How does working capital management affect firms´ profitability? : evidence from Portugal
Year: 2013
Type: dissertation
Abstract: The purpose of this study is to analyze the relationship between working capital management (WCM) and firm’s profitability for Portugal. We use a database, combining firm-level financial data with a matched employer-employee data, for the period from 2004 to 2009, obtaining a sample of 106,961 observations corresponding to 41,536 firms. Like previous studies, we examine the existence of a non-linear relationship between WCM and firm’s profitability. Unlike them, we evaluate how the non-linear relationship is affected by CEO’s demographic and educational characteristics and firm’s characteristics such as age, size, industry sector and location. The relationship between WCM and profitability is analyzed using panel data methodology, applying Fixed Effects model with robust standard errors. Our results show that there is a concave relationship between WCM and profitability, indicating that firms have an optimal working capital level where firms should stand to maximize profitability. For CEO’s characteristics these are positively related with profitability, showing that male, Portuguese, older and with higher educational level CEOs have more profitable firms. The age, size, industry and location of firms affect the optimal WCM level that maximizes profitability. For firms, with the WCM level below the optimal point, in order to increase profitability, should increase the investment in WCM, once there is a positive relation between the two variables for low levels of working capital.
Author: Gomes, Diogo Filipe Nascimento
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W10813268