WORKING CAPITAL AND FIRM PERFORMANCE: NON-LINEAR EVIDENCE FROM VIETNAM

This study explores the non-linear relationship between working capital management, as measured by the Cash Conversion Cycle, and firm performance, evaluated through Return on Equity and Return on Assets. It utilizes a dataset comprising 8,343 observations from Vietnamese listed companies over the period of 2008–2024. By combining traditional regression models with machine learning techniques, including Random Forest and Support Vector Regression, the analysis aims to capture complex financial patterns. The results indicate that the impact of the Cash Conversion Cycle on performance follows a non-linear trajectory, identifying an optimal cycle length that maximizes profitability while ensuring liquidity. This optimal cycle length varies significantly across different firm sizes and industries. Notably, small firms tend to benefit from shorter cycles to minimize financing costs, while larger firms utilize longer cycles to gain operational flexibility. Additionally, sector-specific dynamics play a role in influencing outcomes between manufacturing and service industries. The findings reveal significant non-linear effects, where deviations from the optimal cycle negatively impact performance. This provides managers with a strategic tool to customize working capital policies in Vietnam’s volatile market. This research adds valuable empirical evidence by validating the Trade-off Theory within an emerging market context, challenging the linear assumptions that are common in previous studies. It establishes a pioneering financial framework that offers Vietnamese firms context-specific strategies to enhance profitability and resilience, illustrating that optimized working capital management can foster sustainable growth in a rapidly changing economy. The study’s extensive dataset and advanced analytical methods emphasize its robustness, providing insights into managing liquidity-profitability trade-offs. These findings have broader implications for working capital management in developing economies, where economic volatility necessitates tailored financial strategies. This work contributes to the advancement of financial management scholarship and serves as a resource for policymakers aiming to promote economic stability.