Impact of deviation from target working capital on firm profitability: evidence from India
Punam Prasad,
Sivasankaran Narayanasamy and
Ankur Shukla
International Journal of Productivity and Performance Management, 2019, vol. 68, issue 8, 1510-1527
Abstract:
Purpose - The purpose of this paper is to assess the impact of deviation from the target investment in working capital (WC) (measured by net trade cycle (NTC)) on the profitability (measured by gross operating income (GOI) and net operating income (NOI)) of the listed non-financial Indian firms. Design/methodology/approach - The study is based on the data collected on NTC, GOI, NOI and other variables pertaining to 242 listed non-financial Indian firms that form part of the Bombay Stock exchange 500 Index for the period 2012–2017 (1,452 firm-year observations). Following Banos-Caballeroet al.(2010), the authors use a firm fixed effect regression as the benchmark regression for finding out the determinants of NTC of the sample firms. Furthermore, this study explores the impact of deviation (above and below target) from the target investments in WC on the firm profitability (GOI and NOI) employing fixed effect regression. Findings - The result of this study reveals that Indian firms maintain a target NTC and try to converge in case of any deviations to it. Furthermore, the profitability of the sample firms was observed to be influenced by the deviation from the target NTC irrespective of whether the deviation was above or below the target investment level in WC. Practical implications - This study highlights the importance of good WC management for firms due to the negative impact of the over- and under-investments in WC and contributes to the existing body of knowledge by suggesting that managers should keep close to the target WC and not deviate from this in order to maximize the firms’ profitability. Originality/value - To the best of the knowledge of the researchers, this is perhaps the first study to examine the impact of firms’ deviation from their target investment in WC on the profitability for non-financial firms listed and operating in India.
Keywords: Profitability; Net trade cycle; Net operating income; Deviation; Indian listed non-financial firms; Target working capital investments; Gross operating income (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eme:ijppmp:ijppm-11-2018-0407
DOI: 10.1108/IJPPM-11-2018-0407
Access Statistics for this article
International Journal of Productivity and Performance Management is currently edited by Dr Luisa Huatuco and Dr Nicky Shaw
More articles in International Journal of Productivity and Performance Management from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support (feeds@emerald.com).