The determinants of working capital management: the contextual role of enterprise size and enterprise age
Abstract
Purpose – working capital management plays a vital role in determining the continuity of enterprises’ business activities. Enterprises should manage their working capital efficiently to avoid excessive working capital investments and at the same time, to maintain their liquidity. This study aims to examine the determinants of working capital management and to test the different effects of the determinants of working capital management based on enterprise size and enterprise age.
Research methodology – the sample consists of 117 manufacturing enterprises listed at the Indonesian Stock Exchange for the years 2010–2017. Panel data regression was used to test the hypothesis.
Findings – the findings reveal that sales growth and economic growth determine working capital management. However, the effects of the determinants of working capital management differ depending on enterprise size and enterprise age. Specifically, economic growth is the only determinant that exhibits different effects on working capital management between different enterprise size and enterprise age subsamples. Meanwhile, besides economic growth, capital expenditure, and operating cash flow are the other enterprise-specific determinants that exhibit different effects on working capital management between the two enterprise age subsamples.
Research limitations – this study only measures enterprise size with total assets. Thus, we advise future studies to complement this proxy with other measures such as market value and the listing size criterion (main board vs development board). Further, it is necessary to analyse the non-linear relationship between leverage and working capital management to explain the positive effect of leverage on working capital management.
Practical implications – the empirical results suggest that manufacturing enterprises must focus more on their sales growth because it affects their ability to manage their working capital efficiently. Besides, younger manufacturing enterprises need to shorten their cash cycles that are longer relative to old enterprises.
Originality/Value – no previous studies have analysed the determinants of working capital management based on enterprise characteristics, especially enterprise size and age. Specifically, in the scientific literature, enterprise size and enterprise age mainly act as the dependent variables.
Keyword : working capital management, sales growth, economic growth, enterprise size, enterprise age
How to Cite
Nastiti, P. K. Y., Atahau, A. D. R., & Supramono, S. (2019). The determinants of working capital management: the contextual role of enterprise size and enterprise age. Business, Management and Economics Engineering, 17(2), 94-110. https://doi.org/10.3846/bme.2019.10409
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Ademola, O. J. (2014). Working capital management and profitability of selected. European Journal of Accounting Auditing and Finance Research, 2(3), 10-21.
Agustini, A. T. (2016). The effect of enterprise size and rate of inflation on cost of capital: the role of IFRS adoption in the world. Procedia – Social and Behavioral Sciences, 219, 47-54. https://doi.org/10.1016/j.sbspro.2016.04.031
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Appuhami, B. R., & Department. (2008). The impact of enterprises’ capital expenditure on working capital management: an empirical study across industries in Thailand. International Management Review, 4(8-21), 134-140.
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Goel, A. S. U. (2015). Working capital management efficiency in Indian manufacturing sector: trends and determinants. International Journal of Economics and Business Research, 10(1), 30-45. https://doi.org/10.1504/IJEBR.2015.070273
Gujarati, D. (2003). Basic econometrics (4th ed.). New Delhi, DN: McGraw Hill.
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Kurshev, A., & Strebulaev, I. A. (2015). Enterprise size and capital structure. Quarterly Journal of Finance, 5(3), 1-46. https://doi.org/10.2139/ssrn.686412
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Adekola, A., Samy, M., & Knight, D. (2017). Efficient working capital management as the tool for driving profitability and liquidity: correlation analysis of Nigerian companies. International Journal Business and Globalisation, 18(2), 251-275. https://doi.org/10.1504/IJBG.2017.081957
Ademola, O. J. (2014). Working capital management and profitability of selected. European Journal of Accounting Auditing and Finance Research, 2(3), 10-21.
Agustini, A. T. (2016). The effect of enterprise size and rate of inflation on cost of capital: the role of IFRS adoption in the world. Procedia – Social and Behavioral Sciences, 219, 47-54. https://doi.org/10.1016/j.sbspro.2016.04.031
Ahangar, N., & Shah, F. (2017). Working capital management, enterprise performance, and financial constraints: Empirical evidence from India. Asia-Pacific Journal of Business Administration, 9(3), 206-219. https://doi.org/10.1108/APJBA-06-2017-0057
Aminu, Y., & Zainudin, N. (2015). A review of anatomy of working capital management theories and the relevant linkages to working capital components: a theoretical building approach. European Journal of Business and Management Online, 7(2), 2222-2839.
Appuhami, B. R., & Department. (2008). The impact of enterprises’ capital expenditure on working capital management: an empirical study across industries in Thailand. International Management Review, 4(8-21), 134-140.
Attom, B. E. (2016). Working capital management as a financial strategy to improve profitability and growth of micro and small scale enterprise. International Journal of Research in Commerce and Management, 7(7), 42-50.
