Working capital management and firms’ profitability: evidence from emerging Asian countries

Abstract

Purpose

Excessive working capital or paucity of the same can impair the profits and health of an organization. The purpose of this paper is to analyze the impact of working capital management (WCM) on the profitability of firms for a sample comprising of non-financial companies in countries of South East Asia, South Asia and East Asia.

Design/methodology/approach

Analytical modeling has been used to estimate the impact of WCM on profitability with the help of financial data of the companies listed in major indices of the target countries (India, Pakistan, Myanmar, Sri Lanka, Bangladesh, Singapore, Thailand, Malaysia, Indonesia, Vietnam, Hong Kong, Japan, China, South Korea and Taiwan). The mathematical model presented in the paper has been tested using two-step-generalized method of moments.

Findings

The study reveals a non-linear relationship between profitability of a firm and WCM for 11 economies of the Asia Pacific region.

Research limitations/implications

The results are subject to the differences in the market dynamics of different economies (countries). Moreover, the limitations of the specific statistical method used to verify the model apply to the model too.

Practical implications

The research can be used as a tool by the firms (global as well as local) to ameliorate their performance by understanding the effects of WCM on profitability in different global markets and adjusting their working capital accordingly.

Originality/value

The research on the impact of WCM on profitability of the firms of South East Asia, South Asia and East Asia is a new effort and tries to make the importance of WCM more luciferous.

Citation

Singhania, M. and Mehta, P. (2017), "Working capital management and firms’ profitability: evidence from emerging Asian countries", South Asian Journal of Business Studies, Vol. 6 No. 1, pp. 80-97. https://doi.org/10.1108/SAJBS-09-2015-0060