Article

Corporate Governance and Emerging Economy Studies

6(1) 106–122, 2020
Working Capital Policy: An 2020 International
Management Institute
Unobserved Influence Reprints and permissions:
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DOI: 10.1177/2394901520907710
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Martha Coleman1, Mengyun Wu1, and Mark Baidoo2

Abstract
This study examines the effect of corporate governance on working capital policy; Aggressive and
Conservative of 103 firms listed on Nigeria and Ghana Stock Exchange from 2012 to 2016. This study
used a panel data of nonfinancial companies listed on Nigeria and Ghana stock exchange for the period
2012–2016. Data extracted from the annual financial report. Companies with missing data were dropped
given a total of 103 companies from both countries (Nigeria and Ghana) with total observation of 510.
We discovered that corporate governance on implemented aggressive/conservative working capital
policy by firms produced a mixed result. Aggressive working capital policy implementation calls for strict
control mechanism to ensure less investment in current assets. Therefore, there is strong corporate
governance influence on working capital management of firms that operate aggressive working policy
than firms which have implemented conservative working capital policy.

Keyword
Corporate governance, working capital policy, aggressive working policy, conservative working capital
policy

Introduction ship between corporate governance and firm per-

formance. The study by Bebchuk and Weisbach
The main assignment of corporate governance is (2009) shows that the actions and monitoring of
to supervise, manage, and monitor the various the board of directors directly affect firm activi-
activities of organization for objective achieve- ties. Board of directors’ composition affects the
ment. Several scholars, including Paniagua et al., general activities of the firm. Efficiency and effec-
(2018), Detthamrong et al. (2017), Kyereboah- tiveness operation of every corporate organization
coleman et al. (2007), have investigated into cor- leads to the satisfaction of stakeholders. This leads
porate governance and corporate performance, and to agency theory for the maximization of satisfac-
the result shows that there is significant relation- tion of both managers and other stakeholders.
1
School of Finance and Economics, Jiangsu University, Zhenjian, China.
2
Faculty of Business Studies, Takoradi Technical University, Ghana.

