Bi-Directional Causality between Working Capital Management and Profitability: Empirical Study of Indian Listed Firms

Abstract

Management of short term funds and their disbursement plays a vital role in deciding fate of entity’s financial soundness and future prospect. Thus efficient working capital management is prerequisite for business success so has not only remained orbit of many theoretical and empirical studies but also great concern for management and academic experts. Empirical literature in Indian context on this topic not only presents ambiguous results, but is centered mainly on the possible impact efficient working capital management levels on profitability of the companies, disregarding the possibility of reverse causality running from profitability to effective liquidity and working capital management efficiency, except few recent studies from developed nations. Olarewaju M.O & Adeyemi K.O (2013); Awad, I & Jayyar F (2013). Current study is an attempt to shed light on bidirectional causal relationship between working capital management components like liquidity and cash conversion cycle proxies efficiency of the management in formulating and executing growth and sustainability oriented policies and profitability in the Indian listed firms for the period last one decade through use of econometric model of granger causality and other related methods according to need of study. The results failed to support theoretical assumption and strengthened the prior works and revealed that there is no causal relationship but while taking lag of one year results favored the casual relationship between efficiency liquidity and profitability. The study addressing the current issues may frame consciousness among managers and academicians and help to rule out myths and touch the modern horizons of managing daily financial requirements.

Keywords: Working Capital Management, bidirectional relationship, Profitability, Granger causality Test