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.
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. (Citation2021), who show that the smallest US firms experienced the largest drop in profitability.
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.
7 Nicholas et al. (Citation2021) 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 (Citation2015) show the link between CEO tenure and earnings management; Peni and Vähämaa (Citation2010) show the link between CEO Gender and earnings management; Davidson et al. (Citation2007) show the impact of CEO age on earnings management; Alves (Citation2021) documents the link between CEO-Chair duality and earnings management and earnings quality.
13 This result is consistent with Nicholas et al. (Citation2021), who find that the smallest US companies suffered the most during the pandemic.