Corresponding author:
Martha Coleman, Faculty of Business Studies, Takoradi Technical University, Ghana.
E-mail: naadjoacole@yahoo.com
Coleman et al.
Agency theory advocates separating management
decisions from corporate control by differentiating
the roles of CEO and chairman of the board, mak-
ing strategic decisions and to monitor and super-
vise them in acting on those decisions (Jensen,
1986). It is the responsibility of board of directors
in setting policies for the organization in all aspects
where the working capital management is not
exceptional. Poor management of working capital
hinders the efficient and survival of the corporate
firm. Corporate governance plays an important
role in controlling the management of working
capital by formulating sound policies. Corporate
governance plays a role in maintaining an appro-
priate working capital management policy, board
size, audit committee, and CEO duality in working
capital management. CEO duality and board size
help in maintaining an appropriate level of work-
ing capital in the organization (Gill et al., 2012).
Therefore, working capital policies adopted by a
corporate organization affect the general perfor-
mance and firm value. Financing decision of the
board of directors on aggressive working capital
policy implies higher levels of current liabilities
and less long-term debt, whereas conservative
working capital financing policy finances opera-
tion by the use of long-term debt and capital and
less current liabilities. Firms are more aggressive
in terms of current liabilities management if they
are concentrating on the use of more current liabil-
ities, which put their liquidity at risk. Therefore,
board of directors’ implementation of Aggressive
Investment Policy (AIP) will be for minimal level
of investment in current assets as compared to
investment in fixed assets. In conservative invest-
ment policy, greater percentage of capital is
invested in liquid assets resulting in lesser profita-
bility. As the level of current assets increased in
proportion to the total assets of the firm, the man-
agement is being more conservative in managing
the current assets of the firm. Either policy adopted
by the board of directors has a link to the achieve-
ment of overall objective of the firm. Nazir and
Afza (2009) assert that managers can create value
107
if they are adopting for conservative approach
towards working capital investment and working
capital financing policies. However, if firms are
having aggressive approach to manage the short
term liabilities, investors give more value to those
firms in stock markets.
Several authors have researched into the effect
of corporate governance on working capital effi-
ciency index, and among these are Achchuthan et
al. (2013), Akram et al. (2018), Kamau and
Basweti (2013), Gill and Biger (2013), but no
study has been undertaken on the effect of corpo-
rate governance index on working capital policy
(aggressive and conservatism). The study aims at
finding relationship between the corporate govern-
ance index and working capital policy of listed
firms in Nigeria and Ghana stock exchange.
The study reveals that the influence of corporate
governance on firms which have implemented
aggressive working capital policy is stronger than
firms which have implemented conservative
working capital policy.
Literature Review
Effect of Corporate Governance on
Working Capital Efficiency
The influence of board of directors is felt in every
aspect of the organization as they are engine of
direction for any corporate institution. Kamau and
Basweti (2013) examined the relationship between
corporate governance and working capital effi-
ciency using 42 firms listed on Nairobi Securities
Exchange from 2006 to 2012. The results of the
study indicate that there is non-significant relation-
ship between corporate governance and working
capital management efficiency. The study by Rose
(2016) revealed that there is a positive link between
ROE/ROA and Danish firm total corporate govern-
ance comply or explain disclosure scores. In a
study by Achchuthan et al. (2013), there is no sig-
nificant mean difference between the levels of
108 Emerging Economy Studies 6(1)
working capital management efficiency (Accounts
Receivable, Accounts Payable, Accounts Inventory
and Cash Conversion Cycle) among corporate gov-
ernance practices as board committees, board
meetings, and proportion of non-executive direc-
tors. Akram et al.’s (2018) board structure has a
negative and insignificant relationship with current
ratio. Therefore, we expect a relationship between
corporate governance and working capital effi-
ciency in both countries (Nigeria and Ghana). The
following hypothesis is proposed:
H1: corporate governance index positive associated
with working capital management.
Board Size and Working Capital
Efficiency Index
Anderson et al. (2004) asserted that size of the
board of directors plays an important role in the
directors’ ability to oversee and control managers.
A larger board size is seen as the one with various
expertise and diverse experience and knowledge to
enabling proper decision-making that enhances
better firm performance than a smaller board size.
The study by Achchuthan et al. (2013) reveals that
there is a significant mean different between effi-
ciency levels of working capital management
across the Board Leadership Structure. While the
study of Gill and Biger (2013) discovered that there
is no significant relationship between board size
and accounts receivable, inventory, cash conver-
sion efficiency and account payable. Akram et al.
(2018) specified that the board structure also has a
positive impact on inventory, and it is significant.
Base on the above results, we propose that there is
a mix relationship between board size and working
capital efficiency index (ARR, INV, APP, CCC) in
both aggressive and conservative working capital
policy groupings. We hypothesize the following:
H2.1: Board size positively associated with working
capital efficiency indexes when the firm has aggres-
sive working capital policy in place.
H2.2: Board size negatively associated with working
capital efficiency indexes when the firm has conserv-
ative working capital policy in place.
Board Independence and Working
Capital Efficiency Index
Independent directors also known as outside direc-
tors play a very important role is undertaking strate-
gic decision for the corporate organization. They
carry diverse and rich expertise that helps the board
to undertake its duties effectively and efficiently.
Lack of independent directors on the board restricts
the board from viewing issues from different per-
spective and may cause failure in top management
performance. The concentration of decision man-
agement and decision control in one individual hin-
ders boards’ effectiveness in monitoring top
management (Fama & Jensen, 1983). By definition,
independent directors are not major shareholders or
groups of shareholders and executives of the com-
pany. Their unique expertise and qualification are
needed by the board of directors’ for better strategic
decision making on company’s operation. As the
independent directors may have knowledge or
information, which may allow the firm to have effi-
cient working capital policy, independent director(s)
on the board will enhance efficient and effective
working capital management. Akram et al.’s (2018)
study revealed that board with more independent
directors contributes efficiently in managing work-
ing capital. Based on these, we proposed that there
is a relationship between the number of independent
directors on the board and working capital effi-
ciency index. We hypothesize the following:
H3.1: Independent directors negatively associated
with working capital efficiency indexes when the
firm has aggressive working capital policy in place.
