277-297. If a firm raises funds through debt financing, there is a positive item in the financing section of the cash flow statement as well as an increase in liabilities on the balance sheet. Whited and Wu (2006) index is a linear combination of six factors: cash flow, a dividend payer dummy, leverage, firm size, industry sales growth and firm sales growth[2].

Accordingly, the percentage of working capital financed by short-term credit may impact the performance of the firm positively or negatively (Baños-Caballero et al., 2016). , (2018a), “Investment and financial constraints in Indian firms: does working capital smoothen fixed investment?”, Decision, Vol.

t The p-values for the m2 statistics as presented in Columns (2), (3), (4) and (5) is a test for the absence of AR(2) process serial correlation in the first difference residuals.

517-529. Accordingly, we use the instrumental variable estimation method to avoid the problem of endogeneity. Four popular decision tree algorithms (CHAID, C5.0, QUEST and C&RT) were used to investigate the impact of financial ratios on firm performance. Having verified the existence of inverted U-shape relationship between working capital financing and firm performance, we further explore the possible effects of financial constraints on this relationship. The break-even point for less financially constrained firm comes from the following expression: −(β1 + φ1)/2(β2 + φ2).

t 1, pp. This implies that firms facing lower financial constraint can finance greater proportion of their working capital by short-term sources without hurting performance. This study while providing new evidence with regard to the impact of working capital financing on firm performance and also the impact of financial constraints on this relationship. Z

3547808, Working capital management, corporate performance, and financial constraints, Financing of working capital requirement, financial flexibility and SME performance, Journal of Business Economics and Management, Working capital policy practice: evidence from Sri Lankan companies, Working capital management and firm performance in emerging economies: evidence from India, Corporate financial policy and the value of cash, Working capital and fixed investment: new evidence on financing constraints, Did financial liberalization ease financing constraints?

We find that the mean value of WCF variable is (0.425), implying that on average Indian firms finance 42.5 percent of their working capital from short-term debt. 3, pp. In addition, this study can be used as a guide for testing the relationship between working capital financing and performance in subsequent studies.

Firms have been grouped on the likelihood of being more or less constrained by using proxies mentioned in Section 2.2. Altaf, N. and Ahmad, F. (2019), "Working capital financing, firm performance and financial constraints: Empirical evidence from India", International Journal of Managerial Finance, Vol. −

Moulton, B.R.

In addition, the authors also found that the firms that are likely to be less financially constrained can finance greater proportion of working capital using short-term debt. 2, pp. Thus, for the purpose of this study idea of Baños-Caballero et al.

(2007), “Impact of working capital management policies”, Global Business Review, Vol. This is the point at which the financing costs and cost of capital are minimized, thereby increasing firm value and performance. 3, pp. This p-values of m2 statistics are non-significant, implying that there is no second-order serial correlation. SG

and Petersen, B.C. 1425-1460. Older firms have easily access to finance and improved their performance. Keeping in view the above-mentioned literature this study attempts to advance the working capital management literature as follows. This winsorization left us with 573 firms. Evidence from Indian firm-level data, Trade-off model of debt maturity structure, Review of Quantitative Finance and Accounting, Profitability and working capital management: the Jordanian case, International Journal of Economics and Finance, Bayesian Analysis of Stochastic Frontier Models: A Companion to Theoretical Econometrics, Random group effects and the precision of regression estimates, Diagnostics for group effects in regression analysis, Journal of Business & Economic Statistics, Working capital requirements and the determining factors in Pakistan, The relationship between working capital management policy and financial performance of companies quoted at Nairobi securities exchange, Kenya, International Journal of Economics, Finance and Management Sciences, An empirical analysis of corporate debt maturity structure, Different working capital polices and the profitability of a firm, International Journal of Business and Management, Financing constraints and investments in R&D: evidence from Indian manufacturing firms, The Quarterly Review of Economics and Finance, Working capital management and firms’ profitability: evidence from emerging Asian countries, Working capital management and profitability: evidence from Indian manufacturing companies, The determinants of working capital management and firms performance of textile sector in Pakistan, Relationship between working capital management, policies, and profitability of small manufacturing firms, Impact of working capital management policies, Debt, liquidity constraints, and corporate investment: evidence from panel data. The final sample of the study has been chosen by dropping all financial firms including banks and financial services. This approach is suitable for firms operating in volatile market conditions and facing an uncertain demand curve (Awopetu, 2012).

t

► EFA is used to identify and validate underlying dimensions of the financial ratios.

