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Moderating Effects of Firm Size and Leverage on the Working Capital Finance–Profitability Relationship: Evidence from China

Faisal Mahmood (), Dongping Han (), Nazakat Ali (), Riaqa Mubeen () and Umeair Shahzad ()
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Faisal Mahmood: School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China
Dongping Han: School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China
Nazakat Ali: School of Management, Iqra University, Islamabad 44000, Pakistan
Riaqa Mubeen: School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China
Umeair Shahzad: School of Management, Ocean University, Qingdao 266100, China

Sustainability, 2019, vol. 11, issue 7, 1-14

Abstract: We evaluated the moderating effects of firm size and leverage on the working capital finance (WCF)–profitability relationship among Chinese companies during 2000–2017. Applying the generalized method of moments (GMM) technique on panel data, we observed that firm size and leverage have strong moderating roles in the WCF–profitability relationship. We observed that small or low-leverage firms have an inverted U-shaped WCF–profitability relationship. However, this relationship is U-shaped for large or high-leverage firms. We report break-even points in these relationships that show the portion of short-term debt in working capital financing. The results reveal that the break-even point for all subgroups (small, large, low-leverage, and high-leverage firms) decreases compared to the break-even point of the full sample. This study shows how the break-even point of the WCF–profitability relationship shifts when a company expands or its leverage level changes. Managers can use this information for profit maximization.

Keywords: working capital finance; short-term borrowings; profitability; breakeven point; generalized method of moments; firm size; leverage (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2019
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