The Influence of Operating Capital and Cash Holding on Firm Profitability

Ashfaq Habib, Muhammad Asif Khan, József Popp and Mónika Rákos
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Ashfaq Habib: Department of Business Administration, University of Poonch, Rawalakot 12350, Pakistan
Muhammad Asif Khan: Department of Commerce, Faculty of Management Sciences, University of Kotli, Kotli 11100, Pakistan
József Popp: Department of Management, Faculty of Applied Sciences, WSB University, 43-100 Dabrowa Górrnicza, Poland
Mónika Rákos: Faculty of Economics and Business, University of Debrecen, 4032 Debrecen, Hungary

Economies, 2022, vol. 10, issue 3, 1-13

Abstract: This study analyzes the influence of operating capital on a firm’s profitability in the manufacturing sector of China. The study investigates that operating capital develops a non-linear relationship with firm profitability by using the ordinary least square (OLS), fixed effect (FE), and generalized method of moments (GMM) regression. The research reveals that positive operating capital in financially less-constrained firms significantly negatively influences the firm’s profitability. Conversely, negative operating capital in financially constrained firms significantly positively influences the firm’s profitability. Further, we find that financially less-constrained firms design an efficient level of operating capital by holding positive operating capital and negative cash, while constrained firms design an efficient level of operating capital by holding negative operating capital and positive cash. Additionally, we also identify the optimal level of operating capital to increase the firm’s profitability. Generally, we conclude that a firm can design a level of efficient operating capital by trading-off cash with non-cash assets.

Keywords: operating capital; cash holding; financial constrained firms; less-constrained firms (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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