Cash Conversion Cycle and Bargaining Power in the Product Market: A Global Perspective

Abstract

This study theoretically and empirically examines working capital management in a general setup that allows for variation in market power and financial constraints. Under asymmetric financial constraints, firms may extend trade credit; otherwise, they will use their market power to extract value from the supply chain. We test the latter behavior in an international sample that includes 21,613 firms in 83 countries, compared with 11,395 firms in the United States of America (US) for the period 1962–2017. We also use the global financial crisis of 2008 as an exogenous shock to firms’ ability to issue debt. The results demonstrate that the crisis strengthened the relationship between market power and the cash conversion cycle for firms that had a positive cash conversion cycle. The study also demonstrates that firms outside of the US are most affected by the adverse relationship between market power and working capital.

Keywords: cash conversion cycle, market power, trade credit, profit maximization, general dynamic model