The Impact of Capital Expenditure on Working Capital Management: Evidence from the Listed Manufacturing Companies in the Colombo Stock Exchange (CSE)

Abstract

The study investigated the effect of capital expenditure (CE) on working capital management (WCM) using quarterly financial data of 30 selected listed manufacturing companies in Sri Lanka during the period of 2014 to 2018. The Net liquidity balance (NLB), working capital requirement (WCR) and cash conversion cycle (CCC) were utilized as proxies for WCM and pooled least squares regression analysis model was used analyzing the relationship between CE and WCM. Based on three different models, six different hypotheses were tested. The effect of CE financial expenditure and operating expenditure on NLB were investigated as the first model and secondly the effect on WCR and CCC was investigated. The significant negative relationship has been identified between NLB and CE, which implies that these firms do not strive increasing the balance of most liquid assets when facing with CE since firms use debt or bank overdraft as firms don’t have enough internally generated funds to be used in long term fixed investments. Further, the insignificant relationship between operating working capital and CE was found. Based on the investigation, managerial implications of the manufacturing companies have to consider the trend of CE in managing WC and establish trade between CE and WCM in order to enhance long term profitability through fixed asset investment while ensuring smooth functioning of company’s liquidity activities without incurring any liquidity risk.