Bayesian analysis of working capital management on corporate profitability: evidence from India

Abstract

PurposeDecisions pertaining to working capital management have pivotal role for firms’ short-term financial decisions. The purpose of this paper is to examine impact of working capital on profitability for Indian corporate entities.Design/methodology/approachBoth classical panel analysis and Bayesian techniques have been employed that provides opportunity not only to perform comparative analysis but also allows flexibility in prior distribution assumptions.FindingsIt is found that longer cash conversion period has detrimental influence on profitability. Financial soundness indicators are playing significant role in determining firm profitability. Larger firms seem to be more profitable and significant as per Bayesian approach. Bayesian approach has led to considerable gain in estimation fit.Practical implicationsObserving the highly skewed distribution of dependent variable, Multivariate Student t-distribution has been considered along with normal distribution to model stochastic term. Accordingly, Bayesian methodology is applied.Originality/valueAnalysis of working capital for firms has been performed in Indian context. Application of Bayesian methodology is performed on balanced panel spanning from 2003 to 2012. As per author’s knowledge, this is the first study which applies Bayesian approach employing panel data for the analysis of working capital management for Indian firms.