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3, June 2012
I. INTRODUCTION
Working capital, the money needed for day-to-day
operations of a firm, is described as an investment of the
firms capital in current assets and the use of current
liabilities to fund part of the investment [1]- [3]. Management
of these current assets and current liabilities is important in
creating value for shareholders [3], [4]. If a firm can
minimize its investment tied up in current assets, the resulting
funds can be invested in value-creating projects, thereby
increasing the firms growth opportunities and shareholders
return [2], [3], [5]. However, management can also confront
liquidity problems due to underinvestment in working capital
[3]. As pointed out by Filbeck and Krueger (2005) [6], the
ability of financial managers to effectively manage
receivables, inventories, and payables has a significant
impact on the success of the business [3]. If capital invested
in cash, trade receivables, or inventories is not sufficient, the
firm may have difficulty in carrying out its daily business
operations [2], [3]. This may result in declining sales and, in
the end, a reduction in profitability [2], [7]. Smith (1980) [8]
emphasized the trade-off between liquidity and profitability
when he argued that working capital management can play an
essential role not only in a firms profitability and risk, but
also in its value. Decisions regarding an increase in
profitability are likely to involve increased risk, and
risk-reducing decisions are likely to result in a reduction in
profitability [9]. An accepted measure of working capital
management is the cash conversion cycle [9], [10], [12]
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International Journal of Trade, Economics and Finance, Vol. 3, No. 3, June 2012
INDUSTRY
FIRMS
Industrials
Consumer products
Technology
Agro & Food
Resources
Construction & Building
Materials
Service
67
21
26
34
15
44
48
International Journal of Trade, Economics and Finance, Vol. 3, No. 3, June 2012
Median
Mean
Standard
Deviation
Min
1.36
5.94
10.87
.00
7.93
DEBT
GROSS
2,777.5
1
43.65
17.61
INV
11.31
91.35
3.70
42.58
20.75
11,2282.
17
23.14
17.46
43.0
124.31
305.10
.00
ARR
PAY
52.0
37.12
61.18
52.15
59.34
54.01
.00
.00
CCC
59.03
133.73
307.21
-412
SALES
17,889.57
40.53
.30
-17.9
Max
83.41
2,534.
23
200,08
15.8
157.94
200.69
3,413.
14
631.00
502
3751.7
7
B. Correlation Analysis
Table IV presents Pearson correlations for the variables
included in the regression model. The gross operating profit
is negatively correlated with the variables of inventory
conversion period, receivables collection period, payables
deferral period, and cash conversion cycle. This reveals that
selling products quicker, collecting money from customers
faster, and paying suppliers sooner are all related to an
increase in the firms profitability. These results are
consistent with the notion that the shorter the period between
production and sale of products, the larger the firms
profitability. Meanwhile the negative relationship between
229
DEBT
LN
SALES
GROSS
INV
ARR
DEBT
-.14
.00***
LN
SALES
.021
.565
-.06
.09
GROSS
.10
.00***
-.13
.00***
.376
.00***
INV
-.09
.01**
.05
.13
-.02
.68
-.15
.000**
ARR
.02
.63
-.01
.88
-.02
.63
-.18
.00***
.05
.14
PAY
.03
.47
.32
.00***
.002
.96
-.09
.01**
.22
.00**
.22
.00***
CCC
-.10
.00***
-.002
.96
-.02
.61
-.17
.00***
.97
.00***
.21
.00***
PAY
.376
.00***
.10
.01**
C. Regression Analysis
To shed more light on the relationship of working capital
management and a firms profitability, regression analysis
was employed. The independent variables were fixed
financial assets, the natural logarithm of sales, debt ratio, and
cash conversion cycle. Industry dummy variables were also
included. However, to achieve the minimum degree of
freedom necessary, this research used industry categories
instead of sectors, which resulted in seven industries:
industrials, consumer products, technology, agriculture and
food, resources, property and construction materials, and
services. A dummy variable was assigned a value of 1 for
each of the following industries: industrials, consumer
products, technology, agriculture and food, resources, and
property and construction materials. Service industry was
used as the comparison industry and assigned a value equal to
0. These variables were included to control for possible
industry type effects. Dummy 1, Dummy 2, Dummy 3,
Dummy 4, Dummy 5, and Dummy 6 represent industrials,
consumer products, technology, agriculture and food,
resources, and property and construction materials,
respectively.
Table IV presents the results of regression 1. This model is
acceptable from a statistical perspective (p-value=.000). The
plot of the regression function of this model (Figure 1) also
shows that the multiple regression analysis is valid. This
regression equation demonstrates that a negative relationship
exists between the cash conversion cycle and profitability,
which confirms the notion that a decrease in the cash
conversion cycle will produce more profits for a firm. The
coefficient of the cash conversion cycle variable is negative
and highly significant; this implies that an increase in the
cash conversion cycle of one day is associated with a decline
in gross operating profit of .006. Moreover, the regression
shows that the larger the firm (measured through the natural
International Journal of Trade, Economics and Finance, Vol. 3, No. 3, June 2012
Regression (2)
GROSS = 27.865 +.047 FIXED FA -.044 DEBT -.004 INV
+.074 LNSALES -12.697 DUM 1-1.184 DUM 24.298
DUM 3 + 3.366 DUM 4 10.929 DUM 5 10.612 DUM 6
Analysis of Variance
Sources
DF SS
MS
F P
Regression 10 69,462.2 6,946.2 32.0 .00
Residual Error 754 173,352.4
217.6
Total
764 232,814.6
Durbin-Watson Statistic = 1.80
R Square = 29.8 % Adjusted R Square = 28.9 %
Std. Error of the Estimate = 14.72
Analysis of Variance
Sources
DF SS MS
F P
Regression 10 68,500.2 6,850.0 31.4 .00
Residual Error 754 174,314.4 217.9
Total
764 232,814.6
Durbin-Watson Statistic = 1.805
R Square = 29.4 % Adjusted R Square = 28.5 %
Std. Error of the Estimate = 14.76
International Journal of Trade, Economics and Finance, Vol. 3, No. 3, June 2012
Regression (3)
Regression (4)
Analysis of Variance
Sources
DF SS
MS
F P
Regression 10 73,249.9 7,325.0 34.6 .000
Residual Error 754 159,564.7
211.6
Total
764 232,814.6
Durbin-Watson Statistic = 1.775
R Square = 31.5 % Adjusted R Square = 30.6 %
Std. Error of the Estimate = 14.54
Analysis of Variance
Sources
DF SS
MS
F P
Regression 10 67,613.8 6,761.4 30.9 .000
Residual Error 754 175,200.8
210.1
Total
764 232,814.6
Durbin-Watson Statistic = 1.80
R Square = 29.0 % Adjusted R Square = 28.1 %
Std. Error of the Estimate = 14.80
V. DISCUSSION
The results of this research are similar to those found in
previous studies (Shin and Soenen, 1998 [4]; Deloof, 2003
[7]; Wang, 2002 [16]) and the analysis performed
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International Journal of Trade, Economics and Finance, Vol. 3, No. 3, June 2012
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
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