Working capital management and firm performance nexus in emerging markets: do financial constraints matter?

Abstract

Purpose

This study aims to examine the impact of working capital management (WCM) on firm performance. The authors pursue innovation by exploring how the level of financial constraints shapes the impact of WCM on corporate performance.

Design/methodology/approach

In this study, the generalized method of moments (GMM) is used to analyze a sample of 753 firms listed on ten Middle East and North Africa (MENA) emerging markets.

Findings

The authors' empirical analysis demonstrates that financially constrained firms are coerced to adopt an aggressive WCM approach to reduce investment in working capital, minimize financing costs and improve financial performance despite the risks associated with this strategy. Contrarily, financially unconstrained firms, uphold a high level of investments in working capital to grow sales and improve financial performance. The authors' results strongly reject the “one size fits all” approach of WCM. The authors assert that the degree of financial constraints largely defines the firm's optimal WCM approach.

Practical implications

The authors' study reveals to financial managers the importance of adopting an appropriate WCM strategy that fits firm-specific characteristics and financial flexibility. The authors' results urge policy makers to ease access to financing to all firms to enhance both their financial flexibility and ability to respond efficiently to emerging investment opportunities as well as develop resilience to economic slumps.

Originality/value

To the best knowledge of the authors, this is the first study that explores WCM and financial constraints in MENA emerging markets.

Citation

Jabbouri, I., Satt, H., El Azzouzi, O. and Naili, M. (2022), "Working capital management and firm performance nexus in emerging markets: do financial constraints matter?", Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JEAS-01-2022-0010