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Association between the availability of financial resources and working capital management with stock surplus returns in Iran

Mahdi Salehi (Department of Economics and Administrative Sciences, Ferdowsi University of Mashhad, Mashhad, Islamic Republic of Iran)
Nadia Mahdavi (Department of Economics and Administrative Sciences, Imam Reza International University, Mashhad, Islamic Republic of Iran)
Saeed Zarif Agahi Dari (Department of Economics and Administrative Sciences, Kavian Institute of Higher Education, Mashhad, Islamic Republic of Iran)
Hossein Tarighi (Department of Economics and Administrative Sciences, Attar Institute of Higher Education, Mashhad, Islamic Republic of Iran)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 11 December 2018

Issue publication date: 19 March 2019

1133

Abstract

Purpose

The purpose of this paper is to investigate the relationship between access to financial resources, working capital with surplus stock returns and value of the company in Iran.

Design/methodology/approach

The study population consists of 728 observations and 91 firms listed on the Tehran stock exchange during an eight-year period between 2009 and 2016. The statistical model used in this study is a multivariate regression model; further, the statistical technique used to test the hypotheses is panel data.

Findings

The results saw a negative and significant linkage between changes in cash and stock’ excess returns, whereas no meaningful association between changes in working capital and stock surplus returns was seen. In other words, an Iranian rial (Iran’s currency) invested in working capital worth less on average than a rial held in cash. Furthermore, the authors realized that in an inflationary economy, firms mainly pay more dividends so as to illustrate better their financial position and also to attract more investors’ trust. The results also indicated that the final value of working capital in the companies that are faced with financial constraints is more than companies that are not faced with financial constraints. Subsequently, after the elimination of the effects of inflation on stock returns, it was found there is not any significant association between the stock’s real return and firm value.

Practical implications

This is one of the most comprehensive research works in Iran that simultaneously surveys the impacts of access to finance and working capital on firm value. This research warns corporate managers to pay more attention to the importance of keeping cash to finance and manage working capital for profitability and sustainability of their company’s operations. Surely, by understanding the relationship between cash holdings, working capital management and stock surplus return, investors will be able to make appropriate decisions about the optimal choice of funds.

Originality/value

What really will fascinate other scholars about this paper is the time period of the study because there were unprecedented sanctions against Iran market and many manufacturing industries were in financial strain. Without hesitation, the paper will make aware investors and stakeholders of this fact that cash holdings will be a good way in reducing the corporate financial problems in emerging markets, particularly those markets face financial sanctions like Iran.

Keywords

Citation

Salehi, M., Mahdavi, N., Zarif Agahi Dari, S. and Tarighi, H. (2019), "Association between the availability of financial resources and working capital management with stock surplus returns in Iran", International Journal of Emerging Markets, Vol. 14 No. 2, pp. 343-361. https://doi.org/10.1108/IJoEM-11-2017-0439

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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