Access to External Financial Resources, Bargaining Power, and Speed of Working Capital Adjustment

Document Type : Research Paper

Authors

1 Associate Professor of Accounting, Bu-Ali Sina University, Hamadan, Iran.

2 M.A in Accounting, Bu-Ali Sina University, Hamadan, Iran.

3 Assistant Professor of Accounting, Takestan Branch, Islamic Azad University, Takestan, Iran.

10.22103/jak.2021.17897.3577

Abstract

Objective: Since Smith (1980) emphasized the importance of working capital management1 due to its impact on the firm's profitability and risk, the theoretical and empirical literature has focused on working capital management. In this regard, some studies have focused more on how investment in working capital affects business unit performance and a few studies have focused on the determinants of this investment. However, some studies have ignored the risk of a decrease in sales and disruption in the production process due to a decrease in the amount of investment in working capital. Furthermore, some researches have not considered the increase in the risk of bankruptcy that may be caused by the increase in the amount of investment in working capital. Therefore, investing more or less than the optimal amount in working capital may have a negative impact on the firm's performance. Based on the trade-off theory, firms may have an optimal (or target) level of working capital whose benefits and risks are balanced. However, firms adjust the amount of working capital only when the benefits of doing so exceed the costs of adjustment. Various factors such as financial costs, company size, growth opportunities, financial crises, company profitability, economic growth, etc. affect working capital adjustment costs; but the two variables of access to external financial resources and the bargaining power of the business unit have received less attention. Although the existence of the target working capital level and the factors affecting the speed of its achievement in foreign researches, but in domestic research, only Dadashzadeh and Hejazi (2019) paid attention to some aspects of this issue. Therefore, due to the importance of the topic, in this research, the speed of adjustment of working capital has been discussed and the effect of access to external financial resources and the bargaining power of the business unit on the speed of adjustment has been the focus of attention.
Methods: The research sample includes 137 firms (2,466 firm-year observations) listed on the Tehran Stock Exchange during the period 2003-2020, which are set in the form of unbalanced panel data. In order to measure the speed of working capital adjustment and also to test the hypotheses, a partial adjustment approach with a dynamic model using the system generalized method of moments estimator (System-GMM) has been used. For robustness tests, we use the difference generalized method of moments estimator (Difference-GMM). Furthermore, to address the heterogeneity of speed of adjustment, we use Orlova and Rao’s (2018) two-stage approach.
Results: Overall, the results show that compared with other firms, firms that have more access to external financing and have more bargaining power in business negotiations, have a faster working capital speed of adjustment. Findings from robust tests that confirm our initial results are consistent with the trade-off (between costs and benefits of debts) theory. The results of this research are useful for managers and investors. Considering the importance and benefits of having the optimal level of working capital and its positive effect on firm's performance and its value, and the fact that firms with a higher adjustment speed achieve the aforementioned benefits faster, managers are advised to increase and facilitate access to external financial resources and increase the firm's ability to participate in business negotiations, because access to more financial resources and bargaining power and a higher hand in business negotiations will reduce adjustment costs and benefit the firm faster from the benefits of the optimal working capital ratio. On the other hand, investors are also advised to consider the components of access to external financial resources and the bargaining power of the business unit when making investment decisions, because these two variables that affect the speed of adjustment of working capital ultimately affect profitability and efficiency.
Conclusion: Awareness of the role of external financial resources and bargaining power in increasing the speed of working capital adjustment in order to achieve an optimal level can provide useful information to business managers and investors. In all stages of this research, procedures have been chosen and implemented so that the results of the research have appropriate generalizability; however, there may be limitations that prevent this from happening. One of the things that may influence the results is the use of only one macroeconomic variable (GDP growth) and not using the variable at the industry level to explain working capital management. Although this action has been carried out following previous researches, it is possible that the use of other economic variables as well as the use of a variable at the industry level to explain changes in working capital management may have different results. In the continuation of the path and to clarify other aspects of the issue, it is possible to advise future researchers to carry out the current research in the time periods before and after the intensification of economic sanctions against Iran, to include another variable to measure the macroeconomic situation and also to use a variable at the industry level. Check to explain working capital management.

