Working capital management, firm performance and financial constraints: Empirical evidence from India
Asia-Pacific Journal of Business Administration
ISSN: 1757-4323
Article publication date: 4 September 2017
Abstract
Purpose
The purpose of this paper is to examine the relationship between working capital management and firm performance for a sample of 437 non-financial Indian companies. In addition, this paper examines the impact of financial constraints on working capital management-performance relationship.
Design/methodology/approach
This study is based on secondary financial data of 437 non-financial Indian companies obtained from CAPITALINE database, pertaining to a period of ten years. This study employs the two-step generalized method of moments (GMM) technique to arrive at results.
Findings
Results of the study confirm the inverted U-shape relationship between working capital management and firm performance. In addition, the authors also found that the firms that are likely to be more financially constrained have lower optimal working levels.
Originality/value
Unlike prior studies, which found a linear relationship between working capital management and firm performance, this study provides newer evidence for an inverted U-shaped relation between investment in working capital and firm performance in India. In addition, this study also tests the impact of financial constraints on this relationship. In contrast to the prior studies, this study uses GMM to control the potential problems of endogeneity.
Keywords
Citation
Altaf, N. and Shah, F. (2017), "Working capital management, firm performance and financial constraints: Empirical evidence from India", Asia-Pacific Journal of Business Administration, Vol. 9 No. 3, pp. 206-219. https://doi.org/10.1108/APJBA-06-2017-0057
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited