A reassessment of the relationship between working capital management and firm performance: evidence from non-financial companies in Nigeria
-
DOIhttp://dx.doi.org/10.21511/imfi.15(3).2018.21
-
Article InfoVolume 15 2018, Issue #3, pp. 249-266
- Cited by
- 1288 Views
-
262 Downloads
This work is licensed under a
Creative Commons Attribution-NonCommercial 4.0 International License
This paper reassesses the relationship between working capital management (WCM) and firm performance in the Nigerian context. The study is motivated by the limited insights available on the impacts of WCM on firm performance in the country. To date, most studies from Nigeria have been largely descriptive and focused on a small sample size that is non-representative of the population. In addition, there are limited rigorous statistical analyses involved in such studies. This paper addresses the methodological limitations apparent in prior literature and provides a better understanding of the relationship between WCM and firm performance, revealing how firms can manage their operations more profitably. The paper adopts a panel data regression analysis on a sample of 75 non-financial firms listed on the Nigerian Stock Exchange from 2007 to 2015. The results of the analyses showed that WCM variables have an inconsistent relationship with the measures of performance adopted, which were return on assets and Tobin’s Q. Specifically, accounts receivable management and inventory management were negatively associated with the return on assets, while accounts payable management, cash conversion cycle and cash conversion efficiency were positively associated with return on assets. Additionally, accounts receivable management and inventory management were positively associated with Tobin’s Q, whereas accounts payable management, cash conversion cycle and cash conversion efficiency were negatively associated with Tobin’s Q. These results were found to be robust using quantile regression. The results of the quantile regression showed inconsistency across the various quantiles used (0.10, 0.25, 0.50 and 0.75). These findings have two important implications. The first is that WCM variables influence the performance of firms. The second is that the mixed findings partly indicate that firms and managers must understand and formulate WCM policies that reflect their peculiar conditions.
- Keywords
-
JEL Classification (Paper profile tab)M21, M410
-
References50
-
Tables9
-
Figures0
-
- Table 1. Sample selection distribution
- Table 2. Summary of variables and measurements
- Table 3. Descriptive statistics
- Table 4. Descriptive statistics of logged variables
- Table 5. Correlations
- Table 6. Regression results of WCM and firm performance
- Table 7. Result of quantile regression (QR) for the ROA model
- Table 8. Result of quantile regression (QR) for the TQ model
- Table A1. Industry classification of a sample
-
- Abosede, S. A., & Luqman, O. S. (2014). A comparative analysis on working capital management of Brewery Companies in Nigeria. International Journal of Finance and Accounting, 3(6), 356-371.
- Abuzayed, B. (2012). Working capital management and firms’ performance in emerging markets: The case of Jordan. International Journal of Managerial Finance, 8(2), 155-179.
- Afrifa, G. A., & Padachi, K. (2016). Working capital level influence on SME profitability. Journal of Small Business and Enterprise Development, 23(1), 44-63.
- Ailemen, O., & Folashade, O. (2014). Working capital management and profitability of the manufacturing sector: An empirical investigation of Nestle Nigeria Plc and Cadbury Nigeria Plc. Global Journal of Management and Business Research, 14(4), 20-28.
- Ajibolade, S. O., & Sankay, O. C. (2013). Working capital management and financing decision: Synergetic effect on corporate profitability. International Journal of Management, Economics and Social Sciences, 2(4), 233-251.
- Akindele, J. A., & Odusina, A. O. (2015). Working capital management and firm profitability: Evidence from Nigerian quoted companies. Research Journal of Finance and Accounting, 6(7), 148-153.
- Akinlo, O. O. (2012). Effect of working capital on Profitability of selected Quoted firms in Nigeria. Global Business Review, 13(3), 367-381.
- Alam, H. M., Ali, L., Rehman, C. A., & Akram, M. (2011). Impact of working capital management on profitability and market valuation of Pakistani firms. European Journal of Economics, Finance & Administrative Sciences, 32, 48-54.
