Working Capital Management and Firm Performance Relationship: An Empirical Investigation of Australasian Firms

Abstract

This paper examines the empirical relationship between working capital management (WCM) and firm performance (FP) for Australasian publicly listed firms. Australia and New Zealand are attractive investment destinations due to their business friendly environments. The past two decades have seen increased academic attention in studies linking WCM and FP across various parts of globe. The empirical relationship between WCM-FP has not been sufficiently examined in regards to Australian and New Zealand firms. This study measures the role of WCM during the 2008 global financial crisis in both Australia and New Zealand firms. This study uses System General Method of Moments to address the endogeneity problem in order to reduce the possibility of biased results. The results show that WCM has a significant relationship with FP. More specifically, the Cash Conversion Cycle (CCC) and the Inventory Conversion Period (ICP) exhibit negative relationships with FP indicating that a reduction in the CCC and the ICP help to improve FP in Australasian firms. However, in the case of the Average Collection Period (ACP) and the Average Payment Period (APP), the results vary between both countries. In Australia, the ACP has no significant relationship, whereas APP has a positive relationship. This is contrary in the case of New Zealand firms. Another important finding is that firms in both markets were relatively efficient collecting their receivables during the 2008 global financial crisis period. These findings provide new empirical evidence that WCM matters for improving FP in Australasian firms.