Analyzing the impact of sustainable performance on working capital management: Evidence from emerging markets

This study examines the relationship between sustainable performance and working capital management in emerging markets. Using cash conversion cycle (CCC) as a measure for working capital management, we find that firms with better ESG performance have lower cash conversion cycles (CCC). Additionally, we examine the impact of ESG on individual components of CCC (account receivables, inventory, and account payables) and find a negative relationship. Furthermore, we also investigate how each dimension of ESG, i.e., Environmental, Social, and Governance, affects each component of CCC separately. Our finding shows that environmental (E) and social (S) dimensions negatively affect each component of CCC, whereas the governance (G) dimension only affects inventory days. This shows that consistent with signalling and stakeholder theories, firms' stakeholders prioritise environmental and social dimensions over the governance dimension of ESG. We further document that the negative relationship between ESG and CCC is due to decreased financial constraints and the probability of default. Apart from this, we also performed various robustness tests and found consistent results. Overall, the study emphasises that allocating resources towards sustainability initiatives has the potential to enhance the efficiency of managing working capital.