To read this content please select one of the options below:

Financial constraints and optimal working capital – evidence from an emerging market

Gaurav S. Chauhan (Indian Institute of Management Indore, Indore, India)
Pradip Banerjee (Indian Institute of Management Indore, Indore, India)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 24 August 2017

Issue publication date: 7 February 2018

4545

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

Copyright © 2018, Emerald Publishing Limited

Related articles