H3.2: Independent directors positively associated with
working capital efficiency indexes when the firm has
conservative working capital policy in place.
Coleman et al.
Audit Committee Size and Working
Capital Efficiency Index
One of the vital parts of good corporate governance
is audit committee. Therefore, the role of audit
committee on board of directors’ performance can-
not be disputed. A sub-committee is independently
responsible for the preparation of financial reports
and accurate disclosure in compliance with report-
ing standards with internal control system and
strong enough audit standards. The audit commit-
tee is responsible for providing advice in selecting
the external auditors to the board, controlling man-
agement, creating confidence in the accuracy, reli-
ability, and quality of financial reports (Harris &
Raviv, 2006). Studies by Kyereboah-coleman et al.
(2007) revealed that audit committee represents
another internal governance mechanism whose
impact is to improve the quality of financial man-
agement of a company. Aldamen et al. (2012) find
a negative effect of audit committee on firm perfor-
mance; more specifically, firms with smaller audit
committee with more financial expertise and expe-
rience tend to have positive firm performance. Gill
and Biger (2013) established that there are non-
significant relationships between audit committee
and accounts receivable, audit committee and
inventory, audit committee and accounts payable,
audit committee and cash conversion cycle, audit
committee and cash conversion efficiency.
Achchuthan et al. (2013) discovered that there is a
significant mean different between efficiency lev-
els of working capital management across the
board committees. Akram et al.’s (2018) audits
have a negative and insignificant relationship with
current ratio and also an audit has a significant pos-
itive relationship with inventory management.
Detthamrong et al. (2017) show that smaller audit
committees with financial expertise and more
experience are more likely to be associated with
positive firm performance, this implies that there is
positive influence of audit committee on efficient
working capital management which consequently
has positive impact on firm performance. Better
109
internal control mechanisms induced by the firm’s
audit committee may mitigate upwards earnings
managements, thereby lowering firm performance
in the short run. We argue that the efficiency of
working capital management efficiency depends
on the efficiency of the audit committee on the
board since they provide internal control mecha-
nism to top management. We propose the following
hypothesis:
H4.1: Audit committee positively associated with
working capital efficiency indexes when the firm has
aggressive working capital policy in place.
H4.2: Audit committee negatively associated with
working capital efficiency indexes when the firm has
conservative working capital policy in place.
CEO Duality and Working Capital
Efficiency Index
CEO duality is seen as CEO of a corporate organi-
zation performing a dual role: CEO and board chair-
man. The duality role of CEO causes conflict of
interest which hinders the disclosure of some key
information for better decision making by the board
of directors (Cornett et al., 2003). Where there is no
duality role of the CEO, better decisions are taken
with clarity and understanding and allow for proper
policy-making and monitoring. Studies show that
there is a positive relationship between CEO duality
and accounts receivable. CEO duality and the inter-
nationalization of the firm improve the efficiency of
accounts receivable management, which in turn
help reduce working capital requirements. On the
contrary, the study of Gill and Biger (2013) reveals
that there is non-significant relationship between
CEO duality and inventory, cash conversion cycle
but there is significant positive relationship between
CEO duality and accounts payable. Sanjai Bhagat
and Brian Bolton (2007) show that CEO duality is
negatively associated with firm performance for
firms in the US. We therefore argue that there is a
significant relationship between CEO duality and
110 Emerging Economy Studies 6(1)
working capital efficiency index. The following
hypothesis is proposed:
H5.1: CEO duality positively associated with working
capital efficiency indexes when the firm has aggres-
sive working capital policy in place.
H5.2: CEO duality negatively associated with work-
ing capital efficiency indexes when the firm has con-
servative working capital policy in place.
Audit Reputation and Working Capital
Efficiency Index
Financial statement provides information about the
performance of organization which is a useful tool
for effective decision-making by key stakeholders.
The role of auditors in meeting this requirement is
needed. The reputation of the auditor in providing
accurate information about the operational
efficiency of the organization which working
capital efficiency is one of the keys of effective and
efficient performance. The study by Caramanis and
Lennox (2008) reveals that audit effort is inversely
related to positive abnormal accruals, suggesting
that when audit effort is low, the manager tends to
manage earnings upwards. In another study by
Detthamrong et al. (2017) for small firms, audit
reputation has a negative effect on firm performance.
Auditors from the large international auditing firms
may have higher audit standards than small local
auditing firms. A very high quality and independent
auditing processes hinder the manipulation of
earnings. We argue and investigate into the
relationship between firms that uses the service of
BIG FOUR auditing firms (EY, Deloitte, KPMG,
and PricewaterhouseCoopers) within the two
groupings of working capital policy (aggressive
and conservative). We hypothesize the following:
H6: Audit reputation positively associated with
working capital efficiency indexes in both aggressive
and conservative capital policy firm groupings.
Data and Methodology
This study used a panel data of nonfinancial com-
panies listed on Nigeria and Ghana stock exchange
for the period 2012–2016. Data is extracted from
the annual financial report. Companies with seri-
ous missing annual financial data were dropped
given a total of 103 companies from both countries
(Nigeria and Ghana) with total observation for the
study being 510. We tested the hypothesis dis-
cussed in the section “Effect of Corporate
Governance on Working Capital Efficiency” and
the research question that corporate governance
influences the adaptation of working capital policy
(aggressive and conservative). Companies were
grouped into two groups—aggressive and con-
servative working capital policy—by calculating
for the investment policy of every firm, that is,
total current liabilities divided by total assets.
Firms with lower ratio <0.3 were considered to
adopt aggressive working capital policy, whereas
those with >0.3 were considered to adopt conserv-
ative working capital policy.
Dependent Variables
The dependent variable for the study was lag of
working capital which is calculated by subtracting
total current liabilities from total current assets
which follows the study by Detthamrong et al.
(2017). Working capital efficiency index was also
used as dependent variables; account receivables
(ARR) measured as accounts receivables divided
by sales multiplied by number of days in a year;
inventory (INV) measured as inventory divided
by cost of sales multiplied by number of days in a
year; account payable (APP) measured as accounts
payable divided by cost of sales multiplied by
number of days in a year; cash conversion cycle
(CCC) measured as days in account receivable
plus days in inventory minus days in account
payable consistent with Gill and Biger (2013).
Coleman et al. 111

