The relationship between Working Capital, Profitability and Firm‘s Value Evidence from Tehran Stock Exchange

Abstract

In the highly challenging economy of today with ever increasing environmental pressures and limited outside sources, current assets and debts – i.e. the enterprise working capital – play a crucial role as the two key groups of instruments in the hands of working capital management (WCM) which could serve the enterprise as a source of competitive advantage if managed efficiently. Present research examines the relationships among working capital management, profitability, and valuation of the listed companies on Tehran Stock Exchange (TSE). The general purpose of this study is to investigate the management working capital policies for their eventual impact on the firm‘s profitability and valuation in the TSE-listed companies. The research general purpose is then further specified by examining the individual relationship of WCM with each of the response variables, i.e. the firm‘s profitability and the firm‘s value. In this research, the hypothesized impact of WCM on profitability and value of the companies is examined using static panel data models and the estimated generalized least square (GLS) method. Firm‘s profitability is identified by indicators return on assets (ROA) and return on sales (ROS), firm‘s value is represented by the indicator Tobin‘s Q ratio. The findings indicate a significant association between working capital components and ROA and ROS, and no significant relationship between working capital components and firm‘s value.