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Financial constraints and optimal working capital – evidence from an emerging market

Financial constraints and optimal working capital – evidence from an emerging market The purpose of this paper is to investigate the existence of an optimal or target level of working capital for the Indian manufacturing firms, and whether firms intensely follow the target or not.Design/methodology/approachThe paper uses cash conversion cycle as a measure of net working capital and employs partial-adjustment dynamic panel models to test its target-following behavior.FindingsThe empirical results show that there is no evidence of systematic target-following behavior of working capital for the Indian manufacturing firms. The results hold true even after dividing the sample into four groups depending on the sign and magnitude of deviation. The results further show that lack of target-following tendency is not quite influenced by varying firm-specific characteristics and, therefore, seems to be a systematic feature across firms in India.Research limitations/implicationsScarcity of such working capital management studies across emerging economies, facing several financial constraints, limits the comparison of findings. Future studies should be conducted to confirm the results.Practical implicationsThe findings imply that even though an optimal working capital might exist, emerging market firms may not be able to actively pursue it on account of several financial constraints and managerial considerations.Originality/valueThe study contributes to the scant existing literature on the target-following behavior of working capital management in the Indian manufacturing firms, representing a typical emerging market facing several financial constraints. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Managerial Finance Emerald Publishing

Financial constraints and optimal working capital – evidence from an emerging market

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References (48)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1743-9132
DOI
10.1108/ijmf-07-2016-0131
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to investigate the existence of an optimal or target level of working capital for the Indian manufacturing firms, and whether firms intensely follow the target or not.Design/methodology/approachThe paper uses cash conversion cycle as a measure of net working capital and employs partial-adjustment dynamic panel models to test its target-following behavior.FindingsThe empirical results show that there is no evidence of systematic target-following behavior of working capital for the Indian manufacturing firms. The results hold true even after dividing the sample into four groups depending on the sign and magnitude of deviation. The results further show that lack of target-following tendency is not quite influenced by varying firm-specific characteristics and, therefore, seems to be a systematic feature across firms in India.Research limitations/implicationsScarcity of such working capital management studies across emerging economies, facing several financial constraints, limits the comparison of findings. Future studies should be conducted to confirm the results.Practical implicationsThe findings imply that even though an optimal working capital might exist, emerging market firms may not be able to actively pursue it on account of several financial constraints and managerial considerations.Originality/valueThe study contributes to the scant existing literature on the target-following behavior of working capital management in the Indian manufacturing firms, representing a typical emerging market facing several financial constraints.

Journal

International Journal of Managerial FinanceEmerald Publishing

Published: Feb 7, 2018

Keywords: India; Financial constraints; Cash conversion cycle; Working capital; Target following

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