Working capital management and
firms’ performance in emerging
markets: the case of Jordan
Bana Abuzayed
Talal Abu-Ghazaleh College of Business, The German Jordanian University,
Amman, Jordan
Abstract
Purpose – The purpose of this paper is to examine the effect of working capital management on
firms’ performance for a sample of firms listed on a small emerging market, namely Amman Stock
Exchange.
Design/methodology/approach – The paper includes a conceptual as well as empirical analysis, in
which data from a sample of listed firms for the period from 2000 to 2008 are analyzed to examine
if more efficient working capital management improves firms’ accounting profitability and firms’
value. Cash conversion cycles as well as its components are used as measures of working capital
management skills. In this study, two performance measures are used: one accounting and one market
measure, believing that wealth maximization is shareholders’ main concern. To bring up more robust
results, this study used more than one estimation technique, including panel data analysis, fixed and
random effects, and generalized methods of moments.
Findings – Using robust estimation techniques this study found that profitability is affected
positively with the cash conversion cycle. This indicates that more profitable firms are less motivated
to manage their working capital. In addition, financial markets failed to penalize managers for
inefficient working capital management in emerging markets.
Originality/value – The paper’s originality and value lies in suggesting that policy makers in
emerging markets need to motivate and encourage managers and shareholders to pay more attention
to working capital through improving investors’ awareness and improving information transparency.
Keywords Jordan, Working capital, Profit, Cash management, Market value, Emerging markets,
Working capital management, Profitability, Cash conversion cycle
Paper type Research paper
1. Introduction
The current financial crisis and the recession that took speed through 2008 have
brought more focus to the investment that firms make in short-term assets, and the
resources used with maturities of under one year which represent the main share of
items on a firm’s balance sheet. This inflamed the importance of short-term working
capital management at companies all over the world and stimulates researchers’
attention. Where one group of practitioners and researchers believed that efficient
management of working capital is essential for companies during the booming
economic periods (Lo, 2005) and can be managed strategically to improve competitive
position and profitability, others emphasized on that improving working capital
management is reasonably important for companies to withstand the impacts of
economic turbulence (Reason, 2008).
Liquidity or profitability and the balance between both are challenging decisions
while conducting a firm day to day operation. Liquidity is a precondition to ensure that
firms are able to meet their short-term obligations and their continued flow can be
guaranteed from a profitable venture. The importance of cash as an indicator of
continuing financial health should not be surprising in view of its crucial role within
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1743-9132.htm
Received September 2010
Revised July 2011
Accepted July 2011
International Journal of Managerial
Finance
Vol. 8 No. 2, 2012
pp. 155-179
r Emerald Group Publishing Limited
1743-9132
DOI 10.1108/17439131211216620
155
Working capital
management