Working capital and performance: Europe’s challenge to crises
Abstract
This paper explores the relationship between working capital management (WCM) strategies and business performance during the COVID-19 crisis. Data from 1,067 non-financial European firms from 33 countries distributed across 6 economic sectors in the period from 2015 to 2021, feed Ordinary Least Squares model (OLS), robust and quantile pooled regression. COVID-19 crisis seems to have negatively influenced only median-low-range performance firms in Europe, showing that crisis coming from productive capacity hibernation do not impact nor impose tough slow recovery, transversal to all firms, as occurred on other financial crises. As for WCM, only median-top-range performance firms had significant statistical evidence for negative impact, that become positive for median-range performance firms during COVID-19. For Eurozone firms, there was an additional positive influence of the WCM on performance during COVID-19. Median-range performance firms seems to benefit from conservative WCM strategies mitigating firms’ performance negative effect raised by COVID-19 crisis. Relation between COVID-19 and WCM seems to be sensitive to different levels of firms’ performance and to different business’ economic sector. Contrary to knowledge on WCM, performance and financial crises in Europe, for COVID-19 alike crises, performance benefits from higher cash conversion cycles and thus encourage conservative WCM strategies. Liquidity should not be pushed by adopting aggressive WCM strategies.
Keyword : working capital, performance, WCM strategies, Europe, EuroZone, COVID-19
How to Cite
Zanolla, E., Pimentel, P., & Couto, G. (2024). Working capital and performance: Europe’s challenge to crises. Journal of Business Economics and Management, 25(4), 789–808. https://doi.org/10.3846/jbem.2024.21685
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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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
Bhattacharyya, A., Rahman, M. L., & Wright, S. (2023). Improving small and medium‐size enterprise performance: Does working capital management enhance the effectiveness of financial inclusion? Accounting and Finance. https://doi.org/10.1111/acfi.13081
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Campello, M., Graham, J. R., & Harvey, C. R. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), 470–487. https://doi.org/10.1016/j.jfineco.2010.02.009
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Czerwinska-Kayzer, D., Florek, J., Staniszewski, R., & Kayzer, D. (2021). Application of canonical variate analysis to compare different groups of food industry companies in terms of financial liquidity and profitability. Energies, 14(15), Article 4701. https://doi.org/10.3390/en14154701
DeAngelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3–29. https://doi.org/10.1016/0304-405X(80)90019-7
Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3–4), 573–588. https://doi.org/10.1111/1468-5957.00008
Ding, S., Guariglia, A. G., & Knight, J. K. (2013). Investment and financing constraints in China: Does working capital management make a difference? Journal of Banking & Finance, 37(5), 1490–1507. https://doi.org/10.1016/j.jbankfin.2012.03.025
Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance, 32, 36–49. https://doi.org/10.1016/j.ribaf.2014.03.005
Farhan, N. H. S., Almaqtari, F. A., Al-Matari, E. M., Senan, N. A. M., Alahdal, W. M., & Hazaea, S. A. (2021). Working capital management policies in Indian listed firms: A state-wise analysis. Sustainability, 13(8), Article 4516. https://doi.org/10.3390/su13084516
Fávero, L. P., Belfiore, P., Takamatsu, R. T., & Suzart, J. (2014). Métodos quantitativos com Stata®. Elsevier Brasil.
García-Teruel, P. J., & Martínez-Solano, P (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 164–177. https://doi.org/10.1108/17439130710738718
García-Teruel, P. J., & Martínez-Solano, P. (2008). On the determinants of SME cash holdings: Evidence from Spain. Journal of Business Finance and Accounting, 35(1–2), 127–149. https://doi.org/10.1111/j.1468-5957.2007.02022.x
Greene, W. H. (2008). Econometric analysis (6 ed.). Pearson Prentice Hall.
Jaworski, J., & Czerwonka, L. (2022). Which determinants matter for working capital management in energy industry? The case of European Union economy. Energies, 15, Article 3030. https://doi.org/10.3390/en15093030
Jensen, M. C., & Meckling, W. (1976). The theory of the firm: Managing behavior, agency costs and capital structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kayakus, M., Tutcu, B., Terzioglu, M., Talas, H., & Ünal Uyar, G. F. (2023). ROA and ROE forecasting in iron and steel industry using machine learning techniques for sustainable profitability. Sustainability, 15(9), Article 7389. https://doi.org/10.3390/su15097389
Keynes, J. M. (1985). A teoria geral do emprego, do juro e da moeda: Inflação e deflação (2 ed.). Cultural.
