The Impact of Working Capital Management on Firm Profitability in Different Business Cycles: Evidence from Finland
40 Pages Posted: 28 Mar 2011 Last revised: 30 Aug 2013
Date Written: August 30, 2013
The recent economic downturn of 2007-2008 has brought renewed focus on working capital policies. In this paper we examine the role of business cycles on the working capital-profitability relationship using a sample of Finnish listed companies over an 18 year period. We find the impact of business cycle on the working capital-profitability relationship is more pronounced in economic downturns relative to economic booms. We further show that the significance of efficient inventory management and accounts receivables conversion periods increase during periods of economic downturns. Our results demonstrate that active working capital management matters and, thus, should be included in firms’ financial planning.
Keywords: Working capital, Business cycles, Profitability
JEL Classification: G30, G31, G32
Suggested Citation: Suggested Citation