Working capital efficiency and firm performance: empirical evidence from an emerging market

A critical area of study in the financial management literature has been the significance of effective working capital management in determining corporate financial performance (firm profitability). In this regard, our study looks at the relationships between working capital (and its constituent parts) and company profitability for a group of manufacturing firms in India's developing economy. We deploy Arellano and Bond's (1991) two-step 'generalised method of moments (GMM) ' approach to investigate the nonlinearity between 'working capital and firm profitability'. Using robust estimation techniques, we document presence of an inverted U-shaped relationship hereby implying presence of an ideal level of working capital in case of manufacturing firms along with a quantitative estimation of the same. Unlike previous studies, our work also takes into account the presence of endogeneity problems while presenting the empirical evidence on influence of working capital. Our study provides useful insights for finance managers, investors, and policymakers in understanding and achieving the optimal range of working capital investment to maximise corporate financial profitability.