Azami, Z., & Tabar, F. J. (2016). Investigating the factors affecting working capital of companies using the generalized method of moments. Bulletin de la Société Royale des Sciences de Liège, 85(1999), 1402-1415.
Banõs-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2010). Working capital management in SMEs. Accounting and Finance, 50, 511-527. https://doi.org/10.1111/j.1467-629X.2009.00331.x
Beck, T., & Demirguq-kunt, A. (2005). Financial and legal constraints to growth: does enterprise size matter? Finance, 60(1), 137-177. https://doi.org/10.1111/j.1540-6261.2005.00727.x
Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22(6-8), 613-673. https://doi.org/10.1016/S0378-4266(98)00038-7
Bhunia, A. (2010). A study of liquidity trends on private sector steel companies in India. Asian Journal of Management Research, 618-628.
Coad, A., Holm, J. R., Krafft, J., & Quatraro, F. (2017). Enterprise age and performance. Journal of Evolutionary Economics, 28(1), 1-11. https://doi.org/10.1007/s00191-017-0532-6
Cuong, N. T., & Nhung, N. T. H. (2017). Determinants of working capital requirement: evidence from non-financial enterprises listed on the Vietnam Exchange. Journal of Insurance and Financial Management, 3(1), 19-29.
Dang, C., Li, Z. F., & Yang, C. (2018). Measuring enterprise size in empirical corporate finance. Journal of Banking & Finance, 86, 159-176. https://doi.org/10.1016/j.jbankfin.2017.09.006
Deloof, M. (2003). Does working capital management affects profitability of Belgian enterprises? Journal of Business Finance and Accounting, 30(3), 573-587. https://doi.org/10.1111/1468-5957.00008
Elbadry, A. (2018). The determinants of working capital management in the Egyptian SMEs. Accounting and Finance Research, 7(2), 155. https://doi.org/10.5430/afr.v7n2p155
Embong, Z., Mohd-Saleh, N., & Hassan, M. S. (2012). Enterprise size, disclosure, and cost of equity capital. Asian Review of Accounting, 20(2), 119-139. https://doi.org/10.1108/13217341211242178
Ezeoha, A. E. (2009). Enterprise size and corporate financial-leverage choice in a developing economy: Evidence from Nigeria. The Journal of Risk Finance, 9(4), 351-364. https://doi.org/10.1108/15265940810895016
Fatimatuzzahra, M., & Kusumastuti, R. (2017). The determinant of working capital management of manufacturing companies. MIMBAR. Jurnal Sosial dan Pembangunan, 32(2), 276. https://doi.org/10.29313/mimbar.v32i2.1872
Gill, A., Biger, N., & Mathur, N. (2010). The relationship between working capital management and profitability: evidence from The United States. Business and Economics Journal, 2010, 1-9.
Goel, A. S. U. (2015). Working capital management efficiency in Indian manufacturing sector: trends and determinants. International Journal of Economics and Business Research, 10(1), 30-45. https://doi.org/10.1504/IJEBR.2015.070273
Gujarati, D. (2003). Basic econometrics (4th ed.). New Delhi, DN: McGraw Hill.
Hadlock, C. J., & Pierce, J. R. (2010). New evidence on measuring financial constraints: Moving beyond the KZ index. Review of Financial Studies, 23(5), 1909-1940. https://doi.org/10.1093/rfs/hhq009
Haron, R., & Nomran, N. M. (2016). Determinants of working capital management before, during and after the global financial crisis of 2008: evidence from Malaysia. The Journal of Developing Areas, 50(5), 461-468. https://doi.org/10.1353/jda.2016.0029
Ilyas, M. (2014). The impact of capital expenditure on working capital management of listed enterprises (Karachi Stock Exchange) in Pakistan. Journal of Economics and Sustainable Development, 5(22),153-159.
Indonesia Stock Exchange (IDX). (2019). Retrieved from https://www.idx.co.id/
Isik, O., & Unal, E. A. (2017). The effect of enterprise size on profitability: evidence from Turkish. Journal of Business, Economics, and Finance, 6(4), 301-308. https://doi.org/10.17261/Pressacademia.2017.762
Kieschnick, R., & Moussawi, R. (2018). Enterprise age, corporate governance, and capital structure choices. Journal of Corporate Finance, 48, 597-614. https://doi.org/10.1016/j.jcorpfin.2017.12.011
Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders’ wealth. Review of Finance, 17(5), 1827-1852. https://doi.org/10.1093/rof/rfs043
Koh, S. K., Duran, R., Dai, L., & Chang, M. M. (2015). Financial distress: Lifecycle and corporate restructuring. Journal of Corporate Finance, 33, 19-33. https://doi.org/10.1016/j.jcorpfin.2015.04.004
Koralun-Bereźnicka, J. (2014). On the relative importance of corporate working capital determinants: findings from the EU countries. Contemporary Economics, 8(4), 415-434. https://doi.org/10.5709/ce.1897-9254.154
Kurshev, A., & Strebulaev, I. A. (2015). Enterprise size and capital structure. Quarterly Journal of Finance, 5(3), 1-46. https://doi.org/10.2139/ssrn.686412
Lazaridis, I., & Tryfonidis, D. (2006). Relationship between working capital management and profitability of listed companies in the Athens stock exchange. Journal of Finance Management and Analysis, 19, 26-35.
