Working capital management, corporate performance, and financial constraints

Resumen

This paper examines linkage between working capital management and corporate performance for a sample of non-financial UK companies. Since a higher investment in working capital can increase firms� sales, a positive relation between working capital and firm value would be expected. However, as working capital increases, a firm�s value is also likely to decrease, due to the low return of current assets and the additional financing expenses borne by the firm. Consequently, a negative relation between working capital and firm value might be expected at high levels of working capital. Our findings provide strong support for an inverted U-shaped relation between investment in working capital and firm performance. Additionally, we also analyze whether the optimal working capital level is sensitive to financial constraints. Our findings show that this optimum is lower for firms more likely to be financially constrained.