The effect of working capital investment on firm value and long-term investment: evidence from Indian manufacturing sector

Abstract

Purpose

This study investigates the relationship between working capital investment (WCI) and firm value for Indian manufacturing firms using excess net working capital (NWC) and Tobin's Q as a measure of WCI and firm value, respectively. The study also examines whether firms use the cash released from excess investment in working capital to make long-term investments.

Design/methodology/approach

The sample comprises 834 Bombay Stock Exchange (BSE) listed Indian manufacturing firms whose data from April 2010 to March 2020 are analyzed using a fixed-effect panel regression analysis approach.

Findings

The empirical results show that excess NWC influences firm value negatively and significantly. However, the nature of the relationship becomes nonlinear upon dividing the sample into positive excess NWC and negative excess NWC. The findings from the study also reveal that firms redistribute cash freed from positive excess NWC for long-term investments to improve their value without impacting the corresponding risk.

Practical implications

Overall, the results suggest that firms with positive excess NWC can enhance their valuations by building adequate long-term investments from surplus WCI funds.

Originality/value

To the authors’ best knowledge, studies on this issue have primarily focused on developed economies. No study seems to have been done on this subject in the emerging South Asian economies. The present study is the first to bridge the research gap by investigating the relationship between excess WCI and firm value for manufacturing firms in India. Moreover, it examines whether a positive excess NWC reduction translates into corporate investments (CI).

Citation

Roshan and Chatnani, N.N. (2023), "The effect of working capital investment on firm value and long-term investment: evidence from Indian manufacturing sector", South Asian Journal of Business Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/SAJBS-06-2022-0221