TESTING TRADE-OFF THEORY BETWEEN NETWORKING CAPITAL AND FIRM VALUE: EMPIRICAL EVIDENCE FROM VIETNAM

Duong Dang Khoa (), Pham Thi Tram Anh and Le Thi My Duyen
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Duong Dang Khoa: Faculty of Finance and Banking, Ton Duc Thang University, Ho Chi Minh City, Vietnam
Pham Thi Tram Anh: #x2020;Faculty of Business Administration, Finance and Marketing University, Ho Chi Minh City, Vietnam
Le Thi My Duyen: #x2021;Faculty of Finance and Banking, Van Lang University, Ho Chi Minh City, Vietnam

Annals of Financial Economics (AFE), 2020, vol. 15, issue 03, 1-21

Abstract: This study investigates empirically how net-working-capital (NWC) affects firm value, using a sample of the Vietnamese stock market. Our empirical results indicate an optimal NWC level that maximizes firm value. Our research also shows empirical evidence that deviations from actual and estimated NWC levels (above and below optimal level) can reduce firm value. We show that more than 40% of NWC observations in our sample on the right-hand side of the breakpoint reduce firm value. Managers tend to build up excessive working capital to prevent hiking funding costs after the 2008 crisis. Therefore, our findings help managers determine an optimal level of NWC, which enhances firm value. Our findings are consistent with the trade-off theory.

Keywords: Net-working-capital; firm value; trade-off theory; optimal (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S201049522050013X

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