Factors Associated with the Year-End Decline in Working Capital

Forthcoming, Management Science

56 Pages Posted: 12 May 2011 Last revised: 3 Sep 2015

See all articles by Richard M. Frankel

Richard M. Frankel

Washington University in Saint Louis - Olin Business School

Hagit Levy

City University of New York - Stan Ross Department of Accountancy

Ron Shalev

New York University (NYU) - Leonard N. Stern School of Business

Date Written: September 2, 2015

Abstract

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.

Suggested Citation

Frankel, Richard M. and Levy, Hagit and Shalev, Ron, Factors Associated with the Year-End Decline in Working Capital (September 2, 2015). Forthcoming, Management Science. Available at SSRN: https://ssrn.com/abstract=1697922 or http://dx.doi.org/10.2139/ssrn.1697922

Richard M. Frankel

Washington University in Saint Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Hagit Levy

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Ron Shalev (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980418 (Phone)

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