Abstract
The purpose of this study is to investigate the relationship between working capital and firm profitability for a sample of 719 Polish listed firms over the period of 2007–2016. The scarcity of empirical evidence for emerging economies and the importance of working capital efficiency motivate the research on the working capital–financial performance relationship. The paper adopts a quantitative approach using different panel data techniques (ordinary least squares, fixed effects, and panel-corrected standard errors models). The empirical results report an inverted U-shape relationship between working capital level and firm profitability, meaning that working capital has a positive effect on the profitability of Polish firms to a break-even point (optimum level). After the break-even point, working capital starts to negatively affect firm profitability. The study brings theoretical and practical contributions. It extends and complements the literature on the field by highlighting new evidence on the non-linear interrelation between working capital management (WCM) and corporate performance in Poland. From the practitioners’ perspective, the results highlight the importance of WCM for firm profitability.
Highlights
The corporate finance literature recognizes the importance of short-term financial decisions for the firm’s profitability
The results indicate an inverted Ushaped relationship between working capital ratio and firm profitability and the findings are robust for different proxies and methodologies, namely a panel model with fixed effects and the panel-corrected standard errors (PCSE) estimation, respectively
In line with the Pecking Order Theory of capital structure, firm profitability is negatively associated with debt (Aktas et al 2015; Enqvist et al 2014)
Summary
The corporate finance literature recognizes the importance of short-term financial decisions for the firm’s profitability. The problematics of working capital management represent an ongoing topic because of its importance in ensuring the optimal route for businesses. The report highlights new challenges for the financial performance of globally listed companies for the last five years: capital expenditure has declined, cash has become more expensive and harder to convert, and working capital has improved only marginally. Given this backdrop, businesses need to have a working capital culture as support for financial performance
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