Economic value added and working capital efficiency linkages: an Indian context

Prince Bhatia, Rahul Kumar, Subir Chattopadhyay and Ritesh Kumar Dubey

Accounting Research Journal, 2024, vol. 37, issue 6, 557-573

Abstract: Purpose - This paper aims to explore the relationship between the economic value added (EVA) and the working capital efficiency (WCE) of the listed firms in India. Design/methodology/approach - This paper uses annual data of 401 listed companies for the period 2012–2019. Furthermore, the dynamic panel data regression model was used to investigate the relationship between the variables of interest. Findings - The results reveal that the net trade cycle (NTC) is significantly and negatively associated with listed firms’ economic value in India, indicating that a shorter NTC generates higher EVA for Indian firms. The authors further explore the association between individual components of the NTC with EVA. The authors also found that an inverse, and significant relationship exists between EVA and the individual components of the NTC. The findings also reported a meaningful relationship between EVA and control variables except for leverage and age. For listed firms, the results suggest that sales growth and firm size are crucial factors driving firms’ EVA. Practical implications - Higher WCE enhances shareholder value creation, forming positive stakeholders’ expectations toward the company. Originality/value - Over the years, many studies have been conducted to determine the relationship between WCE and traditional measures of firms’ profitability. However, hardly any study finds out the impact of WCE on the value-based measures of firms’ performance. This study fills the gap in the existing literature by analyzing the impact of WCE on firms’ EVA.

Keywords: Working capital efficiency; Economic value-added; Net trade cycle; Indian listed firms; Net working capital; Working capital efficiency multiplier (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:arjpps:arj-05-2023-0138

DOI: 10.1108/ARJ-05-2023-0138

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