Abstract
The study investigates how working capital management (WCM) impacts the profitability and operating performance of publicly traded companies in Republic of China, Taiwan. The authors use the quarterly data of 539 stocks listed on the Stock Exchange of Taiwan from 2008 to 2015, containing 17,248 observations. The study examines whether two WCM variables, namely, the cash conversion cycle (CCC), as well as the gap between days of payables outstanding and days of sales outstanding (PRGap) have any significant effects on firm profitability and operating performance. The findings demonstrate that there are significantly negative relationships between the CCC and performance indicators, whereas there are consistent positive relationships between PRGap and performance indicators. Keywords: working capital management, performance, cash conversion cycle, PRGap, Tobin’s Q. JEL Classification: G30, G31, G32, M10
Highlights
The corporate finance literature focuses on the study of long term financial decisions, on investment, capital structure, dividends to firm performance
The objective of this study is to provide a deeper understanding of how the Conversion Cycle (CCC) and Payable Receivable Gap (PRGap) affect firm performance in terms of Return On Assets (ROA), the Operating Profit Ratio (OPR), and Tobin’s Q in Taiwan
The study has three main empirical findings: first, our regression results reveal that the CCC exhibits a negative relationship with firm profitability in terms of ROA and the OPR and firm operating performance of Tobin’s Q
Summary
The corporate finance literature focuses on the study of long term financial decisions, on investment, capital structure, dividends to firm performance. Methods for shortening the company CCC are employed, such as shortening the periods of selling goods or services, as well as accounts receivable, to increase firm profitability and performance (Wilner, 2000; Ng et al, 1999). A company must have the most appropriate level of working capital for maximizing firm value, and high inventory policy and longer receivable conditions can decrease firm profit. To observe the results obtained after subtracting DIO, we use PRGap, the difference between DPO and DSO, to represent the bargaining power among suppliers’ and customers’ credit policies. How PRGap influences the profitability and operating performance is not known, but one theory suggests that the longer a firm’s PRGap, the more it benefits from conserving cash. For the first time, we use PRGap as a measure, in addition to the CCC, for performance analysis
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