Exploring the relationship between short-term borrowings and profitability in China: the moderating role of cash conversion cycle
Abstract
This study focuses on the moderating role of the cash conversion cycle (CCC) and its components while investigating the relationship between short-term borrowings and profitability in Chinese firms. The generalized method of moments (GMM) approach is employed on the panel data over the period 2000 to 2017. The findings reveal a significant moderating role of CCC and its components in the short-term borrowings and profitability relationship. Specifically, the firms following a conservative strategy in CCC and its components, adopt the same strategy in the external financing which lies in the long-term borrowings. Consequently, such firms require less short-term borrowings compared to the full sample. However, the firms following an aggressive strategy in the CCC and its components, do not follow the aggressive strategy in external financing that lies in the short-term borrowings. Instead, these firms adopt the conservative strategy for profit maximization and require less amount of short-term borrowings compared to the full sample. Finally, several policy options are proposed to achieve the optimum relation between short-term borrowings and profitability.
Keyword : short-term borrowings, break-even point, profitability, cash conversion cycle, account payable days, account receivable days, inventory days, generalized method of moments
How to Cite
Mahmood, F., Dongping, H., Ahmed, Z., Shahzad, U., Ali, N. ., Bodian, W., & Shahbaz, M. (2021). Exploring the relationship between short-term borrowings and profitability in China: the moderating role of cash conversion cycle. Journal of Business Economics and Management, 22(3), 675-694. https://doi.org/10.3846/jbem.2021.13723
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Tahir, M., & Anuar, M. B. A. (2016). The determinants of working capital management and firms performance of textile sector in pakistan. Quality and Quantity, 50(2), 605–618. https://doi.org/10.1007/s11135-015-0166-4
Tsuruta, D. (2019). Working capital management during the global financial crisis: Evidence from Japan. Japan and the World Economy, 49(January), 206–219. https://doi.org/10.1016/j.japwor.2019.01.002
Altaf, N. (2018). Do financial development and law enforceability effect the relationship between net working capital and firm value? Empirical evidence from Asia. American Journal of Business, 33(3), 120–132. https://doi.org/10.1108/AJB-11-2017-0034
Altaf, N., & Ahmad, F. (2019). Working capital financing, firm performance and financial constraints: Empirical evidence from India. International Journal of Managerial Finance, 15(4), 464–477. https://doi.org/10.1108/IJMF-02-2018-0036
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2010). Working capital management in SMEs. Accounting and Finance, 50(3), 511–527. https://doi.org/10.1111/j.1467-629X.2009.00331.x
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2012). How does working capital management affect the profitability of Spanish SMEs? Small Business Economics, 39(2), 517–529. https://doi.org/10.1007/s11187-011-9317-8
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2013). The speed of adjustment in working capital requirement. European Journal of Finance, 19(10), 978–992. https://doi.org/10.1080/1351847X.2012.691889
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2016). Financing of working capital requirement, financial flexibility and SME performance. Journal of Business Economics and Management, 17(6), 1189–1204. https://doi.org/10.3846/16111699.2015.1081272
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2019). Net operating working capital and firm value: A cross-country analysis. BRQ Business Research Quarterly (In press). https://doi.org/10.1016/j.brq.2019.03.003
Baum, C. F., Schaffer, M. E., & Stillman, S. (2003). Instrumental Variables and GMM: Estimation and Testing. The Stata Journal: Promoting Communications on Statistics and Stata, 3(1), 1–31. https://doi.org/10.1177/1536867X0300300101
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Brandt, L., & Li, H. (2003). Bank discrimination in transition economies: Ideology, information, or incentives? Journal of Comparative Economics, 31(3), 387–413. https://doi.org/10.1016/S0147-5967(03)00080-5
