Promoter ownership and working capital management efficiency of indian manufacturing firms

This study aims to explore the true nature of the impact of working capital management (WCM) efficiency, measured by cash conversion cycle (CCC), on the stock market performance (proxied by stock’s Alpha) of Indian non-financial firms. The article presents four possible models from literature and argues why the relationship should be non-linear. Generalized method of moments (GMM) estimation is used on firm-level data of 718 Indian firms from 11 industries listed in the Bombay Stock Exchange (BSE) from 2011 to 2017. A negative relationship is confirmed. However, contrary to prior findings, neither a quadratic relationship nor the deviations from industry median CCC can explain the relationship for Indian firms. Therefore, firms are divided into CCC decile-based equally weighted portfolios and estimation of a threshold level of CCC is carried out iteratively. Threshold thus obtained is validated at the firm level, using dynamic panel through GMM estimation. The novelty of this study is that it is the first one to propose the possibility of a universal threshold level of working capital (WC) efficiency and its impact on the market performance of firms in India. The article argues that in India, due to uncertainties in supply chains, firms, as well as the investors, prefer a threshold level of investment in WC. If CCC is above the threshold level, firms’ excess stock returns fall significantly, while there is no impact below the threshold level. The study is relevant for managers so that they can maintain WC below a threshold level, as well as for investors who can use the threshold WC criteria for valuation and selection of stocks.

A higher level of debt may help in aligning the interests of managers and shareholders; however, managers may underestimate the resulting costs of bankruptcy. Moreover, notwithstanding the tax and other benefits of debt, literature shows that firms may have more debt in their capital structure than is appropriate. A higher level of leverage becomes detrimental by increasing the chances of financial distress and, consequently, the chances of bankruptcy. This study investigated relationships between changes in promoter ownership and changes in leverage by taking a sample of 322 Indian service and manufacturing firms from Top 500 Companies listed on the Bombay Stock Exchange (BSE) for a period of five years (from 2010-2014). The results indicate that changes in promoter ownership play a role in lowering the leverage of Indian firms and, consequently, reducing the chances of bankruptcy. The findings of this study also indicate that changes in promoter ownership have more effect on the leverage of Indian service firms as compared to manufacturing firms. This study contributes to the literature on the factors that affect the leverage of the firm. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders

PurposeThis study aims to examine the impact of the COVID-19 pandemic on the working capital management (WCM) efficiency of resilient and nonresilient firms listed on India’s BSE 500 index. It focuses on key WCM components such as cash conversion cycles (CCC), accounts receivable periods, inventory conversion periods and accounts payable periods.Design/methodology/approachPanel data from 2012 to 2023 is analyzed using the System Generalized Method of Moments model. This study differentiates between resilient and nonresilient firms based on liquidity stress tests and cash flow performance before and during the pandemic.FindingsResilient firms demonstrated superior WCM efficiency, maintaining shorter CCCs, effective receivables and inventory management and stable payables. Nonresilient firms faced significant inefficiencies, including extended CCCs and slower receivables and inventory turnover, exposing gaps in their WCM practices.Research limitations/implicationsThis study is limited to the pandemic period. Future research could explore broader timeframes to understand the long-term effects on WCM.Practical implicationsManagers should enhance WCM strategies, focusing on cash flow optimization to strengthen firm resilience during crises.Social implicationsEfficient WCM supports job retention, preserves supplier relationships and stabilizes local economies, contributing to broader community resilience during crises.Originality/valueThis study extends the resource-based view by emphasizing WCM as a critical internal resource that supports firm resilience during economic crises. It contributes new insights into how Indian firms adapted their WCM strategies in response to COVID-19.

PurposeThe purpose of this study is to investigate the impact of corporate governance on working capital management efficiency. This study also seeks to extend the findings of Gill and Shah.Design/methodology/approachThis study applied a co‐relational research design. A sample was selected of 180 American manufacturing firms listed on the New York Stock Exchange (NYSE) for a period of 3 years (from 2009‐2011).FindingsThe findings of this study indicate that corporate governance plays some role in improving the efficiency of working capital management.Research limitations/implicationsThis is a co‐relational study that investigated the association between corporate governance and working capital management efficiency. There is not necessarily a causal relationship between the two, although the paper provides some conjectures to the findings. The findings of this study may only be generalized to firms similar to those that were included in this research.Originality/valueThis study contributes to the literature on the factors that improve the efficiency of working capital management, and in particular on the association between several features of corporate governance and the efficiency of working capital management. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders.

