Working capital policy of newly incorporated firms

Abstract

PurposeThe present study examines the initial working capital policy (WCP) and its evolution for newly established manufacturing firms.Design/methodology/approachUsing panel data of 162 firms over a period of 10 years, the study analyses the persistence-cum-convergence in WCP over the subsequent years through descriptive analysis and difference of means test. Further, the prevalence of ß – convergence, and σ-convergence has been examined using standard least squares regression, dynamic panel analysis and the Wald test.FindingsThe results indicate that sample firms continue to follow the initial WCP in the subsequent years with a gradual convergence in the WCP. Alternatively, the firms with aggressive (conservative) WCP at the time of incorporation will continue following it. Further, the firms with aggressive initial WCP have witnessed higher growth than those with conservative initial WCP.Research limitations/implicationsFindings will assist managers and practitioners to understand the dynamics of WCP over the life cycle of the firm and select appropriate WCP as certain policies lead to certain growth paths.Originality/valueThough working capital management has been recognized as a critical managerial decision, limited research is available on its evolution, especially for newly established manufacturing companies in an emerging economy. Current research attempts to fill this gap and provide valuable insights for the effective management of liquidity.