Working Capital Management and Firm Performance: Evidence from China

We explore the relationship between working capital (WC) management and firm performance using accounting and market performance measures. WC management plays an important role in the daily financial management of firms. Due to the benefits and defects of investment in WC management, some researchers explain that there is an optimal level of WC to maximize firm performance. However, more empirical evidence proved that less investment in WC is more profitable for companies. As different financial environments may be an essential reason for the mixed results, we examine the relationship between WC management and firm performance to confirm and complement the prior studies based on the Chinese context, which has a unique financial environment from other countries. This study employs 4,094 firm-year observations of manufacturing firms listed in mainland China and conducted regression analysis. The results suggest that firms with shorter cash conversion cycle (CCC) are more likely to have better performance, indicating that managers can decrease the period of CCC to achieve better firm performance. The results remain unchanged after several sensitivity tests. This study implies that managers may seek an approach to maximize firm profitability and firm value by handling effective WC management. This study contributes to a more comprehensive understanding of the relation between WC management and performance using Chinese firm data.Key words: Cash conversion cycle, Firm performance, Working capital management