Chauhan, G. S., & Banerjee, P. (2018). Financial constraints and optimal working capital – evidence from an emerging market. International Journal of Managerial Finance, 14(1), 37–53. https://doi.org/10.1108/IJMF-07-2016-0131
Dalci, I., & Ozyapici, H. (2018). Working capital management policy in health care: The effect of leverage. Health Policy, 122(11), 1266–1272. https://doi.org/10.1016/j.healthpol.2018.09.012
Eldomiaty, T., Anwar, M., & Ayman, A. (2018). How can firms monitor the move toward optimal working capital? Journal of Economic and Administrative Sciences, 34(3), 217–236. https://doi.org/10.1108/JEAS-06-2017-0056
Gao, J., & Wang, J. (2017). Is working capital information useful for financial analysts? Evidence from China. Emerging Markets Finance and Trade, 53(5), 1135–1151. https://doi.org/10.1080/1540496X.2016.1278166
Gill, A., Mand, H. S., Obradovich, J. D., & Mathur, N. (2019). The impact of working capital management on the decision of Indian production firms about the amount of dividends. International Journal of Business and Globalisation, 22(3), 372–388. https://doi.org/10.1504/IJBG.2019.099300
Goel, U., & Sharma, A. K. (2015). Analysing efficiency change in working capital management using Malmquist Productivity Index. Journal of Information and Optimization Sciences, 36(6), 595–616. https://doi.org/10.1080/02522667.2015.1047586
Li, F. (2016). Endogeneity in CEO power: A survey and experiment. Investment Analysts Journal, 45(3), 149–162. https://doi.org/10.1080/10293523.2016.1151985
Lyngstadaas, H., & Berg, T. (2016). Working capital management: Evidence from Norway. International Journal of Managerial Finance, 12(3), 295–313. https://doi.org/10.1108/IJMF-01-2016-0012
Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders’ wealth. Review of Finance, 17(5), 1827–1852. https://doi.org/10.1093/rof/rfs043
Laghari, F., & Chengang, Y. (2019). Investment in working capital and financial constraints: Empirical evidence on corporate performance. International Journal of Managerial Finance, 15(2), 164–190. https://doi.org/10.1108/IJMF-10-2017-0236
Mahmood, F., Dongping, H., Abbas, A., Ibrar, M., & Ali, N. (2018). Effects of working capital management on firms’ performance: Empirical study in Pakistan. In Proceedings of the 32nd International Business Information Management Association Conference, IBIMA 2018 – Vision 2020: Sustainable Economic Development and Application of Innovation Management from Regional Expansion to Global Growth (pp. 1098–1107). https://doi.org/10.6007/IJARBSS/v4-i6/931
Mahmood, F., Han, D., Ali, N., Mubeen, R., & Shahzad, U. (2019). Moderating effects of firm size and leverage on the working capital finance-profitability relationship: Evidence from China. Sustainability, 11(7), 19–22. https://doi.org/10.3390/su11072029
Masri, H., & Abdulla, Y. (2018). A multiple objective stochastic programming model for working capital management. Technological Forecasting and Social Change, 131(January), 141–146. https://doi.org/10.1016/j.techfore.2017.05.006
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and theory of investment. The American Economic Review, 48(3), 261–267.
Moussa, A. A. (2018). The impact of working capital management on firms’ performance and value: Evidence from Egypt. Journal of Asset Management, 19(4), 259–273. https://doi.org/10.1057/s41260-018-0081-z
Panda, A. K. K., & Nanda, S. (2018). Working capital financing and corporate profitability of Indian manufacturing firms. Management Decision, 56(2), 441–457. https://doi.org/10.1108/MD-07-2017-0698
Shahzad, U., Fukai, L., Mahmood, F., Jing, L., & Ahmad, Z. (2020). Reliable and Advanced predictors for corporate financial choices in Pakistan. The Journal of Asian Finance, Economics and Business, 7(7), 73–84. https://doi.org/10.13106/jafeb.2020.vol7.no7.073
Smith, K. (1980). Profitability versus liquidity tradeoffs in working capital management. In Readings on the management of working capital (pp. 549–562).
Tahir, M., & Anuar, M. B. A. (2016). The determinants of working capital management and firms performance of textile sector in pakistan. Quality and Quantity, 50(2), 605–618. https://doi.org/10.1007/s11135-015-0166-4
Tsuruta, D. (2019). Working capital management during the global financial crisis: Evidence from Japan. Japan and the World Economy, 49(January), 206–219. https://doi.org/10.1016/j.japwor.2019.01.002