- Ali, S. (2011). Working capital management and the profitability of the manufacturing sector: A case study of Pakistan’s Textile Industry Shahid. Lahore Journal of Economics, 16(2), 141-178.
- Arunkumar, O. N., & Ramanan, T. (2013). Working capital management and profitability: A sensitivity analysis. International Journal of Research and Development, 2(1), 52-58.
- Azam, M., & Haider, S. I. (2011). Impact of working capital management on firm’ performance: Evidence from non-financial institutions of KSE-30 index. Interdisciplinary Journal of Contemporary Research in Business, 3(5), 481-492.
- Barine, M. N. (2012). Working capital management efficiency and corporate profitability: Evidences from quoted firms in Nigeria. Journal of Applied Finance and Banking, 2(2), 215-237.
- Baum, C. F. (2006). An introduction to modern econometrics using Stata. College Station, TX: Stata press.
- Dehnel, G. (2014). Winsorization Methods in Polish Business Survey. STATISTICS in Transition new series, Winter, 15(1), 97-110.
- Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3‐4), 573-588.
- Eljelly, A. M. (2004). Liquidity-profitability trade-off: an empirical investigation in an emerging market. International Journal of Commerce and Management, 14(2), 48-61.
- El-Maude, J. G., & Shuaib, A. I. (2016). Empirical examination of the association of working capital management and firms’ profitability of the listed food and beverages firms in Nigeria. Researchers World, 7(1), 12-22.
- Falope, O. L., & Ajilore, O. T. (2009). Working capital management and corporate profitability: Evidence from panel data analysis of selected quoted companies in Nigeria. Research Journal of Business Management, 2(3), 73-84.
- Festus, A. F (2012). E-Business conflict resolution: Working capital management in resolving profitability distress in a profit making organization. British Journal of Economics, Finance and Management Sciences, 4(2), 81-94.
- Field, A. (2005). Discovering statistics using IBM SPSS (3rd ed.). London: Sage.
- Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. American Journal of Business, 20(2), 11-20.
- Greene, W. H. (2008). Econometric analysis (6th ed.). Upper Saddle River, N.J.: Prentice Hall.
- Iqbal, A., & Zhuquan, W. (2015). Working capital management and profitability evidence from firms listed on Karachi Stock Exchange. International Journal of Economics and Finance, 7(2), 231-235.
- Kline, R. B. (2011). Principles and practice of structural equation modelling (3rd ed.). New York: Guilford Press.
- Knauer, T., & Wöhrmann, A. (2013). Working capital management and firm profitability. Journal of Management Control, 24(1), 77-87.
- Kolapo, F. T., Oke, M. O., & Ajayi, L. B. (2015). Effect of working capital management on corporate performance: cross-sectional evidence from Nigeria. IOSR Journal of Business and Management (IOSR-JBM), 17(2), 93-103.
- Kurawa, J. M., & Garba, S. (2014). Impact of working capital management on the profitability of quoted Nigerian cement companies. International Journal of Advanced Studies in Business Strategies and Management, 2(1), 1741-8763.
- Lawal, A. A., Abiola, B. I., Oyewole, O. M. (2015). Effect of working capital management on the profitability of selected manufacturing companies in Nigeria. International Journal of Sciences: Basic and Applied Research (IJSBAR), 19(2), 370-386.
- Lazaridis, I., & Tryfonidis, D. (2006). Relationship between working capital management and profitability of listed companies in the Athens stock exchange. Journal of Financial Management and Analysis, 19(1), 1-12.
- Mathuva, M. D. (2010). The influence of working capital management components on corporate profitability: A survey on Kenyan listed firms. Research Journal of Business Management, 4(1), 1-11.
- Murugesu, T. (2013). Effect of cash conversion cycle on profitability: listed plantation companies in Sri Lanka. Research Journal of Finance and Accounting, 4(18), 132-137.
