Assessing the Impact of Working Capital on Free Cash Flow: Evidence from Portuguese Accommodation Companies

This study analyses the impact of working capital (WC) on free cash flow (FCF) for Portuguese firms operating in Division 55 (Accommodation), a sector that is a central pillar of the national tourism industry and characterised by high capital intensity and pronounced seasonality. The empirical analysis is based on an unbalanced panel dataset of 5,744 firms, corresponding to 27,689 firm-year observations for the period 2011–2023, obtained from the SABI database. A panel data model is estimated using generalised estimating equations (GEE) with firm- and year-fixed effects to examine how changes in WC and its components influence firms’ capacity to generate FCF. Twelve research hypotheses are formulated and empirically tested within a cash-flow-based valuation framework. The results show that variations in WC have a negative and statistically significant effect on FCF, indicating that increased investment in short-term operational assets constrains liquidity generation in the accommodation sector. Several components of WC are identified as significant determinants of FCF, while others do not exhibit statistically significant effects, underscoring the heterogeneous influence of short-term assets and liabilities on cash flow dynamics. The model adjustment criteria (QIC and QICC), assessed within the scope of the GEE, indicate that the estimated specification is well suited and robust, supporting the reliability of the results obtained. Although the analysis is limited to the accommodation sector, which may restrict the generalisability of the findings, the study makes an important contribution by adopting an FCF-based perspective on WC management. By focusing on liquidity generation rather than traditional profitability measures, this research enhances understanding of financial management dynamics in tourism-related firms and provides insights into firms’ strategic flexibility and capacity to invest in market-facing activities.DOI: https://doi.org/10.54663/2182-9306.2026.SpecialIssueCMTH.42-55