Keywords

References

اسدی، غلامحسین؛ نادری نور عینی، مهدی و سرفراز، منصور (1397). نقش تعدیل‌کنندگی کیفیت گزارشگری مالی بر رابطه بین مدیریت سرمایه در گردش و عملکرد مالی. دانش حسابداری مالی، 5(2)، 150-131.
افلاطونی، عباس (1397). اقتصادسنجی در پژوهش‌های مالی و حسابداری با نرم‌افزار EViews. تهران، نشر ترمه.
بهارمقدم، مهدی؛ محمدرضاخانی، وحید و هوشمند زعفرانیه، رحمت‌اله (1391). بررسی اثر ویژگی‌های خاص شرکت‌ها بر مدیریت سرمایه در گردش. دانش حسابداری مالی، 2(6)، 89-71.
بهارمقدم، مهدی؛ یزدی، زینب و یزدی، سمیه (1390). بررسی اثرات مدیریت سرمایه در گردش بر سودآوری شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران. حسابداری مدیریت، 4(3)، 75-63.
تائبی نقندری، امیر حسین؛ صادقی، مسعود و تائبی نقندری، علی (1397). اثر آنتروپی صورت‌های مالی بر سرعت تعدیل ساختار سرمایه. مجله دانش حسابداری، 9(3)، 176-145.
تهرانی، رضا و حصارزاده، رضا (1388). تأثیر جریان‌های نقدی آزاد و محدودیت در تأمین مالی بر بیش سرمایه‌گذاری و کم سرمایه‌گذاری. تحقیقات حسابداری و حسابرسی، 1(3)، 67-50.
جوکار، حسین؛ دانشی، وحید و بهارمقدم، مهدی (1398). بررسی وجود نقطه بحرانی تورّم و سطح بهینه مدیریت سرمایه در گردش و تأثیر آن بر عملکرد مالی بنگاه‌های اقتصادی. پژوهش‌های حسابداری مالی، 11(3)، 50-19.
داداش‌زاده، قادر و حجازی، رضوان. (1399). ارزش انعطاف‌پذیری مالی، کارایی سرمایه‌گذاری و سرعت تعدیل سرمایه درگردش. راهبرد مدیریت مالی، 8(1)، 196-177.
دولو، مریم و محمودی، مسعود (1395). مدیریت سرمایه در گردش، عملکرد شرکت و محدویت‌های تأمین مالی. دانش حسابداری مالی، 3(4)، 130-107.
دیانتی دیلمی، زهرا؛ لطفی، محسن و آزادبخش، کسری (1391). تأثیر مدیریت سرمایه در گردش مبتنی بر چرخه تبدیل نقدی «گیتمان» بر کاهش ریسک سقوط (ریزش) قیمت سهام. دانش حسابداری و حسابرسی مدیریت، 1(4)، 64-55.
سپاسی، سحر؛ حسنی، حسن و سلمانیان، لیدا (1396). مدیریت سرمایه در گردش، عملکرد مالی و محدودیت‌های تأمین مالی: شواهدی از بورس اوراق بهادار تهران. مدیریت دارایی و تأمین مالی، 5(4)، 116-99.
ستایش، محمدحسین؛ کاظم نژاد، مصطفی و ذوالفقاری، مهدی (1387). بررسی تأثیر مدیریت سرمایه در گردش بر سودآوری شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران. مطالعات تجربی حسابداری مالی، 6(23)، 65-43.
عزیزی، صدیقه و جوکار، حسین (1400). بررسی وجود سطح بهینه مدیریت سرمایه در گردش و نقطه بحرانی تورم و تأثیر آن بر سطح نگهداشت وجه نقد. دانش حسابداری مالی، 8(1)، 173-145.
کردستانی، غلامرضا؛ تاتلی، رشید و کوثری‌فر، حمید (1393). ارزیابی توان پیش‌بینی مدل تعدیل شده آلتمن از مراحل درماندگی مالی نیوتن و ورشکستگی شرکت‌ها. دانش سرمایه‌گذاری، 3(9)، 100-83.
مرادی، محمد علی و نجار، مصطفی (1392). بررسی رابطه بین مازاد سرمایه در گردش و مازاد بازده سهام شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران. بررسی‌های حسابداری و حسابرسی، 20(2)، 132-109.
یوسف‌زاده، نسرین و اعظمی، زینب. (1394). بررسی تأثیر مدیریت سرمایه در گردش بر سودآوری شرکت در چرخه‌های مختلف تجاری. مجله دانش حسابداری، 6(23)، 171-147.
References
Aflatooni, A. (2018). Econometrics in Accounting and Finance Using EViews. Tehran, Termeh pub [In Persian].
Ahangar, N. (2020). Financial constraints and speed of working capital adjustment. Asia-Pacific Journal of Business Administration, 12(3/4), 371-385.
Altaf, N., & Shah, F. (2017). Working capital management, firm performance and financial constraints: Empirical evidence from India. Asia-Pacific Journal of Business Administration, 9(3), 206-219.
Altaf, N., & Shah, F.A. (2018b). How does working capital management affect the profitability of Indian companies? Journal of Advances in Management Research, 15(3), 347-366.
Altman, E.I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte-Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297.
Assadi, G., Naderi Nooreyni, M., & Sarfaraz, M. (2018). The moderating role of financial reporting quality on the relationship between working capital management and financial performance. Journal of Financial Accounting Knowledge, 5(2), 131-150 [In Persian].
Azizi, S., & Jokar, H. (2021). Investigating the existence of the optimal level of working capital management and the critical point of inflation and its effect on the level of cash holding. Journal of Financial Accounting Knowledge, 8(28), 145-173 [In Persian].
Bahar Moghadam, M., Yazdi, Z., & Yazdi, S. (2011). Surveying the effect of auditor type on the value relevance of earnings in the accepted company in Tehran Stock Exchange. Management Accounting, 4(3), 63-75 [In Persian].
