Introducing the nexus between shariah compliance and corporate cash conversion cycle

Purpose The nexus between Shariah compliance and corporates’ cash conversion cycle is silent in the existing literature. The purpose of this study is to examine how Shariah compliance status affects corporate cash conversion targets and adjustment speed. Design/methodology/approach The sample comprises listed firms in six Gulf Cooperation Council countries from 2011 to 2022. The authors used alternative methods, including panel fixed effects, OLS, the System Generalised Method of Moments and Two-Stage Least Squares (2SLS). Findings The results of this study explore that adherence to shariah principles significantly influences the corporate cash conversion cycle. Shariah-compliant (SC) firms maintain shorter cash conversion cycles compared to non-shariah-compliant peers. This shorter cash conversion cycle indicates that Sharia-compliant firms invest less in their working capital relative to conventional firms to avoid the necessity of limited and expensive external financing. Further, the authors find that both sets of firms set a target cash conversion cycle. However, SC firms adjust faster towards their optimal cash conversion cycle target than their conventional counterparts because of the former’s reliance on their internal funds and cash reserves. Originality/value To the best of the authors’ knowledge, no prior studies have directly examined the role of Shariah compliance in explaining the corporate cash conversion cycle. Existing literature has focused primarily on cash holdings and liquidity management in SC firms.