The IUP Journal of Applied Finance
The Role of Financial Constraints in the Relationship Between Working Capital Management and Firm Performance

Article Details
Pub. Date : Jan, 2019
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF41901
Author Name : Nikhil Kaushik and Swati Chauhan
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 23

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Abstract

The main objective of this paper is to investigate the relationship between working capital management and firm performance of Indian firms for the period 2008 to 2016. The study also captures the role of financial constraints in defining the above relationship. The result indicates a significant negative association of net trade cycle, number of accounts receivables in days and number of inventory days on the financial performance of Indian firms while a positive relationship was found with number of accounts payables in days. Inclusion of financial constraints for studying the relation between working capital and firm performance gives mixed results.


Description

Capital budgeting, capital structure and working capital management are important parts of corporate finance theory. Capital budgeting and capital structure deal with investment and financing decision. The investment decision is majorly concerned with asset-mix or the asset composition of the firm. The financing decision is concerned with financing-mix or capital structure. Under investment decision, firm selects two kinds of assets for the purpose of investment: long-term investment and short-term investment. Long-term investment deals with the return over a period and is also known as capital budgeting, while short-term investment includes current assets and part of working capital management. Short-term investment is an important and essential part of financial management as short-term survival is a precondition for the long-term success of the firm. A number of theoretical and empirical studies are available on investment decision. Many studies indicate a direct relation between investment decision and value of the firm (McConnell and Muscarella, 1985; and Burton et al., 1999). Moreover, the seminal paper of Modigliani and Miller (1958) shows that investment and financing decisions are independent and the literature on capital market imperfections supports the relation between these two decisions (Fazzari et al., 1988).


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