Profitability and working capital management: a meta-study in macroeconomic and institutional conditions

Abstract

Working capital management (WCM) concerns decisions on the levels and turnover of the inventories, receivables, cash and current liabilities of a company. Consequently, WCM affects the profitability of an enterprise. This paper aims to determine the relationship between profitability and WCM, characterised by components of the company’s operating cycle. The research is based on meta-analysis and meta-regression methods that allow for the combination and analysis of the outcomes of individual empirical studies using statistical methods. Our final research sample consists of 43 scientific papers from 2003 to 2018. These studies covered almost 62,000 enterprises in 35 countries from 1992 to 2017. Our results indicate that there is a common, negative relationship between profitability and the cash conversion cycle (CCC). This relationship is conspicuous in various countries and in different economic contexts. A negative, statistically significant relationship was also detected between profitability and average collection period (ACP), the accounts payable period (APP) and inventory turnover cycle (ITC) as well. We also identified moderators of the diagnosed dependencies on the grounds of macroeconomic and institutional factors. The richer the economy, the weaker a negative impact of CCC on profitability. The higher the protection of creditors and debtors, the weaker the negative relationship between profitability and ITC. The opposite is applicable to inflation and ACP and APP, unemployment and CCC, ACP and APP, the availability of credit and APP and the degree of capital market development and CCC and ACP. The aforementioned macroeconomic and institutional factors cause the negative relationship between particular components of the operating cycle and profitability to deepen even further. Our research contributes to the existing knowledge by confirming that the negative relationship between profitability and all components of the operating cycle is dominant in the global economy. It also indicates that there are macroeconomic and institutional moderators of the strength and direction of these relationships.