The Moderating Effect of Economic Policy Uncertainty on the Relationship Between Working Capital Management and Profitability: Evidence from UK Non-Financial Firms

Abstract

Uncertainty in economic policy is one of many factors that can have an impact on the relationship between working capital and profitability. The corporate sector places a higher priority on working capital management that employs its working capital resources to have an advantage over rivals. The objective of our study is to determine how economic policy uncertainty (EPU) index for UK, as measured based on newspaper coverage frequency, affects the relationship between working capital management (CCC), return on operating assets, and other profitability measures across several businesses listed on the UK stock exchange for the years 2006 to 2021. To analyze the data for 199 UK manufacturing companies, we applied the Fixed Effect Method, Random Effect Method, and two-stage Generalized Method of Moments (GMM) to tackle the endogeneity problem and report robust findings. The findings of the study revealed that EPU statistically significantly affected the relationship between CCC and profitability. When uncertainty is high, companies may be hesitant to make investments or develop new products, which can lead to a reduction in working capital and lower profitability. Companies that can effectively manage their working capital in the face of uncertainty may be better positioned to maintain their profitability over the long term. This study can provide valuable insights for both companies and investors, helping to improve financial performance and enhance strategic decision-making regarding their working capital management policies in the face of economic policy uncertainty.