Working Capital Management and Shareholder Wealth

We provide the first empirical study of the relationship between corporate working capital management and shareholder wealth. Examining U.S. corporations from 1990 through 2006, we find evidence that: the incremental dollar invested in net operating working capital is worth less than the incremental dollar held in cash for the average firm; the valuation of the incremental dollar invested in net operating working capital is significantly influenced by a firm’s future sales expectations, its debt load, its financial constraints, and its bankruptcy risk; and the value of the incremental dollar extended in credit to one’s customers has a greater effect on shareholder wealth than the incremental dollar invested in inventories for the average firm.