Did COVID-19 pandemic affect firms’ operating cycle?

ABSTRACT

This paper investigates the impact of COVID-19-related disruptions on firms’ operating cycles. Demand shocks and supply chain disruptions can have unexpected outcomes on operating cycles, especially on receivables and inventories. We find that the COVID-19 pandemic caused a significant increase in firms’ operating cycle lengths. Further, we separate the operating cycle into its components and find that firms experienced an increase in both receivables and inventories; this implies longer times to collect receivables and slower-moving inventories. Furthermore, we find that firms with more resources – larger firms and higher cash flows – experienced smaller increases in operating cycles. Moreover, while firms experienced a sharp drop in profitability after COVID-19, an increase in operating cycle exacerbated the drop in profitability even more. We contribute to the literature by showing how the aftermath of COVID-19 impacted firms’ operating cycles.

KEYWORDS:

• Economic uncertainty
• operating cycle
• COVID-19
• responses to crises

JEL CLASSIFICATION:

• G01
• G30
• G39

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ https://www.accenture.com/us-en/insights/consulting/coronavirus-supply-chain-disruption. This is one of the many articles that provide evidence of an explanation for the supply chain disruptions

² This result is consistent with Nicholas et al. (2021), who show that the smallest US firms experienced the largest drop in profitability.

³ https://www.ft.com/content/8920a1da-5ea2-4f3b-86c3-9de4684013cf

⁴ Since Sales and Cost of Goods Sold are flow numbers and Accounts Receivables and Inventory are balance numbers, adjusting by four is required to reflect the correct number.

⁵ This is just for consistency. Avoiding the division would not matter to our results.

⁶ We choose March 2020 as the starting point for COVID-19 since lockdowns in the US were first implemented in March 2020. This is a good starting point since the lockdowns brought disruptions and economic uncertainty to investors and consumers in the US.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7405141/#:~:text=In%20the%20United%20States%2C%20the,exposed%20to%20stay%20at%20home

⁷ Nicholas et al. (2021) find that the smallest US companies suffered the most during COVID-19. So, controlling for size is essential. In an alternate model, we exclude size as a control variable, and our results hold.

⁸ Our sample period runs from 2016 to 2022 to allow us to capture the period around the COVID-19 pandemic. Plus, it also allows us to capture full fiscal year reporting. However, using data from 2023 that is available so far does not change our result.

⁹ Interacting Covid Indicator with the Operating Cycle (continuous variable) would be inappropriate because it would not account for those firms which had a high operating cycle both before and after COVID-19. That could have biased our results.

¹⁰ https://www.worlddata.info/america/usa/inflation-rates.php#:~:text=The%20inflation%20rate%20for%20consumer,rate%20was%203.8%25%20per%20year; https://tradingeconomics.com/united-states/inflation-cpi; https://www.usinflationcalculator.com/inflation/historical-inflation-rates/.

¹¹ One might argue the use of inflation-adjusted operating cycle measure. However, the operating cycle is calculated from numbers reported in the Balance Sheet and Income Statement. These numbers are not inflation-adjusted, so inflation-adjusting these numbers would be inappropriate.

¹² Ali and Zhang (2015) show the link between CEO tenure and earnings management; Peni and Vähämaa (2010) show the link between CEO Gender and earnings management; Davidson et al. (2007) show the impact of CEO age on earnings management; Alves (2021) documents the link between CEO-Chair duality and earnings management and earnings quality.

¹³ This result is consistent with Nicholas et al. (2021), who find that the smallest US companies suffered the most during the pandemic.