Does working capital management affect firm profitability? Evidence from European Union countries

Fitim Deari, Agim Kukeli, Nicoleta Barbuta-Misu and Florina Oana Virlanuta

Journal of Economic and Administrative Sciences, 2022, vol. 40, issue 5, 1060-1080

Abstract: Purpose - The paper aims to investigate the dynamic relationship between working capital management and firm profitability for a sample of firms from eight European Union (EU) countries for the period 2006–2015. Design/methodology/approach - The panel regression model is used in the study. Firm profitability is measured using the return on assets (ROA) ratio, whilst cash conversation cycle, financial leverage, size, tangibility and cash flow ratio are used as independent variables. The novelty of this study is the use of cash flow ratio to develop the analysis firms by dividing them as healthy and nonhealthy. Findings - The paper reveals that working capital management affects firm profitability, and a positive relationship exists between them. The paper shows differences of working capital management and firm profitability across countries. The striking result of this study is that an invertedU-shape relationship exists between working capital management and firm profitability. Whereas the findings suggest that firms should be as close as possible to the optimal length of cash cycle to increase profitability, and managers should give a priority to working capital optimization. Originality/value - The authors consider results of this study relevant to both researchers and business policymakers in the field of working capital management policies.

Keywords: Working capital; Profitability; Cash conversation cycle; Panel data (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jeaspp:jeas-11-2021-0222

DOI: 10.1108/JEAS-11-2021-0222

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