Working capital management and shareholders' wealth creation: evidence from non-financial firms listed on the Johannesburg Stock Exchange

  • Released On
    Friday, 31 March 2017
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  • DOI
    http://dx.doi.org/10.21511/imfi.14(1).2017.08
  • Article Info
    Volume 14 2017, Issue #1, pp. 80-88
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Working capital plays a vital role in shareholders’ wealth creation, yet there is a dearth of empirical studies on the relationship between working capital management and firm value in the South African economic environment. This study attempts to fill this gap by using Richards and Laughlin’s (1980) Cash Conversion Cycle theory to investigate the impact of working capital management efficiency and its separate components on firm value of South African firms listed on the Johannesburg Stock Exchange (JSE). Panel data regression methodology was used to analyze accounting data obtained from I-Net Bridge/BFA McGregor for 75 firms for the 10 year period, 2003 to 2012, to determine the nexus between WCM and profitability (proxied by return on assets). The key findings of the study are as follows: 1) there exists a significant positive relationship between firm value and both inventory conversion period and receivables conversion period; 2) the relationship between the cash conversion cycle and firm value is positive but insignificant; 3) there is a significant positive relationship between accounts payable deferral period (PDP) and profitability; 4) firm size and firm value are significantly positively related, and 5) there is a significant negative relationship between leverage and firm value.

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    • Table 1. Categories of firms listed on the JSE main board at 31 December 2012
    • Table 2. Listed non-financial firms with complete data (1 Jan 2003 to 31 Dec 2012)
    • Table 3. Descriptive statistics for dependent and independent variables
    • Table 4. Correlation matrix of firm value, WCM components and control variables
    • Table 5. OLS regression analysis of the relationship between firm value and WCM
    • Table 6. Effect of WCM on firm value using random effect (RE) regression estimation