"Exploring the Determinants of Working Capital Management: Evidence across East

Asian Emerging Markets"

Working capital management (WCM) is an important aspect of financial management for
any business. It involves managing a company's short-term assets and liabilities to
ensure that there is sufficient cash flow to cover operational expenses and investment
needs.
1 Background:
Working capital management is critical to the success of any business, as it ensures that
the company has sufficient cash flow to meet its operational needs. The authors of this
article note that despite the importance of working capital management, little research has
been conducted on the factors that determine its effectiveness. Therefore, they set out to
explore the determinants of working capital management across East Asian emerging
markets.
2 Literature Review:
The authors review the existing literature on working capital management and note that it
is affected by a variety of factors, including firm size, profitability, liquidity, growth
opportunities, and market conditions. They also note that prior research has yielded
mixed results regarding the impact of these factors on working capital management.
3 Methodology:
The authors analyze data from 1,443 companies across six East Asian emerging markets
(China, Indonesia, Malaysia, the Philippines, South Korea, and Thailand) for the period
2005-2014. They use regression analysis to examine the relationship between the
determinants of working capital management and its effectiveness.
The cash conversion cycle (CCC) is a commonly used measure of WCM. It represents
the length of time it takes for a company to convert its investments in inventory and
accounts receivable into cash. A shorter CCC indicates that a company is able to generate
cash more quickly, while a longer CCC indicates that a company may have difficulty
meeting its short-term cash needs.

The authors use regression analysis to examine the relationship between the determinants
of working capital management and its effectiveness. They use the following model to
estimate the impact of the determinants on the cash conversion cycle (CCC), which is a
commonly used measure of working capital management:

CCC = α + β1(SIZE) + β2(ROA) + β3(CASH) + β4(GROWTH) + β5(MARKET) + ε

Where:
  CCC is the cash conversion cycle, which measures the time it takes for a company
to convert its investments in inventory and accounts receivable into cash.
 SIZE is the natural logarithm of total assets, which is used to measure firm size.
 ROA is the return on assets, which measures the profitability of the firm.
 CASH is the cash ratio, which measures the liquidity of the firm.
 GROWTH is the growth rate of the firm, which measures the growth opportunities
available to the firm.
 MARKET is the market-to-book ratio, which measures the market value of the
firm relative to its book value.
 α is the intercept term, which captures the impact of other factors not included in
the model.
 β1-β5 are the coefficients that estimate the impact of SIZE, ROA, CASH,
GROWTH, and MARKET on the cash conversion cycle.
 ε is the error term.

The authors also use panel data regression analysis to examine the impact of the
determinants on the cash conversion cycle over time. They use the following model:

CCCit = αi + β1(SIZEit) + β2(ROAit) + β3(CASHit) + β4(GROWTHit) +

β5(MARKETit) + εit

Where:

 CCCit is the cash conversion cycle of firm i in time period t.

 αi is the fixed effect for firm i, which captures the impact of unobserved firm-
specific factors that do not vary over time.
 β1-β5 are the coefficients that estimate the impact of SIZE, ROA, CASH,
GROWTH, and MARKET on the cash conversion cycle over time.
 εit is the error term.

4 Key Results:
The study finds that the cash conversion cycle (CCC) is negatively correlated with firm
size, profitability, and liquidity, and positively correlated with growth opportunities and
market value. Specifically, for the sample of firms in the study, a 1% increase in size is
associated with a 0.024% decrease in the CCC, a 1% increase in profitability is associated
with a 0.064% decrease in the CCC, and a 1% increase in liquidity is associated with a
0.272% decrease in the CCC. On the other hand, a 1% increase in growth opportunities is
associated with a 0.405% increase in the CCC, and a 1% increase in market value is
associated with a 0.099% increase in the CCC.
The authors also find that the impact of these determinants on the CCC various over time
and across different countries in the sample. For example, they find that the negative
impact of size on the CCC is more pronounced in China, while the negative impact of
liquidity is more pronounced in Indonesia. They also find that the positive impact of
growth opportunities on the CCC is more pronounced in the Philippines and Thailand.
The study's results suggest that companies in East Asian emerging markets need to be
aware of the impact of different determinants on working capital management and be
adaptable in their approach. For example, companies that are smaller or more profitable
may be able to operate with a shorter cash conversion cycle, while companies with high
growth opportunities may need to maintain a longer cash conversion cycle to finance
their growth.
Overall, the authors find that the determinants of working capital management differ
across the six East Asian emerging markets they studied. Specifically, they find that firm
size, profitability and liquidity are important determinants of working capital
management in all six markets, while growth opportunities and market conditions are
important only in certain markets. Additionally, they find that the impact of these
determinants on working capital management various over time, suggestive that
companies need to be adaptable in their approach to working capital management.
5 Advantages and benefits
The study provides valuable insights into the determinants of working capital
management and their impact on the cash conversion cycle in six East Asian emerging
markets. The findings have important implications for managers and policymakers in
these markets.
The study's use of panel data regression analysis allows the authors to control for
unobserved firm-specific factors that do not vary over time, which improves the accuracy
of the estimated coefficients.
The authors use a range of firm-specific factors, such as size, profitability, and liquidity,
to explain variations in the cash conversion cycle. However, the study does not account
for external factors, such as changes in interest rates or exchange rates, which could also
impact working capital management.
The study's focus on the cash conversion cycle as the primary measure of working capital
management is a limitation, as it overlooks other important aspects of working capital,
such as inventory management and accounts payable and receivable.
The study only examines the impact of determinants on working capital management
within the East Asian emerging markets, and the findings may not be generalizable to
other regions or market contexts.
The authors note that their study is limited by the availability of data, which only goes up
to 2014. Future research could build on this study by using more recent data to examine
the determinants of working capital management in these markets.
6 Limitations
While the study provides valuable insights into the determinants of working capital
management, it only focuses on six East Asian emerging markets. Future research could
explore other regions to determine if the findings hold true in other contexts.
The study relies on secondary data, which may not capture all relevant factors that impact
working capital management. Future studies could collect primary data through surveys
or interviews to gain a more comprehensive understanding of the determinants of
working capital management.
The study only examines the impact of firm-specific factors on working capital
management. Future research could explore the impact of macroeconomic factors, such
as interest rates or inflation, on working capital management.
The study is limited by its focus on only one aspect of working capital management,
namely the cash conversion cycle. Future research could explore other aspects of working
capital management, such as inventory management or accounts payable and receivable,
to gain a more comprehensive understanding of the factors that impact working capital
management.
The study's findings suggest that companies need to be adaptable in their approach to
working capital management. Future research could explore the strategies that companies
can use to be more adaptable, such as developing contingency plans or using technology
to monitor and adjust working capital management strategies in real-time.
7 Comments on the research paper
The findings of this study align with previous research on the determinants of WCM. For
example, a study by Deloof and Jorissen (2005) found that larger firms and firms with
higher profitability tend to have shorter CCCs, while firms with higher growth
opportunities tend to have longer CCCs. Another study by Nazir and Afza (2009) found
that firms with higher levels of liquidity also tend to have shorter CCCs.
East Asian emerging markets have been a focus of much research on WCM, given their
economic importance and the unique challenges they face. For example, a study by Wang
and Chen (2015) found that Chinese companies tend to have longer CCCs due to factors
such as higher inventory levels and longer payment periods, while a study by Saini and
Sood (2016) found that Indian companies tend to have shorter CCCs due to factors such
as higher levels of receivables financing.
This article contributes to our understanding of the determinants of working capital
management and highlights the importance of developing country-specific factors when
working capital management strategies.