Financial constraints and optimal working capital – evidence from an emerging market
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 24 August 2017
Issue publication date: 7 February 2018
Abstract
Purpose
The purpose of this paper is to investigate the existence of an optimal or target level of working capital for the Indian manufacturing firms, and whether firms intensely follow the target or not.
Design/methodology/approach
The paper uses cash conversion cycle as a measure of net working capital and employs partial-adjustment dynamic panel models to test its target-following behavior.
Findings
The empirical results show that there is no evidence of systematic target-following behavior of working capital for the Indian manufacturing firms. The results hold true even after dividing the sample into four groups depending on the sign and magnitude of deviation. The results further show that lack of target-following tendency is not quite influenced by varying firm-specific characteristics and, therefore, seems to be a systematic feature across firms in India.
Research limitations/implications
Scarcity of such working capital management studies across emerging economies, facing several financial constraints, limits the comparison of findings. Future studies should be conducted to confirm the results.
Practical implications
The findings imply that even though an optimal working capital might exist, emerging market firms may not be able to actively pursue it on account of several financial constraints and managerial considerations.
Originality/value
The study contributes to the scant existing literature on the target-following behavior of working capital management in the Indian manufacturing firms, representing a typical emerging market facing several financial constraints.
Keywords
Citation
Chauhan, G.S. and Banerjee, P. (2018), "Financial constraints and optimal working capital – evidence from an emerging market", International Journal of Managerial Finance, Vol. 14 No. 1, pp. 37-53. https://doi.org/10.1108/IJMF-07-2016-0131
Publisher
:Emerald Publishing Limited
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