Financial condition, working capital policy and profitability: evidence from Indian companies
Journal of Indian Business Research
ISSN: 1755-4195
Article publication date: 1 February 2023
Issue publication date: 28 July 2023
Abstract
Purpose
The purpose of this paper is to examine the impact of working capital management (WCM) on profitability under different financial conditions (constraint/unconstraint) and WCM policy (aggressive/conservative). Furthermore, the study investigates the existence of optimal working capital levels under different financial conditions and WCM policy.
Design/methodology/approach
Two-step system generalized method of moments and fixed effect models are used to analyze the data collected from Prowess database from 2011 to 2020 for a sample of 1,104 Indian manufacturing companies.
Findings
The study finds an inverted U-shaped relationship between working capital and profitability in all financial conditions and working capital policy. This finding advocates the existence of an optimal level of working capital that equates the costs and benefits of holding working capital to maximize the companies’ profitability. However, holding working capital beyond the optimal level negatively affects profitability. Companies under financial constraints with aggressive working capital policies have the lowest optimal cash conversion cycle (CCC). Furthermore, the relationship of working capital with profitability and the optimal CCC varies owing to firm age and industry group.
Originality/value
To the best of the authors’ knowledge, this is the first paper that incorporates the impact of working capital on firm’s performance from both financial constraint (unconstraint) and aggressive (conservative) working capital policy perspectives in the Indian context. Furthermore, this study also contributes in terms of reflecting the effect of firm age and industry in determining the optimum CCC of the firms.
Keywords
Acknowledgements
The authors would like to acknowledge the valuable comments provided by the editor and the anonymous reviewers, which helped them to improve this paper.
Funding: The authors have received no financial assistance for the research, authorship and/or publication of this article.
Citation
Dash, S.R., Sethi, M. and Swain, R.K. (2023), "Financial condition, working capital policy and profitability: evidence from Indian companies", Journal of Indian Business Research, Vol. 15 No. 3, pp. 318-355. https://doi.org/10.1108/JIBR-12-2020-0378
Publisher
:Emerald Publishing Limited
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