- Nijam, H. M. (2016). Cash conversion cycle, its properties and profitability: Evidence from listed hotel companies in Sri Lanka. Research Journal of Finance and Management, 7(1), 23-32.
- Nobanee, H., & Al Hajjar, M. (2009). A note on working capital management and corporate profitability of Japanese firms. SSRN Electronic Journal, 1433243.
- Nyamao, N. R., Patrick, O., Martin, L., Odondo, A. J., & Simeyo, O. (2012). Effect of working capital management practices on financial performance: A study of small scale enterprises in Kisii South District, Kenya. African Journal of Business Management, 6(18), 5807-5817.
- Ogundipe, S. E., Idowu, A., & Ogundipe, L. O. (2012). Working capital management, firms’ performance and market valuation in Nigeria. World Academy of Science, Engineering and Technology, 61(1), 1196-1200.
- Oladipupo, A. O., & Okafor, C. A. (2013). Relative contribution of working capital management to corporate profitability and dividend payout ratio: Evidence from Nigeria. International Journal of Business and Finance Research, 3(2), 11-20.
- Omolade, A., & Mukolu, M. O. (2013). Working capital and organization performance in Nigeria. International Journal of Business and Management Invention, 2(6), 26-35.
- Osundina, J. (2014). Working capital management and profitability: evidence from quoted food and beverages manufacturing firms in Nigeria. Research Journal of Finance and Accounting, 5(4), 101-107.
- Osundina, J. A., & Osundina, K. C. (2014). The effect of working capital management on market value of quoted food and beverages manufacturing firms in Nigeria. International Journal of Business and Social Science, 5(8), 168-177.
- Owolabi, S. A., & Alu, C. N. (2012). Effective working capital management and Profitability: A study of selected quoted manufacturing companies in Nigeria. Economic and Finance Review, 2(6), 55-67.
- Padachi, K. (2006). Trends in working capital management and its impact on firms’ performance: An analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58.
- Panigrahi, A. K., & Sharma, A. (2013). Working capital management and firms’ performance: An Analysis of selected Indian Cement Companies. Asian Journal of Research in Business Economics and Management (2013).
- Shah, S. A., & Sana, A. (2006). Impact of working capital management on the profitability of oil and gas sector of Pakistan. Editor-In-chief or European Journal of Scientific Research, 15(3), 301-307.
- Sharma, A. K., & Kumar, S. (2011). Effect of working capital management on firm profitability empirical evidence from India. Global Business Review, 12(1), 159-173.
- Shawtari, F. A., Salem, M. A., Hussain, H. I., Alaeddin, O., & Thabit, O. B. (2016). Corporate governance characteristics and valuation: Inferences from quantile regression. Journal of Economics, Finance and Administrative Science, 21(41), 81-88.
- Simon, S., Sawandi, N., & Abdul-Hamid, M. A. (2017). The quadratic relationship between working capital management and firm performance: Evidence from the Nigerian economy. Journal of Business and Retail Management Research, 12(1), 94-108.
- Takon, S. M., & Atseye, F. A. (2015). Effect of working capital management on firm profitability in selected Nigerian quoted companies. International Journal of Economics, Commerce and Management, 3(10), 414-438.
- Toby, A. (2014). Working capital management policy and corporate profitability of Nigerian quoted companies: A sectoral analysis. International Journal of Financial Management, 3(1), 9-20.
- Uremadu, S. O., Egbide, B. C., & Enyi, P. E. (2012). Working capital management, liquidity and corporate profitability among quoted firms in Nigeria evidence from the productive sector. International Journal of Academic Research in Accounting, Finance and Management Sciences, 2(1), 80-97.
- Zariyawati, M. A., Annuar, M. N., Taufiq, H., & Rahim, A. A. (2009). Working capital management and corporate performance: Case of Malaysia. Journal of Modern Accounting and Auditing, 5(11), 47-56.