Using daily returns from 1980‐2006, we find a significant contemporaneous association between all European Union (EU) equity markets and Germany. There is, however, no significant…
Abstract
Using daily returns from 1980‐2006, we find a significant contemporaneous association between all European Union (EU) equity markets and Germany. There is, however, no significant indication that the German stock market leads or lags the movements in the other EU stock markets. A higher share of imports by Germany from other EU countries, as well as fluctuations and increased volatility in the exchange rate, have negative effects on stock market co‐movements. Conversely, the difference in equity market capitalization with Germany, the greater the foreign direct investment by Germany, and the fact of belonging to the eurozone all contribute to greater stock market co‐movement.
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Punam Prasad, Narayanasamy Sivasankaran, Samit Paul and Manoharan Kannadhasan
The purpose of this study is to introduce working capital efficiency multiplier (WCEM) as a direct profitability measure of working capital management. The existing accounting…
Abstract
Purpose
The purpose of this study is to introduce working capital efficiency multiplier (WCEM) as a direct profitability measure of working capital management. The existing accounting measures in the literature establish an indirect approach to study the relationship between working capital efficiency and profitability of the firms.
Design/methodology/approach
Using the help of a set of companies from CMIE Prowess database, the study introduces WCEM as a direct profitability measure of working capital efficiency.
Findings
In this study, a new direct measure of working capital efficiency is introduced which is multiplicative in nature. WCEM is a product of three components, namely, WACC, ratio of the sum of trade receivables and inventories to trade payables and ratio of net working capital (NWC) to net sales.
Practical implications
The importance of direct measure like WCEM could be enormous in performance evaluation of a firm. It can be used as an indicator for choosing a suitable investment opportunity by an investor. This is due to the fact that the firm that is highly efficient in managing working capital is less exposed to liquidity risk. At the same time, the firm is less dependent on external financing. Therefore, such firms eventually create more value for their shareholders. Another indication that WCEM provides is to gauge the bargaining power of the firm and its competitive position in the market. Lower WCEM indicates higher bargaining power of a firm across the value chain, and its superior position relative to its competitors.
Originality/value
Most of the studies on WCM are of the empirical type and there is a complete dearth on theoretical framework. Researchers hereafter can consider WCEM as one of the financial performance variables in place of the existing measures such as return on asset (ROA), return on invested capital (ROIC), return on equity (ROE), gross operating income (GOI) and net operating income (NOI) and thereby can contribute new empirical insights through their research outcomes.
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Binod Guragai, Paul D. Hutchison and M. Theodore Farris
The purpose of this research study is to use a large sample of the US companies and investigate the impact of cash-to-cash cycle’s (C2C) length on company profitability and…
Abstract
The purpose of this research study is to use a large sample of the US companies and investigate the impact of cash-to-cash cycle’s (C2C) length on company profitability and liquidity in present and future periods and also examine whether such impact is dependent upon firm size or industry type. The authors investigate the association between C2C length and return on equity (ROE), as well as liquidity ratios for current and future years using linear regression models. The authors further examine such association for separate industries and explore the effect of size on the primary associations investigated. Consistent with prior literature, this study documents that C2C length is negatively (positively) associated with current profitability (liquidity). The authors also find that there is a significant negative association between C2C length and future profitability extending up to three years, but only for firms in the manufacturing industry. This research study shows that C2C length affects a firm’s current financial performance and managers should view C2C management as an important strategic tool. However, the authors caution that C2C management is not a “one size fits all” strategy and managers in smaller firms should pay close attention to their C2C cycle. The authors also show that firms in manufacturing industry will specifically benefit financially over long-term from C2C management. This article complements existing literature that examines the impact of working capital management on a firm’s financial performance and extends the literature by examining such relationship for different industries and firm sizes. Although the authors include various factors (e.g., firm size, leverage, growth, industry, year, and past performance) in regressions to control for observable differences among firms, there might be other unobservable differences that may have an effect on the results documented.
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To understand how foreign exchange risk is managed it may be important to document who is involved in its management. Different individuals working in corporations will have…
Abstract
To understand how foreign exchange risk is managed it may be important to document who is involved in its management. Different individuals working in corporations will have different perspectives and different backgrounds including functional specialisms which fit them for functional roles. They will have specific job responsibilities inherent in their job descriptions. It is hypothesised that the nature of who gets involved in managing foreign exchange risk will impact on how it is managed. This paper reports on the findings of a postal survey of foreign exchange risk management practices in British Times 1000 corporations carried out in late 1991. The findings give support to the hypothesis and raise the issue of whether optimal foreign exchange risk management can occur when how it is managed is significantly influenced by who manages it. This is particularly so, given that the nature of the exposure reported by different corporations is not normally found to be significantly associated with who manages it. The paper concludes with a brief discussion of the implications of the findings.
