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The impact of working capital management on firm profitability in different business cycles: Evidence from Finland

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  • Enqvist, Julius
  • Graham, Michael
  • Nikkinen, Jussi

Abstract

The recent economic downturn of 2007–2008 has brought renewed focus on working capital policies. In this paper we examine the role of business cycles on the working capital–profitability relationship using a sample of Finnish listed companies over an 18-year period. We find the impact of business cycle on the working capital–profitability relationship is more pronounced in economic downturns relative to economic booms. We further show that the significance of efficient inventory management and accounts receivables conversion periods increase during periods of economic downturns. Our results demonstrate that active working capital management matters and, thus, should be included in firms’ financial planning.

Suggested Citation

  • Enqvist, Julius & Graham, Michael & Nikkinen, Jussi, 2014. "The impact of working capital management on firm profitability in different business cycles: Evidence from Finland," Research in International Business and Finance, Elsevier, vol. 32(C), pages 36-49.
    • Handle: RePEc:eee:riibaf:v:32:y:2014:i:c:p:36-49
    DOI: 10.1016/j.ribaf.2014.03.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Working capital; Business cycles; Profitability;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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