Corporate net working capital: evidence from Shariah compliance

Abstract

Purpose

This paper examines the influence of Shariah compliance (SC) on firms' net working capital (NWC) target and adjustment speed.

Design/methodology/approach

The study samples of non-financial firms taken from six Gulf Cooperation countries between 2005 and 2019 and employs static and dynamic models to answer the present study research questions.

Findings

The outcomes of the study indicate that SC is one of the major determinants of the decision made by the corporation regarding their NWC. More specifically, enterprises that are compliant with restrictions within Shariah are seen to have laid targets of their NWC at a level that exceeds that of enterprises that are not compliant. Furthermore, compared to conventional firms, they seem to have higher speed when adjusting to meet set NWC targets. Submission to Islamic laws limits the choices from which an enterprise can outsource capital from existing funding instruments. Therefore, they experience a higher expected cost of bankruptcy. That being the case, such financial managers should readily maintain and adjust to higher NWC targets to meet current corporate needs, alleviate the risk of bankruptcy and lower dependency on expensive external funding options.

Originality/value

To the authors’ knowledge, this is the first study to explore the influence of SC on firms' NWC target and adjustment speed.

Citation

Bugshan, A., Alnori, F. and Ananzeh, H. (2023), "Corporate net working capital: evidence from Shariah compliance", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-06-2022-0976