Abstract
Working capital plays a vital role in shareholders’ wealth creation, yet there is a dearth of empirical studies on the relationship between working capital management and firm value in the South African economic environment. This study attempts to fill this gap by using Richards and Laughlin’s (1980) Cash Conversion Cycle theory to investigate the impact of working capital management efficiency and its separate components on firm value of South African firms listed on the Johannesburg Stock Exchange (JSE). Panel data regression methodology was used to analyze accounting data obtained from I-Net Bridge/BFA McGregor for 75 firms for the 10 year period, 2003 to 2012, to determine the nexus between WCM and profitability (proxied by return on assets). The key findings of the study are as follows: 1) there exists a significant positive relationship between firm value and both inventory conversion period and receivables conversion period; 2) the relationship between the cash conversion cycle and firm value is positive but insignificant; 3) there is a significant positive relationship between accounts payable deferral period (PDP) and profitability; 4) firm size and firm value are significantly positively related, and 5) there is a significant negative relationship between leverage and firm value.
Highlights
The results revealed that the value assigned to investment in net working capital (NWC) is lower than that of cash and that reduction in firm value is due to its financing and the additional dollar invested in NWC
The results indicated that there is no significant relationship between working capital management and both Adjusted Economic Value Added (AEVA) and Market Value Added (MVA)
The findings revealed that working capital management has a negative relationship with market valuation (Tobin’s Q), while debt ratio is positively related to market valuation (Tobin’s Q)
Summary
The objectives of the study are: i) To evaluate the relationship between CCC and value (market capitalization) of JSE- listed firms.ii) To determine the relationship between ICP and value (market capitalization) of JSE- listed firms.iii) To ascertain the relationship between RCP and value (market capitalization) of JSE- listed firms.iv) To determine the relationship between PDP and value (market capitalization) of JSE- listed firms. The objectives of the study are: i) To evaluate the relationship between CCC and value (market capitalization) of JSE- listed firms. Ii) To determine the relationship between ICP and value (market capitalization) of JSE- listed firms. Iii) To ascertain the relationship between RCP and value (market capitalization) of JSE- listed firms. Iv) To determine the relationship between PDP and value (market capitalization) of JSE- listed firms
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