DETERMINANTS OF WORKING CAPITAL REQUIREMENTS: EVIDENCE FROM COLOMBO STOCK EXCHANGE

Abstract

Working capital management is one of the crucial factors in shaping the financial performance of firms while ensuring their existence and growth. The study aims to investigate the determining factors of working capital requirements in the Sri Lankan context. The study was conducted using secondary data, manually collected from a sample of 37 firms listed on the Colombo Stock Exchange over a six-year period from 2013/14-2018/19. The working capital requirement has been proxied through the working capital ratio as the dependent variable of the study whereas firm-specific and macroeconomic determinants were taken as the independent variables. Profitability, Cash conversion cycle, Leverage, Tobin’s Q, Firm size, and Altman Z-score have been used as firm-specific determinants and the GDP growth rate, Interest rate, and Inflation has been considered as the macroeconomic determinants of the study. Initially, summary statistics were obtained for the sample along with the diagnostic tests of normality and multicollinearity. The regression models were specified to test the hypotheses developed for the study where the analysis was performed using the Statistical Package for the Social Sciences (SPSS). The results were obtained by carrying out the Ordinary Least Square (OLS) regression method as an overall and specific analysis. Results of the overall analysis indicated that all firm-related variables except firm size have a significant relationship with the working capital requirements. Nevertheless, only the interest rate demonstrated a significant association with working capital amongst the macroeconomic factors analyzed in the study. The specific analysis provided slightly different results with both firm size and GDP growth reflecting a significant relationship with the working capital of firms. It was concluded that the profitability, cash conversion cycle, Altman z-score, leverage, and interest rate are the most influential determinants of working capital requirements amongst the factors considered under the analysis and also that the firm-specific variables are crucial over macro-economic variables in determining working capital requirements in the Sri Lankan context.