Abstract
This paper analyses the determinants of working capital investments of 92 companies listed on the Johannesburg Stock Exchange (JSE) over the period 2001-2010. Working capital management has grown in significance from being a survival issue to a strategic and competitive tool. Using the Generalized Method of Moments estimation, the study found that firms pursue target levels of current assets. However, the adjustment process is relatively slow. The study found that leverage, short-term finance and fixed investment significantly influence the level of working capital investment, while operating cash flows, state of the economy, firm size and sales growth rate were found to be statistically insignificantly related to working capital investment. The study recommends that managers understand the driving factors of working capital investment since working capital investment influences the value of the firm.
Highlights
Working capital management plays an important role in the realization of the shareholder wealth maximization goal, yet it has largely been ignored in both theoretical and empirical literature at the expense of capital budgeting and capital structure decisions
The purpose of the study was to analyze factors influencing working capital investment using Johannesburg Stock Exchange (JSE)-listed firms drawn from eight economic sectors over the period 2001 to 2010
The study used a dynamic panel data and employed Generalized Method of Moments (GMM) estimation techniques in order to control for endogeneity and unobservable heterogeneity
Summary
Working capital management plays an important role in the realization of the shareholder wealth maximization goal, yet it has largely been ignored in both theoretical and empirical literature at the expense of capital budgeting and capital structure decisions. Working capital was traditionally viewed as a balance sheet item that does not contribute to the realization of the shareholder value maximization goal (Sagner, 2007). There is growing evidence that firms are overinvesting in working capital. In its 2009 Working Capital Survey of the top 1000 United States (US) companies, REL found that firms were unnecessarily holding approximately US$ 778 billion in working capital(REL, 2009). Over-investments in working capital compromise shareholder value and can lead to cash flow problems and bankruptcy
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