.

Findings

Empirical evidence finds inverted U-shaped relationship between working capital and corporate performance and exhibits similar evidence for financially constrained firms. Evidence shows impact of high sales and discounts on early payments at low level of working capital and dominance of opportunity cost and cost of external finance at high level of working capital. The findings of the results show that optimal working capital level of financially constrained firms is relatively lower due to high cost of external capital and debt rationing. The results also indicate that on average NET is significantly lower for firms with Tobin’s Q>1 than firms with Tobin’s Q=1, and suggest that aggressive working capital management is significantly and positively associated with higher corporate values.

Originality/value

This paper is among few that complement the existing literature by providing evidence that inverted U-shaped relationship between working capital management and corporate performance also exists in the context of Chinese listed non-financial firms. Exclusively, the relationship of working capital and corporate performance with linkage of financial constraints is scant in the context of Chinese listed non-financial firms.

Keywords

Citation

Laghari, F. and Chengang, Y. (2019), "Investment in working capital and financial constraints: Empirical evidence on corporate performance", International Journal of Managerial Finance, Vol. 15 No. 2, pp. 164-190. https://doi.org/10.1108/IJMF-10-2017-0236

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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