Stochastic frontier modelling of working capital efficiency across Europe

Abstract

This paper adopts the stochastic frontier analysis (SFA) to model working capital efficiency (WCE) on a sample of 6170 European firms from 2009 to 2018. We find: (i) larger firms are more efficient with their working capital management (WCM) than smaller firms, (ii) higher cash holding contributes to WCE, (iii) high competition is less conducive to WCE than low competition, (iv) export and sales growth potential decrease WCE and (v) WCE increases with access to bank credit. In the analysis, a distinction is made between the “old” EU countries and the “new” EU countries. The results are sensitive to the year of admission into the EU. The results are robust to omitted variable bias, using a more novel approach.