Working capital management and firm performance in China

Purpose The purpose of this paper is to examine the relationship between working capital management (WCM) and firm performance in the context of the Chinese economy. Specifically, it investigates the effects of ownership structures as an internal factor and of institutional environments (IE) as an e...

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Bibliographic Details
Published in:Asian review of accounting 2019-11, Vol.27 (4), p.546-562
Main Authors: Ren, Ting, Liu, Nan, Yang, Hongyan, Xiao, Youzhi, Hu, Yijun
Format: Article
Language:English
Subjects:
Accounts payable
Accounts receivable
Area planning & development
Cash flow
Cost control
Current liabilities
Economic models
Financial performance
Interest costs
Inventory
Investments
Profit margins
Profitability
Profits
Return on assets
Stock exchanges
Variables
Working capital
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Summary:Purpose The purpose of this paper is to examine the relationship between working capital management (WCM) and firm performance in the context of the Chinese economy. Specifically, it investigates the effects of ownership structures as an internal factor and of institutional environments (IE) as an external factor shaping this relationship. Design/methodology/approach The study applies two-way fixed effect regression models to a sample of Chinese listed manufacturing firms for the period of 2010 to 2017. WCM is measured by cash conversion cycles (CCC); profitability is measured by core profit ratios; ownership structures are classified based on state-owned enterprises (SOEs) and non-SOEs; and IEs are measured from dimensions of factor markets (FM) and legal systems (LS). Findings First, the results show a negative relationship between CCC and firm performance. Second, the negative relationship between CCC and profitability is significant for non-SOEs but not for SOEs. Third, both the FM and LS strengthen the negative association between CCC and profitability. Fourth, the moderating effect of FMs and LSs is evident for non-SOEs only. The results hold when using alternative measures of WCM and profitability and while controlling for additional variables. Originality/value The current study shows that while WCM has a significant effect on the profitability of Chinese firms, such an effect greatly depends on the ownership structures and IE involved. The results thus offer important implications in helping the Chinese government create better IEs and in allowing manufacturing firms to improve upon their WCM practices.
ISSN:1321-7348
1758-8863
DOI:10.1108/ARA-04-2018-0099