ISSN: 2225-8329
Open access
The concept of financial constraint have a great influence on company decision and capital market entrance as shareholders and directors recognised its negative implication on firm performance. This paper is the first to conceptualize the theoretical influence of financial constraints (FC) on working capital investment (WCI) and corporate performance through firm internal resources and managerial competency by employing a qualitative approach from a theoretical disposition which has been meagerly demonstrated in the literature. Specifically, bearing in mind the rising unpredictability and issues in the credit and capital markets that has been noticed for numbers of years and the similar intensification in regulatory capital about acquiring external financing, the attention of the firm’s gradually shifted to its internal liquidity generated from enterprise operation on the basis of working capital (WC). This study argues that business internal resources through managerial skill and internal capital can to enhance WCI in a financially constrained situation thereby reduces the agency cost and asymmetric information and increases performance. Hence, we conclude that internal funds is suitable to finance WCI in a constrained situation for managers to avoid overinvest or underinvest in working capital asset by controlling for financial constraints. Further review are expected to determine WCI-performance relationship using some vital accounting ratios largely generated from annual reports and accounts.
Afrifa, G. A., & Padachi, K. (2016). Working capital level influence on SME profitability. Journal of Small Business and Enterprise Development, 23(1), 44-63.
Afza, T., & Nazir, M. S. (2008). Working capital management policies of firms: empirical evidence from Pakistan. Pakistan Journal of Commerce and Social Sciences, 1(1), 25-35.
Akbar, A., Minhas, A., Marina, N., Petra, P., & Samrat, R. (2021). Does working capital management influence operating and market risk of firms? Risks 9(1),201. https:// doi.org/10.3390/risks9110201
Alvarez, S. A., & Busenitzs, L. W. (2001). Resource-Based theory. Journal of Management, 2(6), 755-775.
Anton, S., & Nucu, A. (2020). The impact of working capital management on firm profitability: Empirical evidence from the polish listed firms. Journal of Risk and Financial Management, 14(1), 9. https://doi.org/10.3390/jrfm14010009.
Arnold, G. (2008). Corporate Financial Management (4th Ed.). Essex: Prentice Hall.
Banos-Caballero, S., Garc?a-Teruel, P. J., & Mart?nez-Solano, P. (2012). How does working capital management affect the profitability of Spanish SMEs? Small Business Economics, 39(2), 517–529. https://doi.org/10.1007/s11187-011-9317-8.
Banos-Caballero, S., Garcia-Teruel, P. J., and Martinez-Solano, P. (2020). Net operating working capital and firm value: A cross-country analysis. BRQ Business Research Quarterly, 23(1), 234–251.
Banos-Caballero, S., Garcia-Truel, P. J., & Martinez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.
Bates, K. A., & Flynn, E. J. (1995). Innovation history and competitive advantage: A resource-based view analysis of manufacturing technology innovations. Academy of Management Proceedings, 1, 235-239.
Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle. Journal of Banking and Finance, 22(6), 613-673.
Bergh, D. D. (2001). Executive retention and acquisition outcomes: A test of opposing views on the influence of organizational tenure. Journal of Management, 27(5), 603-622.
Berle, A. A., & Means, G. C. (1933). The Modern Corporation and Private Property. New York, Macmillan Co.
Blinder, A. S., & Maccini, L. J. (1991). The resurgence of inventory research: what have we learnt? Journal of Economic Survey, 5(2), 291- 328.
Boisjoly, R. P., Conine, T. E., & McDonald, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1–8. https://doi.org/10. 1016/j.jbusres.2019.09.025.
Botoc, C., & Anton, S. G. (2017). Is profitability driven by working capital management? Evidence for high-growth firms from emerging Europe. Journal of Business Economics and Management, 18(1), 1135–55.
Brigham, E. F., & Ehrhardt, M. C. (2005). Financial Management Theory and Practice, Eleventh Edition, South Western Cengage Learning, Ohio.
Carmeli, A., & Tishler, A. (2004). Resources, capabilities, and the performance of industrial firms: A multivariate analysis. Managerial and decision economics, 25(6 & 7), 299-315.
Carpenter, R. E., & Guariglia, A. (2008). Cash flow, investment, and investment opportunities: New tests using UK panel data. Journal of Banking & Finance. 32(9),1894-1906.
Chiou, J., & Chen, L (2006). The determinants of working capital management. Journal of American Academy of Business. 10(1), 149-155.
Cleary, S. (1999). The relationship between firm investment and financial status. The Journal of Finance, 54(2), 673–692. doi:10.1111/0022-1082.00121.
Conner, K. R., & Prahalad, C. K. (1996). A resource-based theory of the firm: Knowledge versus opportunism. Organization Science, 7 (5), 477–501.
Crum, R. L., Klingman, D. D., & Tavis, L. A. (1983). An operational approach to integrated working capital planning. Journal of Economics and Business, 35(3-4), 343–378.
Cumming, G. S., Cumming, D. H. M., & Redman, C. L. (2006). Scale mismatches in social-ecological systems: causes, consequences, and solutions. Ecology and Society, 11(1), 14. Assessed May 10th, 2022 from http://www.ecologyandsociety.org/vol11/iss1/art14/.
