Current Assets Management of Small Enterprises

Abstract

The purpose of this paper is to investigate the relationship between firm’s net trade cycle, its size, and liquidity as a measure of efficiency in working capital management. The relation between the firm’s net trade cycle and its liquidity is examined using Generalized Method of Moment System Estimation applied to dynamic panel data for a sample of 5802 U.S. non-financial firms listed on the New York Stock Exchange, American Stock Exchange, NASDAQ Stock Market, and Over the Counter Market for the period 1990-2004 (87030 firm-year observations). The analysis is applied at the levels of the full sample and divisions of the sample by size.The results show a negative and significant relationship between net trade cycle as a comprehensive measure of efficiency in working capital management and liquidity for small firms. Most of the literature available focuses on the large firm’s experience in working capital management. The small firms generally face liquidity problems and have limited access to external capital and studies on their efficiency in working capital management are scant. In this context, the present study investigates the relation between the firm’s net trade cycle and liquidity of small firms.