The purpose of this paper is to study the working capital management (WCM) efficiency of firms belonging to the Indian manufacturing sector. We use a large sample of 1,200 firms to analyse the trend in WCM efficiency across ten years (2004 to 2013). We divide these firms into 11 major industries and study the influence of several exogenous firm specific and macroeconomic factors on WCM efficiency. Our study reveals that WCM efficiency has undergone considerable changes during the past ten years and there has been effect of the financial crisis to some extent. We find that firm specific factors like debt ratio, proportion of net fixed assets to total assets, profitability, sales growth, size and age of firm do affect WCM efficiency of firms whereas, there is an insignificant effect of macroeconomic factors. Our study reveals new evidences for better understanding of the short term financial behaviour of firms in developing economies like India.

The purpose of the study is to investigate the influence of corporate governance practices on working capital management efficiency in the listed companies of the manufacturing sector in Sri Lanka. Board meeting, board size, CEO tenure and size of the audit committee are used as corporate governance practices and the cash conversion cycle is calculated to measure the working capital management efficiency. Sales growth and firm size are considered as control variables to evaluate the influence of corporate governance practices on working capital management efficiency. Relevant data are extracted from the annual reports of 30 listed manufacturing companies for the period from 2013 to 2017. Finally, 150 observations are used for the data analysis. Pearson correlations are executed to determine the relationship between corporate governance practices and working capital management efficiency. OLS regression analysis is performed to determine the explanatory power of the combination of corporate governance practices on the efficiency of working capital management. The correlation analysis shows that board meeting, CEO tenure and firm size have a significant positive relationship with cash conversion cycle. The regression results suggest that board meetings and CEO tenure have a significant positive influence on cash conversion cycle. Generally, the shorter the cash conversion cycle is better for the business, therefore, according to this result the increase in a board meeting and CEO tenure have the considerable decreasing in liquidity position in an organization. Therefore, the outcome of the study may be useful to the top management of the firms and practitioners when they are implementing governance mechanisms in order to enhance the working capital efficiency.

This proposed study aims to examine how debt financing affects the working capital management (WCM) efficiency of firms in eight selected MENA countries over the period 2016-2020. This study discusses different theories of debt financing which include the trade-off theory, the pecking order theory, the market timing theory, and the agency theory (i.e., the agency theory of debt, equity, and free cash flow). Particularly, the study addresses how short-term debt, long-term debt, and total debt influence WCM efficiency. We hypothesize that there are positive relationships between the short-term debt (measured by the current ratio), the long-term debt (measured by the long-term debt to total assets ratio), and the total debt (measured by the total debt to total assets ratio) toward WCM (measured by cash conversion cycle). Firm’s specific characteristics such as the firm type, the firm size, firm’s sales growth, and tangibility were used as control variables for WCM. To achieve the study objectives, a sample of 718 non-financial listed companies on stock exchanges in countries of Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, and UAE will be used over the period 2016-2020. Secondary quantitative data will be collected from the annual financial statements of firms. The multiple regression model will be used to test the study hypotheses. This proposed paper originally contributes to the extant literature in several ways. First, there were limited studies of WCM in the MENA context and the current study provided a new insight that has not been investigated before in the MENA region. Thus, it bridges the gap in the literature. However, the majority of extant WCM literature emphasized the relationship between efficient WCM and firms profitability. Moreover, this paper contributes to developing efficient WCM practices and strategies that improve the financial performance of listed companies in the MENA region

