Incentive

Working capital

Economic capital

Financial capital

Cost of capital

Microeconomics

Panel data

Individual capital

Return on capital employed

Economics

Market value

Enterprise value

Business

Profitability index

Econometrics

Valuation (finance)

Capital formation

Industrial organization

Finance

Risk-adjusted return on capital

Profit (economics)

Capital call

International Journal of Managerial Finance

Purpose The purpose of this paper is to examine the effects of working capital management on firm valuation, profitability and risk. Design/methodology/approach The paper uses a panel data set of 497 firms covering the period 2007 to 2016. The authors test the effects of working capital management on firm valuation, profitability and risk using the panel data methodology that includes firm and year fixed effects regressions. Findings The authors find a significantly negative relationship between net working capital (NWC) and firm valuation, profitability and risk. The results suggest that, in managing working capital, firm managers must make a trade-off between their objectives for profitability and risk control. Working-capital management is of particular importance in firms with less access to capital; it is also important when firms are expanding their investments during periods of economic recovery. Originality/value This paper contributes to the literature in several ways. First, to my knowledge, it provides the most comprehensive investigation, to date, on the relationship between working capital management and firm valuation, profitability and risk in an emerging market. Second, this study documents the existence of an optimal level of NWC in an emerging market. Third, firm performance, as measured in both market and accounting value, can be improved with efficient working capital management. Finally, the study includes the impact of the business cycle in an analysis of the effects of working capital management on firm performance.

Working capital management and firm’s valuation, profitability and risk