Factors Associated with the Year-End Decline in Working Capital
Forthcoming, Management Science
56 Pages Posted: 12 May 2011 Last revised: 3 Sep 2015
Date Written: September 2, 2015
Working capital is an important indicator of firm operational efficiency. All else equal, lower levels signal greater efficiency. As such, managers are likely to be motivated to report lower levels of working capital at times of greater external attention to its levels. This study provides evidence that working capital levels decrease in the fourth fiscal quarter significantly more than expected conditional on seasonal changes in economic activity. The decrease subsequently reverses in the following first fiscal quarter. We find that firms manage down year-end working capital through transactions that increase year-end operating cash flow and that firms spread this activity over all working capital major accounts. Finally, the temporary decrease in year-end working capital is correlated with compensation benchmarks and annual analysts’ cash-flow forecasts. The temporary drop is also more pronounced for firms with industry dominance.
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