The primary objective of this study is to examine the impact of working capital management efficiency on the financial health/well-being of a company measured in terms of firm value in the context of a rapidly emerging economy. This study applies a multivariate ordinary least square regression analysis on industry adjusted performance variable of 1532 Indian firms listed on the National Stock Exchange (NSE) for a period of 18 years (from 1999-2017). Not all of the 1532 firms selected for this study were listed during the whole period of study. Only 610 firms were listed at the beginning and gradually more and more companies started to get listed until eventually 922 more companies got listed to the initial tally of 610 listed firms making the total number of listed companies to be 1532 by the end of the study period. A total of 19862 firm year observations correspond to listed firms and 9246 firm year observations for unlisted firms making it a total of 29108 firm year observations. The findings of this study indicate that an efficient working capital management (proxied by Cash conversion cycle and components thereof) leads to better firm performance when adjusted for industry differences. It also shows that the relationship follows a curvilinear trajectory instead of a linear one as a change in sign in the coefficient of working capital management proxy (Cash Conversion Cycle) occurs and its square term and both are manifesting itself as significant in the listed companies. This is a co-relational study investigating the association between working capital management efficiency and firm performance. The findings of this study is based in an economy that is unique in its own right. Indian corporate landscape is replete with business groups and they dominate the market in terms of asset holding and market capitalization coupled with the existence of institutional gaps and weak legal enforcement mechanisms. All of which makes the Indian corporate landscape totally different from its more developed counterparts thus rendering the results not generalizable. The relationship between these variables should be verified in other economies taking their unique characteristics into account. This study to the best of the author’s knowledge is the first one to investigate the relationship between working capital management and firm performance on such a comprehensive dataset having 62 different industries in an emerging economy. The findings of the study are intended to be of use to financial managers, investors, financial management consultants, and other stakeholders.

PurposeThis study aims to test the relationship between information technology investment (IT_INVEST) and working capital management (WCM) efficiency.Design/methodology/approachThis study utilized a survey research design to collect data from micro, small and medium enterprises (MSMEs) owners in India.FindingsEmpirical results show that perceived IT_INVEST plays a role in improving WCM efficiency by decreasing the inventory holding period and reducing the cash conversion cycle (CCC) in India. A three-stage least square model (3SLS) shows that IT_INVEST decreases CCC directly and indirectly through the inventory holding period, accounts receivable period and accounts payable period. The empirical analysis also shows that IT_INVEST decreases the inventory holding period and CCC by 16.80% and 26.40%, respectively, for the examined firms.Research limitations/implicationsIf MSMEs' owners perceive a higher level of IT_INVEST, then the owners perceive a higher WCM efficiency and vice versa.Originality/valueThis study contributes to the literature on the relationship between IT_INVEST and WCM efficiency. This study may encourage further studies of IT investment and WCM efficiency using data from other industries and countries. MSME owners may find empirical results beneficial to improve WCM efficiency. Moreover, financial management consultants may find results helpful to provide consulting services.

PurposeThis paper aims to investigate how firms growing at a high average rate over a period differ in their working capital management (WCM) efficiency from those growing at a low rate during the same period. It also examines how WCM efficiency impacts firms’ financial performance and how firms’ growth influences this relationship.Design/methodology/approachThe authors have analyzed the difference in WCM efficiency of a sample of 431 nonfinancial firms during 2012 to 2019 by segregating them into above median growth (AMG) and below median growth (BMG) firms. The authors have used fixed effect regression to investigate the impact of cash conversion cycle, inventory days, accounts receivable days and accounts payable days on the financial performance and the effect of growth on this relationship.FindingsThis study finds that AMG firms manage their working capital significantly more efficiently than BMG firms. It also reports that the WCM efficiency impacts the profitability and valuation of firms positively; however, this relationship is more intense for firms growing at a high rate than for those growing at a low rate.Originality/valueThis research should contribute to the less researched area of WCM by finding the effect of growth on the relationship between WCM efficiency and performance. The evidence found in this study may be of interest for industry practitioners and managers in identifying WCM efficiency as an important driver for the financial performance of their firms.

The purpose of this study is to examine the impact of merger on the efficiency of working capital management of American production firms. This study applied a co-relational research design. A sample of 497 listed American production firms for a period of 4 years (from 2010-2014) was analyzed. The findings of this study indicate that mergers may contribute to an improvement of the efficiency of working capital management. This is a co-relational study that investigated the association between merger and working capital management efficiency. There is not necessarily a causal relationship between the two, although the paper provides some conjectures to such relationship. The findings of this study may only be generalized to firms similar to those that were included in this research. This study contributes to the literature on the factors that improve the efficiency of working capital management, and in particular on the association between merger and the efficiency of working capital management. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders.

