Working capital management, firm performance and macroeconomic factors: Evidence from Iran

Abstract

This paper investigates the impact of working capital management (WCM) on firm performance among listed Iranian manufacturing firms, focusing on the direct and moderating roles of inflation and GDP variables. This study uses the ordinary least squares with robust standard errors to analyze panel data covering the period 2010–2016. Two-stage least squares with robust standard errors is also used to control the endogeneity problem. The results show that the cash conversion cycle (CCC) is negatively related to return on assets and to refined economic value added (REVA). That is, the shorter time the span between an expenditure to purchase raw materials and the collection of the receivables for sold goods, the higher the performance. However, when endogeneity problem is controlled for, CCC loses its relationship to REVA. Macroeconomic variables are positively and significantly related to ROA, but only inflation is significantly related to REVA. Moreover, macroeconomic factors do not moderate the relationship between WCM and firm performance.

Keywords:

• Working capital management
• return on assets
• refined economic value added
• profitability
• cash conversion cycle
• macroeconomic factors

PUBLIC INTEREST STATEMENT

This study contributes a determination of the moderating role of macroeconomic factors (GDP and Inflation) for the relationship between WCM and firm performance. Further, the relationship macroeconomic factors have to that performance, has been investigated. The findings show that the adoption of an aggressive working capital strategy leads to the improvement of accounting-based performance. However, WCM is not significantly related to economics-based performance, while the endogeneity is controlled. To the best of the authors' knowledge, limited attention has been paid to WCM and economics-based firm performance, and their relevant endogeneity problem. Based on the findings, macroeconomic factors have different direct consequences for short-term and long-term performances of Iranian listed manufacturing firms. Also, these factors don’t moderate the relationship between cash conversion cycle and relevant firm performance measures. Based on the literature reviewed, this paper is a pioneer in investigating the moderating role of macroeconomic condition in the relationship between WCM and firm performance, as well as evaluating the influence of WCM on economics-based performance concept.

Acknowledgements

We are grateful to Professor Collins G. Ntim (Senior Editor), and two anonymous reviewers for their helpful comments and suggestions.

Notes

1. Market value of total assets equals to the market value of equity plus the book value of liabilities. Since, there is not an active market for liabilities in Iran and majority of liabilities are current (87%), it is presumed that the book value of liabilities can be a good proxy for the market value of it. Page 12.

2. In regression analysis, in order to have better comparable coefficients in the second model (in comparison with the first one) and scale both dependent and explanatory variables, the standardized form of REVA has been used in the analysis. Since a considerable part of the variable is negative, it was not practical to use the natural logarithm of it, which could impose a sample size problem. Page 14.

3. In support of this, two regression models are implemented, in which the independent variables are macroeconomic factors and the dependent variable is CCC. The results confirm that macroeconomic factors are not significantly associated with CCC (untabulated results, Page 17).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Iman Soukhakian

Iman Soukhakian is a student of accounting at the University of Tehran, Tehran, Iran. Related to his interests, he is fond of corporate finance, business strategy, cost stickiness and audit quality.

Mehdi Khodakarami

Mehdi Khodakarami is a student of accounting at the University of Tehran, Tehran, Iran. His research interests lie around the issues of corporate finance, financial reporting quality, and auditing.