Working capital management and firms’ performance in emerging markets: the case of Jordan

Abstract

Abstract Purpose – The purpose of this paper is to examine the effect of working capital management on firms' performance for a sample of firms listed on a small emerging market, namely Amman Stock Exchange. Design/methodology/approach – The paper includes a conceptual as well as empirical analysis, in which data from a sample of listed firms for the period from 2000 to 2008 are analyzed to examine if more efficient working capital management improves firms' accounting profitability and firms' value. Cash conversion cycles as well as its components are used as measures of working capital management skills. In this study, two performance measures are used: one accounting and one market measure, believing that wealth maximization is shareholders' main concern. To bring up more robust results, this study used more than one estimation technique, including panel data analysis, fixed and random effects, and generalized methods of moments. Findings – Using robust estimation techniques this study found that profitability is affected positively with the cash conversion cycle. This indicates that more profitable firms are less motivated to manage their working capital. In addition, financial markets failed to penalize managers for inefficient working capital management in emerging markets. Originality/value – The paper's originality and value lies in suggesting that policy makers in emerging markets need to motivate and encourage managers and shareholders to pay more attention to working capital through improving investors' awareness and improving information transparency.