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This study examines the impact of firm-specific and macroeconomic factors on the working capital behavior of firms listed in the Middle East and North African (MENA) region.

This study is based on a panel data analysis of 687 firms listed on 11 MENA markets, carried out using the Generalized Method of Moments (GMM) approach.

The results of this study reveal that profitable firms with high levels of operating cash flows adopt a conservative working capital management. Young firms with rapid growth rates, highly leveraged firms and firms with large investments in fixed assets have higher liquidity needs, which explains their tendency to pursue aggressive working capital strategies. Similarly, large firms exercise their bargaining power over their clients and suppliers to implement an aggressive approach of working capital management. Finally, firms do not have the luxury to decide how working capital should be managed when they are subject to outside macroeconomic forces that affect their stakeholders as well.

The findings of this study can help managers adopt efficient practices and identify optimal working capital levels. Firms in the MENA region maintain excess reserves of cash, which causes under-investment and inefficient allocation of resources in the economy. Improving working capital management practices can allow firms to regain operational efficiency, enhance financial performance and support economic growth.

To the best of the authors' knowledge, this study investigates this topic in MENA emerging markets and contributes to enriching the existing corporate finance literature in emerging markets.

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.

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.

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.

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.

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