Abstract
Despite the importance of managing the working capital effectively, research on this area is still meagre. The company has an option to either adopt a conservative or aggressive working capital management policy. However, what drives them to either use conservative or aggressive working capital policy remains unclear. By segregating into conservative and aggressive working capital management, the study provides better insight as to the motives for companies to do so. Thus, this paper intends to examine the driving factors leading companies in the Trading and Services sector to adopt conservative and aggressive working capital policies. Using secondary data, the study runs panel regression models over seven years from 2001 until 2017 on the companies of the trading and service sector. The identified independent variables are age, free cash flow, growth rate, leverage, profitability and size. Empirically findings reveal that all the identified independent variables are the determinants for adopting conservative working capital investment policy (CWCIP). Only leverage appears to affect the working capital management policies and is negatively related. In essence, there appear to be no specific dominant factors affecting the companies to adopt conservative or aggressive working capital investment and financing policy. Furthermore, it seems that the trading and services companies practice a targeted conservative/aggressive investment and financing policies since the lagged dependent variables are positive and statistically significant. This paper extends the existing growing but dearth literature on the determinants of working capital investment and financing policies. In addition, the results may be of interest to managers who are interested to understand the rationale for adopting a specific working capital policy. Future research should investigate the impact of working capital investment and financing policies on company performance and firm values. In addition, more research could be done to examine whether the industry effect influences the adoption of working capital investment and financing policies taken.
Highlights
The firm capability to manage its working capital effectively will have a substantial implication for its liquidity and profitability (Shin & Soenen, 1998). Pushpavathi and Kamalavalli (2017) stressed that non-optimal implementation of working management capital investment and financing policies are associated with inefficiency, high risk, poor company performance and bankruptcy
Random Effect models are most suitable for aggressive working capital investment policy (AWCIP), conservative working capital financing policy (CWCFP) and aggressive working capital financing policy (AWCFP).F since the chi-square statistic for Hausman tests is not statistically significant
It differs from previous studies as it separated the dependent variables into conservative and aggressive investment and financing policies
Summary
The firm capability to manage its working capital effectively will have a substantial implication for its liquidity and profitability (Shin & Soenen, 1998). Pushpavathi and Kamalavalli (2017) stressed that non-optimal implementation of working management capital investment and financing policies are associated with inefficiency, high risk, poor company performance and bankruptcy. The report highlighted that 60% of those companies prolong paying their accounts payables that subsequently resulted in supplies facing cash flow issues They documented these companies are inefficient in managing their accounts receivable and payables where 70% of them have longer collection periods but shorter payment periods. Their report revealed that those non-performing companies are associated with their failure to address the major aspects of WCM policies They proposed that most of the companies have the potential of improvement in the many aspects of WC especially in improving their profitability through the reducing of cash-to-cash or average cash conversion cycle (how the company could turn cash into inventory and receivables and back to cash again in days). The report concluded that working capital performance variations of these companies appeared to be affected by industry bias, different payment practices, and different logistics and distribution infrastructures
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