Li, C. G., Dong, H., Chen, S., & Yang, Y. (2014). Working capital management, corporate performance, and strategic choices of the wholesale and retail industry in China. Scientific World Journal, 2014, 2-14. https://doi.org/10.1155/2014/953945
Maina, L., & Ishmail, M. (2014). Capital structure and financial performance in Kenya: Evidence from enterprises listed at the Nairobi Securities Exchange. International Journal of Social Sciences and Entrepreneurship, 1(11), 209-223.
Mansoori, E., & Muhammad, J. (2012). Determinants of working capital management: Case of Singapore enterprises. Research Journal of Finance and Accounting, 3(11), 15-24.
Marobhe, M. I. (2015). Determinants of enterprises’ working capital panel evidence from listed East African. International Journal of Business and Social Science, 6(12), 108-116.
Mule, R. K., Mukras, M. S., & Nzioka, O. M. (2015). Corporate size, profitability, and market value: an econometric panel analysis of listed enterprises in Kenya. European Scientific Journal, 11(13), 376-396.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when enterprises have information that investors do not have. Journal of Financial Economics, 13, 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
Naser, K., Nuseibeh, R., & Al-Hadeya, A. (2013). Factors influencing corporate working capital management: Evidence from Emerging market. Journal of Contemporary Issues in Business Research, 2(1), 11-30.
Nastiti, P. K. Y., Atahau, A. D. R., & Supramono, S. (2019). Working capital management and its influence on profitability and sustainable growth. Business: Theory and Practice, 20, 61-68. https://doi.org/10.3846/btp.2019.06
Nguyen, A. T. H., & Nguyen, T. V. (2018). Working capital management and corporate profitability: empirical evidence from Vietnam. Foundations of Management, 10(1), 195-206. https://doi.org/10.2478/fman-2018-0015
Onaolapo, A. A., & Kayjola, S. O. (2015). What are the determinants of working capital requirements of Nigerian Enterprises? Research Journal of Finance and Accounting, 6(6), 118-128.
Padachi, K., Howorth, C., & Narasimhan, M. S. (2012). Working capital financial preferences: the case of Mauritian manufacturing Small and Medium-Sized Enterprises (SMEs). Asian Academy of Management Journal of Accounting and Finance, 8(1), 125-157.
Palombini, N. N. V., & Nakamura, W. (2012). Key factors in working capital management in the Brazilian market. Revista de Administração de Empresas, 52(1), 55-69. https://doi.org/10.1590/S0034-75902012000100005
Petersen, M. A., & Rajan, R. G. (1994). The benefits of lending. Relationships: evidence from small business data. Journal of Finance, XLIX(1), 3-35. https://doi.org/10.1111/j.1540-6261.1994.tb04418.x
Ponikvar, N., Zajc Kejzar, K., & Morec, B. (2013). Determinants of financial constraints: the effect of financial crisis and heterogeneity across industries. Ekonomska Istrazivanja/Economic Research, 1, 45-62. https://doi.org/10.1080/1331677X.2013.11517639
Quayyum, S. T. (2011). Relationship between working capital management and profitability in the context of manufacturing industries in Bangladesh. International Journal of Business and Management, 7(1), 58-69. https://doi.org/10.5539/ijbm.v7n1p58
Rafiq, S., Salim, R., & Smyth, R. (2016). The moderating role of enterprise age in the relationship between R&D expenditure and financial performance: Evidence from Chinese and US mining enterprises. Economic Modelling, 56, 122-132. https://doi.org/10.1016/j.econmod.2016.04.003
Raheman, A., Afza, T., & Qayyum, A. (2010). Working capital management and corporate performance of manufacturing sector in Pakistan. International Research Journal of Finance and Economics, 47(47), 152-163.
Richards, V. D, & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management, 9(1), 32-38. https://doi.org/10.2307/3665310
Salawu, R. O., & Alao, J. A. (2014). Determinants of working capital management: Case of Nigerian manufacturing enterprises. Journal of Economics and Sustainable Development, 5(14), 49-57.
Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.) New York: McGraw-Hill.
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