Working capital management and firms’ performance in emerging markets: the case of Jordan

Working capital management and firms’ performance in emerging markets: the case of Jordan 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Managerial Finance Emerald Publishing

Working capital management and firms’ performance in emerging markets: the case of Jordan

International Journal of Managerial Finance, Volume 8 (2): 25 – Mar 30, 2012

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
1743-9132
D.O.I.
10.1108/17439131211216620
Publisher site
See Article on Publisher Site

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.

Journal

International Journal of Managerial FinanceEmerald Publishing

Published: Mar 30, 2012

Keywords: Jordan; Working capital; Profit; Cash management; Market value; Emerging markets; Working capital management; Profitability; Cash conversion cycle

References

  • Board, audit committee, culture and earnings management: Malaysian evidence
    Abdul Rahman, R.; Mohamed Ali, F.
  • Financial ratios, discriminant analysis and the prediction of corporate bankruptcy
    Altman, E.
  • Does working capital management affects profitability of Belgian firms?
    Deloof, M.
  • Estimating corporate liquidity requirements: a simplified approach
    Gitman, L.
  • Changes in working capital of small firms in relation to changes in economic activity
    Lamberson, M.
  • The capital structure puzzle
    Myers, S.
  • The determinants and implications of corporate cash holdings
    Opler, T.; Pinkowitz, L.; Stulz, R.; Williamson, R.
  • Trade credit management and the decision to use factoring: an empirical study
    Summers, B.; Wilson, N.

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