Article2019

Impact of deviation from target working capital on firm profitability: evidence from India

Punam Prasad · Sivasankaran Narayanasamy · Ankur Shukla

30 citations0/0 files storedInternational Journal of Productivity and Performance Management

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Working Capital and Financial Performance Financial Analysis and Corporate Governance Supply Chain and Inventory Management

Abstract

Purpose The purpose of this paper is to assess the impact of deviation from the target investment in working capital (WC) (measured by net trade cycle (NTC)) on the profitability (measured by gross operating income (GOI) and net operating income (NOI)) of the listed non-financial Indian firms. Design/methodology/approach The study is based on the data collected on NTC, GOI, NOI and other variables pertaining to 242 listed non-financial Indian firms that form part of the Bombay Stock exchange 500 Index for the period 2012–2017 (1,452 firm-year observations). Following Banos-Caballero et al. (2010), the authors use a firm fixed effect regression as the benchmark regression for finding out the determinants of NTC of the sample firms. Furthermore, this study explores the impact of deviation (above and below target) from the target investments in WC on the firm profitability (GOI and NOI) employing fixed effect regression. Findings The result of this study reveals that Indian firms maintain a target NTC and try to converge in case of any deviations to it. Furthermore, the profitability of the sample firms was observed to be influenced by the deviation from the target NTC irrespective of whether the deviation was above or below the target investment level in WC. Practical implications This study highlights the importance of good WC management for firms due to the negative impact of the over- and under-investments in WC and contributes to the existing body of knowledge by suggesting that managers should keep close to the target WC and not deviate from this in order to maximize the firms’ profitability. Originality/value To the best of the knowledge of the researchers, this is perhaps the first study to examine the impact of firms’ deviation from their target investment in WC on the profitability for non-financial firms listed and operating in India.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1958The Cost of Capital, Corporation Finance and the Theory of Investment 2008The cost of capital, corporation finance and the theory of investment 1988The Determinants of Capital Structure Choice 1956DISTRIBUTION OF INCOMES OF CORPORATIONS AMONG DIVIDENDS, RETAINED EARNINGS AND TAXES 2006Corporate governance and the value of cash holdings 1999Corporate Cash Reserves and Acquisitions 2003Does Working Capital Management Affect Profitability of Belgian Firms?

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