Abstract
Effective working capital management assists a firm in achieving improved liquidity through the management of the components of receivables, inventory and payables. Previous studies have established that changes in working capital have a strong positive correlation to profitability and that whilst changes to receivables and inventory have a positive correlation to profitability, changes in payables have an inverse relationship. The inverse correlation of payables and profitability is contrary to the theory that advocates extending payment terms as a means of managing working capital and improving liquidity. We apply a style-based test to an extensive database of Johannesburg Stock Exchange (JSE) listed South African companies over the period 1986 -2014. We find that for those companies in industries that have a significant investment in payables, there is a significant association between payable days and shareholder return, which supports the general theory of working capital management.
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