The influence of capital expenditures on working capital management in the corporate sector of an emerging economy: the role of financing constraints

• Published in: Economic research - Ekonomska istraživanja 2018-01, Vol.31 (1), p.946-966
• Main Authors: Mielcarz, Paweł, Osiichuk, Dmytro, Behr, Adam
• Format: Article
• Language: English
• Subjects: Business cycles; Capital expenditure; Capital expenditures; Capital investments; Capital markets; Cash flow; Economic models; Economic theory; Emerging markets; Expenditures; Finance; Financing; investment smoothing; Panel data; Recurrence; Working capital; working capital management
• ISSN: 1331-677X; 1848-9664
• DOI: 10.1080/1331677X.2018.1436450

Relying on firm-level panel data from an emerging economy, this study explores the impact of fixed capital expenditure on working capital management practices. When facing insufficient internally generated cash flows and external funds for accommodating capital investments, companies are found to finance capital expenditure by primarily depleting cash reserves and increasing trade payables. Corroborating the postulates of the financing constraints theory, working capital investments are found to be inversely related to the degree of financing constraints, and positively sensitive to operating cash flow fluctuations and availability of external finance. For financially constrained companies, capital expenditures are found to more likely exercise a negative impact on working capital investments. Contributing to the discussion on the nature of business cycles, we document that the negative cash flow shocks are likely to be transmitted to firms' counterparties through the trade credit channel rather than through the reduction of investment demand. The empirical findings also suggest that financial managers fail to properly account for capital expenditures in short-term liquidity planning, which, under conditions of limited access to imperfect capital markets, may induce the recurrence of costly working capital adjustments.