Determinants of WCM of Indian listed firms: A GMM regression approach

Abstract

This research paper purposes to discover the reasons that impact the working capital management (WCM) of Indian-listed manufacturing firms. The study uses a panel data set of 291 firms covering years from 2011 to 2020. The authors use working capital requirement (WCR) and cash conversion cycle (CCC) as proxies for working capital management and assess the effect of operating cash flow (OCF), performance as return on assets (ROA), valuation as Tobin’s Q (TQs), size, age, growth opportunities, leverage, and economic condition as the gross domestic product (GDP) over them. We use OLS and GMM estimators for the analysis of the study. Indian listed manufacturing firms’ cash conversion cycle (CCC) has been found to be positively correlated to their firm value, performance, and leverage. At the macro level, CCC is positively correlated to GDP. Further, CCC has been found to be negatively correlated with growth opportunities, operating cash flow, firm size, and age. The working capital requirement (WCR) of the firms, on the other hand, is positively associated with performance, firm age, and value, while it is negatively related to OCF, growth opportunities, leverage, size, and GDP. Our study adds uniqueness to the existing works on working capital in many ways. First, to our knowledge, very few studies exist to measure working capital management in the Indian context using two proxies WCR and CCC of working capital as dependent variables. Second, we used both OLS and GMM estimators to measure the explanatory variable’s effect over WCR and CCC which provided a more valid result. Third, we used eight factors as explanatory variables that provide a wider scope to explain the working capital management of Indian listed firms.