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Working capital management, corporate performance, and financial constraints

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  • Baños-Caballero, Sonia
  • García-Teruel, Pedro J.
  • Martínez-Solano, Pedro

Abstract

This paper examines the linkage between working capital management and corporate performance for a sample of non-financial UK companies. In contrast to previous studies, the findings provide strong support for an inverted U-shaped relation between investment in working capital and firm performance, which implies the existence of an optimal level of investment in working capital that balances costs and benefits and maximizes a firm's value. The results suggest that managers should avoid negative effects on firm performance because of lost sales and lost discounts for early payments or additional financing expenses. The paper also analyzes whether the optimal working capital level is sensitive to alternative measures of financial constraints. The findings show that this optimum is lower for firms more likely to be financially constrained.

Suggested Citation

  • Baños-Caballero, Sonia & García-Teruel, Pedro J. & Martínez-Solano, Pedro, 2014. "Working capital management, corporate performance, and financial constraints," Journal of Business Research, Elsevier, vol. 67(3), pages 332-338.
    • Handle: RePEc:eee:jbrese:v:67:y:2014:i:3:p:332-338
    DOI: 10.1016/j.jbusres.2013.01.016
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