Independent Variables
To measure the effect of corporate governance on
working capital management, five index of
corporate governance used were designed by
Sanjai Bhagat and Brian Bolton (2007); board size
(BSIZE) is measured by number of board of
directors including chairperson and independent
directors; independent directors (LNINDD)
measured by the number of independent directors
on; audit committee (AUCO) is measured by
number of audit committee on the board; CEO
duality (CDUA) is measured by dummy variable 1
for CEO serving as board chairman and 0 for
otherwise; audit reputation (AUPU) is measured
by dummy variable 1 if the firm’s auditor is “1” of
the big four audit firms (EY, Deloitte, KPMG, and
Price water house Coopers) and “0” otherwise.
Control Variables
The control variable used for the study may have
influence on the result of effect of corporate govern-
ance on working capital management. Firm size
(LNFS) is measured by lag of firms total assets; firm
age (LNFA) measured as log of the numbers of years
the firm has been listed on stock exchange; financial
leverage (LEV) measured as ratio of total debt divided
by total assets; firm growth (FGTH) measured as cur-
rent year sales divided by current year sales minus
previous year sales consistent with Paniagua et al.
(2018). All variables are well described in Table 1.

Table 1. Variable Description

Variable Code Variable Name Variable Description

Corporate governance
BSIZE Board size Number of board directors, including a chairperson and
independent directors
LNINDD Independent directors The ratio of the number of independent directors on the number
of all directors
AUCO Audit committee size A number of audit committee on the board
CDUA CEO duality CEO duality is a dummy variable which take a value of “1” if the
CEO is also the chairperson of the board of directors, and “0”
otherwise
AUPU Audit reputation A binary variable, which takes a value of “1” where a firm’s
auditor is one of the big four auditing firms, and “0” otherwise.
The big four auditing firms including KPMG, Deloitte,
PricewaterhouseCoopers, and EY
Working capital management
LNWC Working capital Log of working capital (current assets − current liabilities)
ARR Account receivable (Accounts receivables/sales) × 365 days
INV Inventory management (Inventory/cost of goods sold) × 365 days
APP Account payable (Accounts payables/cost of goods sold) × 365 days
CCC Cash conversion cycle Days in ARR + days in INV − days in APP
Control variables
(Table 1 Continued)
112 Emerging Economy Studies 6(1)