Methods of capital budgeting have been well established in the finance literature as well as in corporate practice. In general, the discounted cash flow methods (IRR, NPV, PI) are…
Abstract
Methods of capital budgeting have been well established in the finance literature as well as in corporate practice. In general, the discounted cash flow methods (IRR, NPV, PI) are considered to be superior. An investment project is therefore acceptable (at least in financial terms) when its net present value is positive or its internal rate of return is above the specified cut‐off rate. In case of capital rationing, we allocate funds and consequently approve projects in descending order of their profitability index to make sure we obtain the maximum present value per dollar invested.
There are several definitions of the concept of “cash flow” in the current financial literature. The article begins by reviewing the most recent definitions of cash flow. An arrow…
Abstract
There are several definitions of the concept of “cash flow” in the current financial literature. The article begins by reviewing the most recent definitions of cash flow. An arrow diagram, showing the flows in and out of the pool of corporate cash, has also been developed. The article then proceeds to examine techniques for accelerating the cash flow cycle, in particular the problem of accounts receivable collection. Indeed, the usual transfer time of payments in Europe varies from four to eighteen days, depending on the country of origin and the method of payment. This means that funds are permanently lost in “float” somewhere in the banking system. The amount of “float” results in an actual loss of working capital for the company. This illustrates the importance of techniques to increase the cash turnover. We limit ourselves to the more important techniques. Finally, we define and examine in detail the phenomenon “float”, a crucial concept in cash management.
Fahmida Laghari and Ye Chengang
The purpose of this paper is to investigate the relationship between working capital management and corporate performance with financial constraints.
Abstract
Purpose
The purpose of this paper is to investigate the relationship between working capital management and corporate performance with financial constraints.
Design/methodology/approach
This study uses large panel sample of Chinese listed firms over the period 2005–2015 using system generalized method of moments (GMM) estimator that controls unobserved heterogeneity of individual firms well and GMM methodology is robust to address endogeneity issues.
Findings
Empirical evidence finds inverted U-shaped relationship between working capital and corporate performance and exhibits similar evidence for financially constrained firms. Evidence shows impact of high sales and discounts on early payments at low level of working capital and dominance of opportunity cost and cost of external finance at high level of working capital. The findings of the results show that optimal working capital level of financially constrained firms is relatively lower due to high cost of external capital and debt rationing. The results also indicate that on average NET is significantly lower for firms with Tobin’s Q>1 than firms with Tobin’s Q=1, and suggest that aggressive working capital management is significantly and positively associated with higher corporate values.
Originality/value
This paper is among few that complement the existing literature by providing evidence that inverted U-shaped relationship between working capital management and corporate performance also exists in the context of Chinese listed non-financial firms. Exclusively, the relationship of working capital and corporate performance with linkage of financial constraints is scant in the context of Chinese listed non-financial firms.
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We have to define “cash flow”; it is variously defined in different contexts. Techniques of accelerating the flow are described.
The purpose of this paper is to investigate whether non-financial firms listed on the Nairobi Securities Exchange (NSE) exhibit a target cash conversion cycle (CCC). The study…
Abstract
Purpose
The purpose of this paper is to investigate whether non-financial firms listed on the Nairobi Securities Exchange (NSE) exhibit a target cash conversion cycle (CCC). The study also examines the speed of adjustment to the target CCC and the factors that influence corporate decisions on the optimum length of the CCC.
Design/methodology/approach
Based on a sample of 33 publicly traded firms on the NSE for the period between 1993 and 2008, cross-sectional and time series analyses were carried out on the data comprising 468 firm-years. A target adjustment model was developed to examine the significant determinants of the CCC. Various regression approaches including ordinary least squares, fixed effects and two-stage least squares estimation models were used in data analysis.
Findings
The results, which are robust for endogeneity, show that non-financial firms listed on the NSE maintain a target CCC. Further analysis reveals that these firms adjust to the target CCC at a slower rate. The results show that the determinants of the CCC include both firm-specific and economy-wide factors. Specifically, the study establishes that older firms and firms with more internal resources maintain longer CCC. Moreover higher return on assets, investment in capital expenditure and growth opportunities have a significant negative association with the CCC. The results also show a significant positive relation between inflation and the CCC.
Practical implications
The study establishes that other than internal firm-specific factors, the CCC is also influenced by inflation, which is an external, economy-wide factor.
Originality/value
To the best of the author's knowledge, this is the first study to examine whether listed non-financial firms in a frontier market maintain a target CCC.