Working capital financing, firm performance and financial constraints: Empirical evidence from India

Abstract

Purpose

The purpose of this paper is to examine the relationship between working capital financing and firm performance for a sample of 437 non-financial Indian companies. In addition, this study examines the impact of financial constraints on working capital financing–performance relationship.

Design/methodology/approach

The study is based on secondary financial data of 437 non-financial Indian companies obtained from Capitaline database, pertaining to a period of 10 years (2007–2016). This study employs two-step generalized method of moments techniques to arrive at results.

Findings

Results of the study confirm the inverted U-shape relationship between working capital financing and firm performance. In addition, the authors also found that the firms that are likely to be less financially constrained can finance greater proportion of working capital using short-term debt.

Originality/value

This study contributes to the scant existing literature by testing the impact of financial constraints on the relationship between working capital financing and firm performance, representing a typical emerging market in India.

Citation

Altaf, N. and Ahmad, F. (2019), "Working capital financing, firm performance and financial constraints: Empirical evidence from India", International Journal of Managerial Finance, Vol. 15 No. 4, pp. 464-477. https://doi.org/10.1108/IJMF-02-2018-0036