Banking uncertainty and cash conversion cycle

Abstract

This study investigates whether and how firms adjust the cash conversion cycle in response to uncertainty in the banking sector. Using micro data from 621 non-financial firms and 40 commercial banks in Vietnam during 2007–2022, we find that firms reduce cash cycles during periods of increased uncertainty within the banking sector. Multiple robustness checks, involving alternative measures of banking uncertainty and subsamples categorized by distinct time spans and firm listing locations, and even employing analytical tools for endogeneity control, justify the consistency of this link. For deeper insights, we decompose the cash cycle into three components and realize that in times of high uncertainty, while days receivable tend to rise, an increase in days payable and a decrease in days inventory are the main drivers of the shorter cash conversion cycle. In further analysis, we observe that the impact of banking uncertainty on cash cycles is more pronounced in non-state-owned companies or during macroeconomic shocks brought about by events of the global financial crisis and the COVID-19 pandemic. As evidence for potential mechanisms, we also reveal that uncertainty yields a more substantial reduction in cash cycles for firms burdened with higher levels of indebtedness and greater financial constraints. Finally, in an effort to gauge the marginal effect of cash cycles on firm valuation, we find that cash conversion cycles can enhance shareholder value amid elevated uncertainty. Collectively, our research could offer implications for bank-based emerging countries to manage working capital more effectively in uncertain times.