Deloof, M., & Jegers, M. (1996). Trade credit, product quoting and intragroup trade: some European evidence. Financial Management, 25(3), 945-968.
Deloof, M. (2003). Does working capital management affect profitability of belgian firms?. Journal of Business Finance and Accounting, 30(3), 573-587.
Dewing, A.S. (1941). The Financial Policy of Corporations. (4th Ed.) New York: The Ronald Press Company.
Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance, 32, 36–49.
https://doi.org/10.1016/j.ribaf.2014.03.005.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law & Economics. 26(2), 301-25.
Fazzari, S. M., Hubbard, R. G., Petersen, B. C., Blinder, A. S., & Poterba, J. M. (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity, (1), 141–206. doi: 10.2307/2534426.
Garcia-Teruel, P. J., & Martinez-Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 164-177.
Gitman, L. A. (2009). Principles of Managerial Finance (12th Ed.), New York, NY: Addison Wesley Inc.
Grant, R. M. (1991). The resource-based theory of competitive advantage: Implications for strategy formulation. California Management Review, 33(3) 114-135.
Hubbard, R. (1998). Capital-market imperfections and investment. Journal of Economic Literature, 36(1), 193–225.
Irene, A. R., & Herick, O. (2018). The effect of working capital management policies on financial performance of commercial and services sector firms listed at the Nairobi Securities Exchange. International Journal of Economics, Commerce and Management, 5(1), 113–42.
Jensen, M., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(1), 305–360.
Kieschnick, R. L., Laplante, M., & Moussawi, R. (2011). Working capital management and shareholder wealth. SSRN Electronic Journal, Assessed 15th June, 2022 from: http://ssrn.com/abstract=1431165. doi:10.2139/ssrn.1431165.
Lamberson, M. (1995). Changes in working capital of small firms in relation to changes in economic activity. American Journal of Business, 10(2), 45-50. https://doi.org/10.1108/19355181199500015.
Lazaridis, L., & Tryfonidis, D. (2006). The relationship between working capital management and profitability of list companies in the Athens stock exchange, Journal of Financial Management and Analysis, 1(19), 26-35.
Le, B. (2019). Working capital management and Firm’s valuation, profitability and risk: Evidence from a developing market. International Journal of Managerial Finance, 15(2), 191–204. https://doi.org/10.1108/IJMF-01-2018-0012.
Mahoney, J. T. (1995). The management of resources and the resource of management, Journal of Business Research, 33(2), 91-101.
Maness, T. S. (1994). The cash-flow timeline and the credit manager. Business Credit, 96(7), 10-12.
Michalski, G. (2016). Risk pressure and inventories levels. Influence of risk sensitivity on working capital levels. Economic Computation and Economic Cybernetics Studies and Research, 1(50) 189–196.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(7), 261–297.
Mun, S, G., & Jang, S, S. (2015). Working capital cash holding and profitability of restaurant firms. International Journal of Hospitality Management, 48, 1-11.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
Nakamura, W. T., & Palombini, N. V. N. (2009). The determinant factors of working capital management in the Brazilian market. Universidade Presbiteriana Mackenzie, São Paulo, Brazil.
Ng, C. K., Smith, J. K., & Smith, R. L. (1999). Evidence on the determinants of credit terms used in interfirm trade, Journal of Finance, 54(1), 1109-1129.
Nwankwo, O., & Osho, G. S. (2010). An empirical analysis of corporate survival and growth: Evidence from efficient working capital management. International Journal of Scholarly Academic Intellectual Diversity, 12(1), 1-13.
Porter, M. E. (1985). The competitive advantage: creating and sustaining superior performance. Free Press, New York.
Ramey, V.A. (1989). Inventories as Factors of Production and Economic Fluctuations. American Economic Review, 79(1), 338-354.
Rey-Ares, L., Fernandez-Lopez, S., & Rodeiro-Pazos, D. (2021). Impact of working capital management on profitability for Spanish fish canning companies. Marine Policy, 130(8), 104583.
Setayesh, M. H. (2009). Determining the optimum capital structure at industrial lever by using data envelopment analysis (DEA) case study: listed companies in Tehran stock. Journal of Financial Accounting Research, 1(1), 52 66.
Smith, K. (1980). Profitability versus Liquidity Tradeoffs in Working Capital Management. In: Readings on the Management of Working Capital, Smith, K.V. (Ed.). St. Paul, MN, West Publishing Firm, USA.
Tsuruta, D. (2019). Working capital management during the global financial crisis: Evidence from Japan. Japan and the World Economy, 49(C), 206–219.
Zariyawati, M. A., Annur, M. N., & Pui-San, N. (2016). Working capital management determinants of small and large firms in Malaysia. International Journal of and Economics and Management, 10(2). 365-377.
In-Text Citation: (Akindele et al., 2022)
To Cite this Article: Akindele, J. A., Marsidi, A., Jakpar, S., Yunusa, L., & Babale, A. (2022). A Theoretical Assessment on the Relationship between Working Capital Investment and Firm's Performance. International Journal of Academic Research in Accounting Finance and Management Sciences. 12(2), 573 – 589.
Copyright: © 2022 The Author(s)
Published by HRMARS (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode