Abstract
This paper looks at the impact of level of working capital on a firm’s financial performance of 153 large manufacturing firms operating in the six Gulf Cooperation Council Countries (GCC).Three hypotheses being tested in the paper are that working capital levels and inventory levels have a negative impact on corporate financial performance, have a positive impact on corporate financial performance, or that there is no empirically provable relationship between working capital and inventory and financial performance. A number of control variables including firm size, gross margins, and age of the firm are used in the regression analysis, as financial performance is not purely dependent on working capital and inventory levels. Pre-tax return on assets (ROA-profit before tax divided by total assets) is used to measure corporate financial performance. Performance is strongly influenced by levels of accounts receivables; however inventory levels and payables have no impact on performance.
Highlights
This paper looks at the impact of level of working capital requirements on a firm’s financial performance in the Gulf Cooperation Countries (GCC)
Three hypotheses being tested in the paper are one, working capital levels have a negative impact on corporate financial performance; two, working capital levels have a positive impact on corporate financial performance; and three, there is no empirically provable relationship between working capital and financial performance
In this paper a number of control variables including firm size, gross margins, and age of the firm are used in the regression analysis, as these are the primary factors which have a strong influence on financial performance and since performance is not purely dependent on working capital requirements
Summary
This paper looks at the impact of level of working capital requirements on a firm’s financial performance in the Gulf Cooperation Countries (GCC). An important contribution of this paper is that it is first to its kind looking at the relationship between working capital requirements and firm performance using published company data from companies operating in the Gulf Cooperation Council countries. Past studies have indicated that firm size, market share, age of the firm, debt levels and economic growth as measured by growth in gross domestic product; have a moderating influence on the relationship between working capital and performance. In this paper a number of control variables including firm size, gross margins, and age of the firm are used in the regression analysis, as these are the primary factors which have a strong influence on financial performance and since performance is not purely dependent on working capital requirements
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