(Table 1 Continued)
Variable Code Variable Name Variable Description
LNFS Firm size The natural logarithm of total assets
LNFA Firm age The natural logarithm of the number of years since the firm was
listed
LEV Financial leverage The ratio of total debt to total assets
FGTH Firm growth Current year sales divided by current year sales minus previous
year sales
Source: The authors.

Empirical Method CCC = β1 + β 2 × BSIZ +

Multiple Regressions, OLS β3 × LNINDD + β 4 × AUCO +
β5 × CDUA + β 6 × AUPU + (5)
Multiple regression analysis is a standard method to
estimate the relationship between the determinants of β7 × LEV + β8 × LNFS +
corporate governance and working capital manage- β9 × LNFA + β10 × FGTH + ε
ment. We estimated the following Equations 1–5:
Panel models (Fixed Effect and Random Effect)
LNWC = β1 + β 2 × BSIZ + were used for the study to deal with the influence
β3 × LNINDD + β 4 × AUCO + of serial correlated errors; fixed effect model using
Equation 6 and random effect model using
β5 × CDUA + β 6 × AUPU + (1) Equation 7. Hauseman test was performed to
β7 × LEV + β8 × LNFS + choose between fixed effect and random effect
β9 × LNFA + β10 × FGTH + ε models because of the unobserved errors of the
exogeneity. The null hypothesis was accepted by
ARR = β1 + β 2 × BSIZ +
Hauseman test; therefore, we chose random effect
β 3 × LNINDD + β 4 × AUCO + model for the study. Endogeneity could affect the
β 5 × CDUA + β 6 × AUPU + (2) estimated result; therefore, to control it the study
β 7 × LEV + β8 × LNFS + used Arellano and Bond’s (1991) two-step
Generalized Method of Moments (GMM) using
β 9 × LNFA + β10 × FGTH + ε Equation 8. The endogeneity issue occurs when an
INV = β1 + β 2 × BSIZ + independent variable is correlated with errors εi,t,
which is often caused by omitted variables, meas-
β 3 × LNINDD + β 4 × AUCO +
urement errors, or simultaneity between dependent
β 5 × CDUA + β 6 × AUPU + (3) variables and independent variables. The most
β 7 × LEV + β8 × LNFS + efficient way to deal with endogeneity is develop-
β 9 × LNFA + β10 × FGTH + ε ing proper instrumental variables, which has
strong correlation with endogenous independent
APP = β1 + β 2 × BSIZ + variables but are not correlated with errors. A
β 3 × LNINDD + β 4 × AUCO + lagged regressor can be used as an instrument and
the lagged differences of all the independent vari-
β 5 × CDUA + β 6 × AUPU + (4)
ables can also be used as instruments to avoid
β 7 × LEV + β8 × LNFS + exogenous issues (Arellano & Bond, 1991). We
β 9 × LNFA + β10 × FGTH + ε estimated the following equations:
Coleman et al. 113

