Does working capital management enhance firm value? Empirical study on Taiwan’s listed company
Date Issued
2016
Date
2016
Author(s)
Huang, Ya-Chi
Abstract
This study mainly examine the relation between working capital management and operating performance for a sample of Taiwan’s listed firms. Our empirical results show that there is a significant negative relation between cash conversion cycle and operating performance. Whether by shortening receivables conversion period or inventory conversion period, or by extending payables conversion period has a positive effect on corporate performance. Even after we control the industry effect by industry grouping, we find that firms adopting aggressive working capital policy, by shortening cash conversion cycle, will enhance the operating performance for most of the industry, except for textiles and transportation industry. Moreover, our study also find that the negative effect between cash conversion cycle and operating performance become more pronounced for firms that are more likely to be financially constrained. For firms with poor internal or external financing capacity, or with high probability of bankruptcy, should adopt aggressive working capital policy, in order to avoid over-investment in working capital, and the additional needs for financing, which might increase financing expense and the risk of financial distress. Finally, our study indicates that the length of the cash conversion cycle has different impact on operating performance. Furthermore, we also find the existence of optimal working capital management among Taiwan’s listed firms. Thus, managers should avoid deviation from the optimal level of working capital, in order to enhance operating performance, and therefore maximize firm value.
Subjects
working capital management
cash conversion cycle
operating performance
financial constraints
optimal working capital management
SDGs
Type
thesis
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