Abstract
The purpose of this study is to examine the impact of working capital management (WCM) and working capital strategy (WCS) on firm’s financial performance across different stages of the corporate life cycle (CLC). We use Pakistani non-financial listed firms nested in 12 diverse industries over a period of 2005–2014 as the research sample and employ the hierarchical linear mixed (HLM) estimator, which can process multilevel data where observations are not completely independent. The empirical findings reveal that, overall, WCM is negatively associated with firm performance. However, this association is not static across different stages of a firm’s life cycle. For example, a negative association is more pronounced at the introduction stage followed by growth and decline stages, whereas WCM does not significantly impact the performance of mature firms. Likewise, WCS also causes varying effects on the financial performance across the CLC. A conservative strategy at the introduction, growth, and decline stages negatively affects firm performance, suggesting that these firms should adopt an aggressive strategy. Nevertheless, management of sample firms did not account for the respective life cycle stage while formulating a WCM strategy, which can seriously compromise their financial sustainability. These findings suggest that firms require customized WCM policies and WCS to attain sustainable financial performance at each stage of firm life cycle. Thus, managers should not overlook the significant role of CLC stages in their financial planning to ensure the sustainable functioning of the enterprise.
Highlights
We posit that firms at various stages of life cycle have different capital requirements and their ability to raise funds from external sources keeps changing across the corporate life cycle (CLC)
Empirical results reveal that regardless of CLC stages, higher investment in working capital (WC) has a negative impact on firm performance
This outcome is consistent with our proposition that introduction firms face scarcity of financial resources due to information asymmetry and difficulty to predict future growth prospects, such firms borrow external capital at higher rates excessive investments in WC at these CLC stages can seriously hamper corporate sustainability
Summary
All of the three pillars are important, after the Global Financial Crises (GFC) of 2007–2008, which badly affected the financial sustainability of firms, corporate finance researchers have diverted their attention toward financial aspect of sustainability. The importance of corporate financial sustainability lies in the fact that it directly affects the other two pillars (social and environmental) of sustainability. CLC such firms may not be financially sustainable in the long term. 113.03 95.6 which is seriously hampering corporate profitability This indicates that despite financial constraints, introduction and decline firm’s WCM is quite inefficient as managers failed to account for the crucial role of CLC stages in WCM. Due to lack of coordination between WCM policies and CLC such firms may not be financially sustainable in the long.
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