Working Capital Financing, Firm Performance and Financial Flexibility: Evidence from Indian Hospitality Firms

Abstract

This article examines the relationship between working capital financing and firm performance for a sample of 185 Indian hospitality firms. In addition, this study examines the impact of financial flexibility on working capital financing performance relationship for a period of 10 years. This study employs two-step generalized method of moment (GMM) techniques to arrive at results. Results of the study confirm the inverted U-shaped relationship between working capital financing and firm performance with optimal break-even point, beyond which short-term debt financing has a negative effect on performance at 0.54. In addition, we found that firms likely to be more financially flexible can finance a greater proportion of working capital using short-term debt, since break-even point turns out to be high for firms likely to be more financially flexible. The study is expected to extend the existing debate on working capital management by using the sample of Indian Hospitality firms for analysing the above-mentioned relationships.