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
Lefebvre, V. (2020). Performance, working capital management, and the liability of smallness: A question of opportunity costs? Journal of Small Business Management, 60(3), 704–733. https://doi.org/10.1080/00472778.2020.1735252
Liu, L., Zhou, X., &d Xu, J. (2024). Does working capital management improve financial performance in China’s agri-food sector during COVID-19? A comparison with the 2008 financial crisis. PLoS One, 19(4), Article e0300217. https://doi.org/10.1371/journal.pone.0300217
Moussa, A. A. (2018). Determinants of working capital behavior: Evidence from Egypt. International Journal of Managerial Finance, 15(1), 39–61. https://doi.org/10.1108/IJMF-09-2017-0219
Myers, S. C. (1984). Capital structure puzzle. The Journal of Finance, 39(3), 574–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investidors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Myers, S. C. (2001). Capital structure. Journal of Economic Perspectives, 15(2), 81–102. https://doi.org/10.1257/jep.15.2.81
Nobanee, H., & Abraham, J. (2015). Current assets management of small enterprises. Journal of Economic Studies, 42(4), 549–560. https://doi.org/10.1108/JES-02-2013-0028
Nwude, E. C., Allison, P. U., & Nwude C. A. (2021). The relationship between working capital management and corporate returns of cement industry of emerging Market. International Journal of Finance & Economics, 26(3), 3222–3235. https://doi.org/10.1002/ijfe.1959
Pais, M. A., & Gama, P. M. (2015). Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance, 11(3), 341–358. https://doi.org/10.1108/IJMF-11-2014-0170
Panda, A. 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
Prasad, P., Narayanasamy, S., Paul, S., Chattopadhyay, S., & Saravanan, P. (2019). Review of literature on working capital management and future research agenda. Journal of Economic Surveys, Vol. 33(3), 827–861. https://doi.org/10.1111/joes.12299
Ramiah, V., Zhao, Y., & Moosa, I. (2014). Working capital management during the global financial crisis: The Australian experience. Qualitative Research in Financial Markets, 6(3), 332–351. https://doi.org/10.1108/QRFM-09-2012-0026
Sawarni, K. S., Narayanasamy, S., & Padhan, P. C. (2023). Impact of earnings management on working capital management efficiency. Finance Research Letters, 54, Article 103778. https://doi.org/10.1016/j.frl.2023.103778
Tarkom, A. (2022). Impact of COVID-19 exposure on working capital management: The moderating effect of investment opportunities and government incentives. Finance Research Letters, 47, Article 102666. https://doi.org/10.1016/j.frl.2021.102666
Tarkom, A., & Ujah, N. U. (2023). Global policy uncertainty and working capital management: Does national culture matter? Technological Forecasting & Social Change, 196, Article 122869. https://doi.org/10.1016/j.techfore.2023.122869
Vieira, E. S., Neves, M. E., & Dias, A. G. (2019). Determinants of Portuguese firms’ financial performance: Panel data evidence. International Journal of Productivity and Performance Management, 68(7), 1323–1342. https://doi.org/10.1108/IJPPM-06-2018-0210
Wang, Z., Akbar, M., & Akbar, A. (2020). The Interplay between working capital management and a firm’s financial performance across the corporate life cycle. Sustainability, 12(4), Article 1661. https://doi.org/10.3390/su12041661
Zahra, S. A. (2021). International entrepreneurship in the post Covid world. Journal of World Business, 56(1), Article 101143. https://doi.org/10.1016/j.jwb.2020.101143
Zeidan, R., & Shapir, O. M. (2017). Cash conversion cycle and value-enhancing operations: Theory and evidence for a free lunch. Journal of Corporate Finance, 45, 203–219. https://doi.org/10.1016/j.jcorpfin.2017.04.014
Ahmad, M., Bashir, R., & Waqas, H. (2022). Working capital management and firm performance: Are their effects same in covid 19 compared to financial crisis 2008? Cogent Economics & Finance, 10(1), Article 2101224. https://doi.org/10.1080/23322039.2022.2101224
Akbar, M., Akbar, A., & Draz, M. U. (2021). Global financial crisis, working capital management, and firm performance: Evidence from an Islamic market. SAGE Open, 11(2). https://doi.org/10.1177/21582440211015705
Aktas, N. A., Croci, E., & Petmezas, D. (2015). Is working capital management value-enhancing? Evidence from firm performance and investments. Journal of Corporate Finance, 30, 98–113. https://doi.org/10.1016/j.jcorpfin.2014.12.008
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
Amponsah-Kwatiah, K., & Asiamah, M. (2020). Working capital management and profitability of listed manufacturing firms in Ghana. International Journal of Productivity and Performance Management, 70(7), 1751–1771. https://doi.org/10.1108/IJPPM-02-2020-0043
Ashraf, B. N. (2020). Economic impact of government actions to control COVID-19 pandemic: Evidence from financial markets. SSRN. https://doi.org/10.2139/ssrn.3628693
Backes, D. A. P., Arias, M. I. A., Storopoli, J. E., & Ramos, H. R. (2020). Os efeitos da pandemia de Covid-19 sobre as organizações: um olhar para o futuro. Iberoamerican Journal of Strategic Management (IJSM), 19(4), 1–10. https://doi.org/10.5585/riae.v19i4.18987
Banerjee, P., & Deb, S. G. (2023). Capital investment, working capital management, and firm performance: Role of managerial ability in US logistics industry. Transportation Research Part E, 176, Article 103224. https://doi.org/10.1016/j.tre.2023.103224
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. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332–338. https://doi.org/10.1016/j.jbusres.2013.01.016
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
Bhattacharyya, A., Rahman, M. L., & Wright, S. (2023). Improving small and medium‐size enterprise performance: Does working capital management enhance the effectiveness of financial inclusion? Accounting and Finance. https://doi.org/10.1111/acfi.13081
Berg, H. L. 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
Campello, M., Graham, J. R., & Harvey, C. R. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), 470–487. https://doi.org/10.1016/j.jfineco.2010.02.009
Chang, C. C. (2018). Cash conversion cycle and corporate performance: global evidence. International Review of Economics and Finance, 56, 568–581. https://doi.org/10.1016/j.iref.2017.12.014
Czerwinska-Kayzer, D., Florek, J., Staniszewski, R., & Kayzer, D. (2021). Application of canonical variate analysis to compare different groups of food industry companies in terms of financial liquidity and profitability. Energies, 14(15), Article 4701. https://doi.org/10.3390/en14154701
DeAngelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3–29. https://doi.org/10.1016/0304-405X(80)90019-7
Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3–4), 573–588. https://doi.org/10.1111/1468-5957.00008
Ding, S., Guariglia, A. G., & Knight, J. K. (2013). Investment and financing constraints in China: Does working capital management make a difference? Journal of Banking & Finance, 37(5), 1490–1507. https://doi.org/10.1016/j.jbankfin.2012.03.025
Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance, 32, 36–49. https://doi.org/10.1016/j.ribaf.2014.03.005
Farhan, N. H. S., Almaqtari, F. A., Al-Matari, E. M., Senan, N. A. M., Alahdal, W. M., & Hazaea, S. A. (2021). Working capital management policies in Indian listed firms: A state-wise analysis. Sustainability, 13(8), Article 4516. https://doi.org/10.3390/su13084516
Fávero, L. P., Belfiore, P., Takamatsu, R. T., & Suzart, J. (2014). Métodos quantitativos com Stata®. Elsevier Brasil.
García-Teruel, P. J., & Martínez-Solano, P (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 164–177. https://doi.org/10.1108/17439130710738718
García-Teruel, P. J., & Martínez-Solano, P. (2008). On the determinants of SME cash holdings: Evidence from Spain. Journal of Business Finance and Accounting, 35(1–2), 127–149. https://doi.org/10.1111/j.1468-5957.2007.02022.x
Greene, W. H. (2008). Econometric analysis (6 ed.). Pearson Prentice Hall.
Jaworski, J., & Czerwonka, L. (2022). Which determinants matter for working capital management in energy industry? The case of European Union economy. Energies, 15, Article 3030. https://doi.org/10.3390/en15093030
Jensen, M. C., & Meckling, W. (1976). The theory of the firm: Managing behavior, agency costs and capital structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kayakus, M., Tutcu, B., Terzioglu, M., Talas, H., & Ünal Uyar, G. F. (2023). ROA and ROE forecasting in iron and steel industry using machine learning techniques for sustainable profitability. Sustainability, 15(9), Article 7389. https://doi.org/10.3390/su15097389
Keynes, J. M. (1985). A teoria geral do emprego, do juro e da moeda: Inflação e deflação (2 ed.). Cultural.
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
Lefebvre, V. (2020). Performance, working capital management, and the liability of smallness: A question of opportunity costs? Journal of Small Business Management, 60(3), 704–733. https://doi.org/10.1080/00472778.2020.1735252
Liu, L., Zhou, X., &d Xu, J. (2024). Does working capital management improve financial performance in China’s agri-food sector during COVID-19? A comparison with the 2008 financial crisis. PLoS One, 19(4), Article e0300217. https://doi.org/10.1371/journal.pone.0300217
Moussa, A. A. (2018). Determinants of working capital behavior: Evidence from Egypt. International Journal of Managerial Finance, 15(1), 39–61. https://doi.org/10.1108/IJMF-09-2017-0219
Myers, S. C. (1984). Capital structure puzzle. The Journal of Finance, 39(3), 574–592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investidors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Myers, S. C. (2001). Capital structure. Journal of Economic Perspectives, 15(2), 81–102. https://doi.org/10.1257/jep.15.2.81
Nobanee, H., & Abraham, J. (2015). Current assets management of small enterprises. Journal of Economic Studies, 42(4), 549–560. https://doi.org/10.1108/JES-02-2013-0028
Nwude, E. C., Allison, P. U., & Nwude C. A. (2021). The relationship between working capital management and corporate returns of cement industry of emerging Market. International Journal of Finance & Economics, 26(3), 3222–3235. https://doi.org/10.1002/ijfe.1959
Pais, M. A., & Gama, P. M. (2015). Working capital management and SMEs profitability: Portuguese evidence. International Journal of Managerial Finance, 11(3), 341–358. https://doi.org/10.1108/IJMF-11-2014-0170
Panda, A. 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
Prasad, P., Narayanasamy, S., Paul, S., Chattopadhyay, S., & Saravanan, P. (2019). Review of literature on working capital management and future research agenda. Journal of Economic Surveys, Vol. 33(3), 827–861. https://doi.org/10.1111/joes.12299
Ramiah, V., Zhao, Y., & Moosa, I. (2014). Working capital management during the global financial crisis: The Australian experience. Qualitative Research in Financial Markets, 6(3), 332–351. https://doi.org/10.1108/QRFM-09-2012-0026
Sawarni, K. S., Narayanasamy, S., & Padhan, P. C. (2023). Impact of earnings management on working capital management efficiency. Finance Research Letters, 54, Article 103778. https://doi.org/10.1016/j.frl.2023.103778
Tarkom, A. (2022). Impact of COVID-19 exposure on working capital management: The moderating effect of investment opportunities and government incentives. Finance Research Letters, 47, Article 102666. https://doi.org/10.1016/j.frl.2021.102666
Tarkom, A., & Ujah, N. U. (2023). Global policy uncertainty and working capital management: Does national culture matter? Technological Forecasting & Social Change, 196, Article 122869. https://doi.org/10.1016/j.techfore.2023.122869
Vieira, E. S., Neves, M. E., & Dias, A. G. (2019). Determinants of Portuguese firms’ financial performance: Panel data evidence. International Journal of Productivity and Performance Management, 68(7), 1323–1342. https://doi.org/10.1108/IJPPM-06-2018-0210
Wang, Z., Akbar, M., & Akbar, A. (2020). The Interplay between working capital management and a firm’s financial performance across the corporate life cycle. Sustainability, 12(4), Article 1661. https://doi.org/10.3390/su12041661
Zahra, S. A. (2021). International entrepreneurship in the post Covid world. Journal of World Business, 56(1), Article 101143. https://doi.org/10.1016/j.jwb.2020.101143
Zeidan, R., & Shapir, O. M. (2017). Cash conversion cycle and value-enhancing operations: Theory and evidence for a free lunch. Journal of Corporate Finance, 45, 203–219. https://doi.org/10.1016/j.jcorpfin.2017.04.014