How Does Efficient Working Capital Management Impact a Firm’s Fundamentals? Evidence from India

Abstract

This article aims to empirically examine the influence of working capital management (WCM) efficiency on the fundamentals of Indian listed firms. The fixed-effects logit regression model is employed to explore the impact of WCM efficiency on the fundamental strength of the sample firms. The fixed-effects regression model is used to investigate the influence of WCM efficiency on the select individual fundamental measures. We have extracted data from 538 Indian listed firms from the Centre for Monitoring Indian Economy (CMIE) database from 2012 to 2020. We find that WCM efficiency positively influences the fundamental strength of the sample firms. We have also validated our results with respect to individual fundamental measures. We observe that an efficient WCM enhances the overall profitability, operational effectiveness, asset utilization efficiency and the ability to generate cash from operations, while inefficient management of working capital (WC) pushes firms towards a more long-term debt financing in the Indian context.