The purpose of this paper is to provide empirical evidence of whether working capital management (WCM) has an effect on the profitability of small- and medium-sized Norwegian firms.
The data comprise 21,075 Norwegian small- and medium-sized enterprises and 84,300 observations made between 2010 and 2013. Panel data regressions were applied with fixed effects and a two-stage least squares analysis was employed to control for endogeneity.
The results indicate that reducing cash conversion cycle will increase profitability. Even though endogeneity may exist, this does not affect the results from the previous analysis. Similar results are also obtained when industry-specific effects are controlled for, supporting the robustness of the results. The relevance of quadratic dependencies of the profitability on independent variables was also identified and suggests a decreasing trend of return on assets with increasing values of the WCM’s characteristic variables.
Drawing on similar studies, this study confirms that WCM is relevant for firms’ profitability.
The practice of aggressive working capital policy in Norwegian firms is confirmed by the results of this study.
This study contributes to the current research on the relationship between WCM and profitability by using a large dataset to add further robustness to results, and thus verifying whether or not the results in previous studies may be confirmed or not. Moreover, this is the first published study about this relationship among Norwegian firms in different industries, thus filling a gap in similar research conducted in other European countries.
Lyngstadaas, H. and Berg, T. (2016), "Working capital management: evidence from Norway", International Journal of Managerial Finance, Vol. 12 No. 3, pp. 295-313. https://doi.org/10.1108/IJMF-01-2016-0012
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