Baharmoghadam, M., Mohammad Reza Khani, V., & Hooshmand Zaferanie, R. (2013). An Investigation of the impact of company characteristics on working capital management in companies listed in Tehran Stock Exchange. Journal of Financial Accounting Knowledge, 2(6), 71-89 [In Persian].
Baños‐Caballero, S., García‐Teruel, P.J., & Martínez‐Solano, P. (2010). Working capital management in SMEs. Accounting and Finance, 50(3), 511-527.
Blazenko, G.W., & Vandezande, K. (2003). Corporate holding of finished goods inventories. Journal of Economics and Business, 55(3), 255-266.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.
Chauhan, G.S., & Banerjee, P. (2018). Financial constraints and optimal working capital–evidence from an emerging market. International Journal of Managerial Finance, 14(1), 37-53.
Chiou, J.R., Cheng, L., & Wu, H.W. (2006). The determinants of working capital management. Journal of American Academy of Business, 10(1), 149-155.
Cunat, V. (2007). Trade credit: suppliers as debt collectors and insurance providers. The Review of Financial Studies, 20(2), 491-527.
Cuong, N.T., & Cuong, B.M. (2016). The determinants of working capital requirement and speed of adjustment: evidence from Vietnam’s seafood processing enterprises. International Research Journal of Finance and Economics, 1(147), 88-98.
Dadashzadeh, G., & Hejazi, R. (2020). The value of financial flexibility, investment efficiency and adjustment speed of working capital. Financial Management Strategy, 8(1), 177-196 [In Persian].
Davallo, M., & Mahmoodi, M. (2017). Working capital management, corporate performance, and financial constraints. Journal of Financial Accounting Knowledge, 3(4), 107-130 [In Persian].
Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance and Accounting, 30(3/4), 573-588.
Dianati Deilami, Z., Lotfi, M., & Azadbakhsh, K. (2012). The effect of working capital management on reducing the stock price crash risk (Case study: Companies listed in Tehran stock exchange). Journal of Management Accounting and Auditing Knowledge, 1(4), 55-64 [In Persian].
Fazzari, S.M., & Petersen, B.C. (1993). Working capital and fixed investment: New evidence on financing constraints. The RAND Journal of Economics, 24(3), 328-342.
Flannery, M.J., & Hankins, K.W. (2013). Estimating dynamic panel models in corporate finance. Journal of Corporate Finance, 19(1), 1-19.
Fosu, S., Danso, A., Ahmad, W., & Coffie, W. (2016). Information asymmetry, leverage and firm value: Do crisis and growth matter? International Review of Financial Analysis, 46(1), 140-150.
García‐Teruel, P.J., & Martínez‐Solano, P. (2007). Effects of working capital management on SME profitability. International Journal of Managerial Finance, 3(2), 167-177.
Greenwald, B., Stiglitz, J., & Weiss, A. (1984). Informational imperfections and macroeconomic fluctuations. American Economic Review Papers and Proceedings, 74(2), 194-199.
Hill, M.D., Kelly, G.W., & Highfield, M.J. (2010). Net operating working capital behavior: A first look. Financial Management, 39(2), 783-805.
Jokar, H., Daneshi, V., & Bahar Moghadam, M. (2019). Investigating the certain point of inflation and optimal level of working capital management and its impact on the financial performance of the companies. Journal of Financial Accounting Research, 11(3), 19-50 [In Persian].
Jose, M.L., Lancaster, C., & Stevens, J.L. (1996). Corporate returns and cash conversion cycles. Journal of Economics and Finance, 20(1), 33-46.
Kaplan, S., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints? The Quarterly Journal of Economics, 112(1), 169-215.
Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders’ wealth. Review of Finance, 17(5), 1827-1852.
Kordestani, G., Tatli, R., & Kosarifar, H. (2014). The evaluate ability of Altman adjusted model to prediction stages of financial distress Newton and bankruptcy. Journal of Investment Knowledge, 3(9), 83-100 [In Persian].
Mathuva, D.M. (2014). An empirical analysis of the determinants of the cash conversion cycle in Kenyan listed non-financial firms. Journal of Accounting in Emerging Economies, 4(2), 175-196.
