Working capital management in competitive market: empirical insights

Abstract

Purpose

This study seeks to examine the relationship between a firm’s effectiveness in managing working capital (WCM), as measured by the cash conversion cycle (CCC), and its exposure to product market competition (PMC).

Design/methodology/approach

Using 85,356 firm-year observations of 9,611 unique firms for the period 1990–2019, from the US, the baseline model assesses the CCC and PMC connection while controlling for multiple firm-level factors. Additional analyses are conducted to control for financial constraints, economic policy uncertainty, and endogeneity.

Findings

An inverse relationship is shown between PMC and CCC, indicating that firms facing increased competition tend to implement more efficient WCM strategies in order to free up scarce resources. In addition, we observe that increased PMC pushes companies to strategically adjust their credit policies, while also improving their administration of payables and inventories, resulting in improved efficiency. Our research highlights that CCC serves as a mediator between PMC and firm performance.

Research limitations/implications

This study enhances comprehension of the impact of PMC on WCM, offering practical recommendations for companies seeking to optimize their strategy in competitive settings.

Originality/value

The study provides valuable insights for managers operating in competitive markets, highlighting the significant influence of working capital on business policies as a response to competition. This study contributes to the existing literature on WCM and PMC by providing guidance to organizations on how to improve their WCM practices, maintain competitiveness, and free up scarce resources.

Citation

Banerjee, P. and Deb, S.G. (2024), "Working capital management in competitive market: empirical insights", International Journal of Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJMF-01-2024-0019