The significance of working capital management in determining firm profitability: evidence from developing economies in Africa, Research in International Business and Finance, https://doi.org/10.1108/IJMF-02-2018-0036, http://scholarworks.waldenu.edu/dissertations/2105/, Market value of equity+book value of debt/book value of assets, (Current year sales/previous year sales) – 1, The number of years from the time the company was incorporated, Total current assets/total current liabilities. In addition, the p-values of Sargan test are also non-significant, in all the specifications made implying the absence of correlation between instruments and error term. i This strategy allows a firm to reduce both the refinancing and interest risk at the same time this approach might force a firm to bear the high cost of liquidity. (2014), “The relationship between working capital management policy and financial performance of companies quoted at Nairobi securities exchange, Kenya”, International Journal of Economics, Finance and Management Sciences, Vol. 33 Nos 2-3, pp. Baños-Caballero, S., García-Teruel, P.J.

i (PDF) EFFECTS OF DEBT FINANCING ON BUSINESSES FIRMS FINANCIAL PERFORMANCE | IJSSIT Publication and Ezekiel Apima - Academia.edu Debt financing has been used as an instrument of filling the budget deficits both in the private and public sector. (2012), “Profitability and working capital management: the Jordanian case”, International Journal of Economics and Finance, Vol. 4, pp. Sargan refers to p-values for over-identifying restrictions distributed asymptotically under the null hypothesis of the validity of instruments. Based on these arguments it can be amplified that both conservative and aggressive approach have their cost and benefits attached to it that might affect the performance of the firm. Debt is a source of financing, other than equity.

Investment and financial constraints in Indian firms: does working capital smoothen fixed investment? However, the way firm finances its working capital has an impact on its performance (Baños-Caballero et al., 2016). 275-282. Contrary to the above arguments, greater reliance on short-term credit might also have a negative impact on firm’s performance. Z-Statistics of two-step GMM model are reported in parentheses and based on robust standard errors.

Under this approach, a firm invests heavily in current assets with minimal use of short-term credit or current liabilities (Temtime, 2016; Bei and Wijewardana, 2012). Bhatia, S. and Srivastava, A. Measuring firm performance using financial ratios: A decision tree approach.

after taking ROA as well as Q as a dependent variable. 313-326. The nominal rate of interest is lower for short-term debt because default and inflation premiums tend to increase as the increase in debt maturity (Jun and Jen, 2003). t Further, in all the specifications, we found that the coefficient on WCF is significant and positive, while as the coefficient on WCF2 is significant and negative, implying that the inverted U-shape relationship exists between WCF and firm performance. *

When a low percentage of working capital is financed by short-term credit, the performance of the firm may increase because the benefits overweigh the costs and accordingly we may find a positive impact on firm performance. t << (2003), “Trade-off model of debt maturity structure”, Review of Quantitative Finance and Accounting, Vol. A manufacturing firm can finance its operations either through equity or debt. This study contributes to the scant existing literature by testing the impact of financial constraints on the relationship between working capital financing and firm performance, representing a typical emerging market in India.

206-219. In addition, in an attempt to reduce the potential bias that may arise on account of omitted variables, we control for other general firm characteristics by incorporating firm size, growth, asset tangibility, firm age, leverage and current ratio as control variables. Accounting based performance is measured by return on assets, whereas market-based performance is measured by Tobin’s Q.

Al-Shubiri, F.N. 41 No. By continuing you agree to the use of cookies. 61 No. 34, Econometric Society Monographs.

However, this break-even point turns out to be high for firms likely to be low financially constrained.

332-338.

28-38.

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