Molina, C.A., & Preve, L.A. (2009). Trade receivables policy of distressed firms and its effect on the costs of financial distress. Financial Management, 38(3), 663-686.
Moradi, M., & Najjar, N. (2013). The relationship between additional working capital and stock’s excess return in Tehran stock exchange accepted companies. Accounting and Auditing Review, 20(2), 109-132 [In Persian].
Nadiri, M.I. (1969). The determinants of trade credit in the US total manufacturing sector. Econometrica: Journal of the Econometric Society, 37(1), 408-423.
Niskanen, J., & Niskanen, M. (2006). The determinants of corporate trade credit policies in a bank‐dominated financial environment: The case of Finnish small firms. European Financial Management, 12(1), 81-102.
Orlova, S.V. (2020). Cultural and macroeconomic determinants of cash holdings management. Journal of International Financial Management and Accounting, 31(3), 270-294.
Orlova, S.V., & Rao, R.P. (2018). Cash holdings speed of adjustment. International Review of Economics and Finance, 54(1), 1-14.
Orlova, S.V., & Sun, L. (2018). Institutional determinants of cash holdings speed of adjustment. Global Finance Journal, 37(1), 123-137.
Padachi, K. (2006). Trends in working capital management and its impact on firms’ performance: An analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58.
Panda, A.K., & Nanda, S. (2018). Working capital financing and corporate profitability of Indian manufacturing firms. Management Decision, 56(2), 441-457.
Paternoster, R., Brame, R., Mazerolle, P., & Piquero, A. (1998). Using the correct statistical test for the equality of regression coefficients. Criminology, 30(4), 859-866.
Petersen, M.A., & Rajan, R.G. (1997). Trade credit: theories and evidence. The Review of Financial Studies, 10(3), 661-691.
Pike, R., Cheng, N.S., Cravens, K., & Lamminmaki, D. (2005). Trade credit terms: asymmetric information and price discrimination evidence from three continents. Journal of Business Finance and Accounting, 32(5/6), 1197-1236.
Qurashi, M., & Zahoor, M. (2017). Working capital determinants for the UK pharmaceutical companies listed on FTSE 350 index. International Journal of Academic Research in Accounting, Finance and Management Sciences, 7(1), 11-17.
Raheman, A., & Nasr, M. (2007). Working capital management and profitability-case of Pakistani firms. International Review of Business Research Papers, 3(1), 279-300.
Sepasi, S., Hassani, H., & Salmanian, L. (2017). Working capital management, corporate performance and financial constraints: Evidence from Tehran Stock Exchange. Journal of Asset Management and Financing, 5(4), 99-116 [In Persian].
Setayesh, M., Kazemnejad, M., & Zolfaghari, M. (2008). The effects of working capital management on the profitability of the firms listed in Tehran Stock Exchange. Empirical Studies in Financial Accounting, 6(23), 43-65 [In Persian].
Shin, H.H., & Soenen, L. (1998). Efficiency of working capital and corporate profitability. Financial Practice and Education, 8(2), 37-45.
Smith, K. (1980). Profitability versus liquidity tradeoffs in working capital management. Readings on the Management of Working Capital, 42(1), 549-562.
Taebi Noghondari, A., Sadeghi, M., & Taebi Noghondari, A. (2018). Effects of entropy of financial statements on the adjustment speed of capital structure. Journal of Accounting Knowledge, 9(3), 145-176 [In Persian].
Tehrani, R., & Hesarzade, R. (2009). The effect of free cash flows and financing restrictions on over and under investment. Accounting and Audit Researches, 1(3), 50-67 [In Persian].
Tsuruta, D. (2019). Working capital management during the global financial crisis: Evidence from Japan. Japan and the World Economy, 49(1), 206-219.
Wilner, B.S. (2000). The exploitation of relationships in financial distress: The case of trade credit. The Journal of Finance, 55(1), 153-178.
Yousefzadeh, N., & Aazami, Z. (2016). Impact of working capital management on firm profitability in business cycles. Journal of Accounting Knowledge, 6(23), 147-171 [In Persian].

Files

History

  • Receive Date: 18 September 2021
  • Revise Date: 11 November 2021
  • Accept Date: 27 November 2021

Share

How to cite

Statistics