Objective— The primary aim of this study is to investigate the effect of dynamic working capital (DWC) management on operational efficiency through operating expenses and operating margins across non-financial firms in emerging markets. Methodology/Technique – This study utilized generalized method of moments (GMM) to evaluate a comprehensive dataset of 438 firms from Indonesia, Malaysia and Thailand for the period 2018 to 2023. Findings – DWC is measured study using both cash conversion cycle (CCC) and working capital ratio (WCR). Results show that optimized DWC management reduces operating expenses (OER) and increases operating margins (OMR). These findings highlight the importance of efficient working capital practices and liquidity management in emerging markets. Novelty – This study provides valuable insights for financial managers in emerging countries, advocating focused strategies on working capital cycles to strengthen operational efficiency and profitability. Type of Paper: Empirical JEL Classification: M13, M40, M49. Keywords: Working capital management, Cash conversion cycle, working capital requirement, Operating efficiency, Emerging countries Reference to this paper should be made as follows: Bashir, R; Ahmad, M; Sherif, S.R. (2024). Determining the nexus between Dynamic Working Capital Management and Operational Efficiency in Emerging Southeast Asia, J. Fin. Bank. Review, 9(2), 49 – 60. https://doi.org/10.35609/jfbr.2024.9.2(1)

Working capital management and corporate governance are two important issues of overall firm management. The purpose of this study was to explore the impact of corporate governance practices on working capital management (WCM) efficiency of firms in a growing economy like India. We used data from 127 large Indian manufacturing sector firms and employed structural equation modelling to study this relationship. The period of the study is from 2004-2013 (10 years). We found that corporate governance indicators like board size, number of independent directors in a board, and percentage of independent members in an audit committee do significantly affect the efficiency of working capital management. We also found that an increase in independence of the board and audit committee compels the management to be conservative in managing short term capital, which in turn negatively affects WCM efficiency. It was observed that an increase in board size weakens control and allows the management to follow aggressive WCM strategies. The results also revealed that the size and independence of a board has more effect on WCM efficiency than the independence of the audit committee. The results of the study will help the practitioners, investors, and analysts to better understand the relation between effective corporate governance and short term funds management and enable them to take better and informed decisions.

PurposeThis study develops an integrated approach combining data envelopment analysis (DEA) and structural equation modeling (SEM) for estimating the working capital management (WCM) efficiency and evaluating the effects of diverse exogenous variables on the WCM efficiency and firms' performance.Design/methodology/approachDEA is applied for deriving WCM efficiency for 212 Indian manufacturing firms over a period from 2008 to 2019. Also, the effect of human capital (HC), structural capital (SC), cost of external financing (CEF), interest coverage (IC), leverage (LEV), net fixed asset ratio (NFA), asset turnover ratio (ATR) and productivity (PRD) on the WCM efficiency and firms' performance is examined using SEM.FindingsThe average mean efficiency scores ranging from 0.623 to 0.654 highlight the firms operating at around 60% of WCM efficiency only, which is a major concern for Indian manufacturing firms. Further, IC, LEV, NFA, ATR revealed direct effect on the WCM efficiency as well as indirect effect on firms' performance, whereas CEF had only a direct effect on WCM efficiency. HC, SC and PRD had no effects on WCM efficiency and firms' performance.Practical implicationsThe findings offer vital insights in guiding policy decisions for Indian manufacturing firms.Originality/valueThis study is the first to identify the endogenous nature of the relationship of HC, SC, CEF, IC altogether with firms' performance, compounded by the WCM efficiency, by applying a comprehensive methodology of DEA and SEM and provides an efficiency performance model for better decision-making.

PurposeThe purpose of this paper is to empirically investigate the relationship between working capital management (WCM) efficiency and exogenous variables of the Indian manufacturing sector along with its sub-industries that are involved in export activities.Design/methodology/approachPanel regression (fixed effects) was used on a sample of 563 Indian manufacturing firms involved in export activities, covering a time period from 2008 to 2018.FindingsIndustry-wise results showed a significant relation of leverage, net fixed asset ratio, profitability, asset turnover ratio, total asset growth rate and productivity with cash conversion cycle (CCC).Research limitations/implicationsFirstly, having taken a sample from a developing economy, the results of our study may be generalizable only among developing contexts. Secondly, the time period taken in this study (2008–2018) has witnessed several economic fluctuations such as recession and demonetization which might differ for the firms or countries in normal conditions.Practical implicationsAn improved working capital model could advance the firms' performance by reducing the CCC of the firm, thereby creating efficiency in WCM. In addition, the results of this study could be helpful for many stakeholders such as working capital managers, debt holders, investors, financial consultants and others for monitoring the firms.Originality/valueThis study contributes to the existing literature in the relation between WCM efficiency and exogenous variables of the Indian manufacturing firms engaged in the export activities. Moreover, this study is one of the few research studies to investigate this relationship among Indian export firms in different industries, thus filling the gap in similar work done in other countries.