Fixed Effect Model Results and Discussion

LNWCi ,t = β1 + β 2 × BSIZ i ,t +
β 3 × LNINDDi ,t + β 4 × AUCOi ,t +
β 5 × CDUAi ,t + β 6 × AUPU i ,t +
(6)
β 7 × LEVi ,t + β8 × LNFSi ,t +
β 9 × LNFAi ,t + β10 × FGTH i ,t + ai + ε i ,t
Random Effect Model
LNWCi ,t = β1 + β 2 × BSIZ i ,t +
β 3 × LNINDDi ,t + β 4 × AUCOi ,t +
β 5 × CDUAi ,t + β 6 × AUPU i ,t + (7)
β 7 × LEVi ,t + β8 × LNFSi ,t +
β 9 × LNFAi ,t + β10 × FGTH i ,t + ε i ,t
GMM Model
LNWCi ,t = β1 + β 2 × LNWCi ,t −1 +
β 3 × BSIZ i ,t + β 4 × INDDI i ,t +
β 5 × AUCOi ,t + β 6 × CDUAi ,t +
(8)
β 7 × AUPU i ,t + β8 × LEVi ,t +
β 9 × LNFSi ,t + β10 × LNFAi ,t +
β11 × FGTH i ,t + ai + ε i ,t
Where, i indicates a particular company, t denotes
the time in years, ε is a stochastic error term, and
all other variables are defined as in Table 1.
Table 2 shows the descriptive statistics of the
variables used in this article for the final sample of
510 for both Nigeria and Ghana with firm-year
observations over the period 2012–2016. The
mean value of BSIZE is 8.10, whereas the mean
value of LNINDDI is 0.15 that of AUDITCO is
2.04. The mean value of LNWC is 3.34, whereas
the mean (median) value of ARR, INV, APP, and
CCC were 22.99, 46.886, 48.616, and 41.263
respectively, implying that it takes a longer period
in their cash conversion cycle. The mean value of
leverage is 0.8, suggesting that the average firm in
both Nigeria and Ghana is overleveraged.
Table 3 presents correlation coefficients of key
variables. As the correlation coefficients between
corporate governance indexes with working capi-
tal are generally below 0.2. The correlation
between corporate governance indexes with the
efficiency indexes of working capital (ARR, APR,
INV, CCC) shows that correlation coefficient of
corporate governance index with CCC was below
0.3, whereas ARR was below 0.5. INV and APR
were having correlation coefficient below 0.65 and
-0.46 respectively. Multicollinearity between vari-
ables was check by conducting Variance Inflation
Factor (VIF). VIF was not greater than 3 for all
variables; therefore multicollinearity does not
exist in the model.

Table 2. Descriptive Statistics of the Variables

Variable OBS Mean STD Minimum Maximum

BSIZE 510 8.100 2.405 4.000 16.000
LNINDD 510 0.145 0.181 0.000 0.600
AUCO 510 2.041 1.007 0.000 6.000
CDUA 510 0.049 0.216 0.000 1.000
AUPU 510 0.559 0.497 0.000 1.000
LNWC 510 3.344 2.953 0.000 8.857
CCC 510 41.263 34.390 51.071 90.431
APP 510 48.616 33.457 52.344 71.127
(Table 2 Continued)
114 Emerging Economy Studies 6(1)
(Table 2 Continued)
Variable OBS Mean
INV 510 46.884 34.276
ARR 510 22.996 15.146
LEV 510 0.806
FGTH 510 0.017
LNFS 510 4.354
LNFA 510 3.059
Source: The authors.
In this section, we present our empirical results
regarding the effects of corporate governance
indexes on working capital. Table 4 presents the
result of OLS, fixed effect, random effect, and
GMM regression analysis to investigate the
relationship between dependent variable working
capital (LNWC) and corporate governance index
(CGI). The result from the four models shows that
board size (BSIZE), CEO duality (CDUA), firm
size (LNFS), and leverage (LEV) are negatively and
statistically significant at 1 percent, implying that a
change in these variable influence the efficiency of
working capital. Audit committee on the board is
positively and statistically significant at 10 percent
in three models (OLS, FE, GMM) but in RE is
positively and statistically significant at 5 percent.
Growth is positively and statistically significant in
OLS, RE and GMM at 10 percent but had no
statistical significance in FE. Audit reputation
(AUPU) had no influence on working capital
efficiency in all the four models. This implies that
monitoring and control of board of directors
influence the operational efficiency of firms. This
rejects the study by Kamau and Basweti (2013)
indicating that there was no statistical significant
relationship between corporate governance and
working capital management efficiency.
Table 5 presents the variation of the effect of
corporate governance index on working capital
policy with and without control variables. In model
1 the result shows that firms which have adopted
aggressive working capital policy has only board
STD Minimum Maximum
0.000 71.360
0.000 34.273
1.543 -0.470 1.698
0.575 -1.000 1.964
1.125 0.000 7.005
0.620 1.609 3.932
size negatively and statistically significant at 5
percent with coefficient of -0.227. All other CGI
do not have statistical relationship with working
capital. In model 2 with the inclusion of control
variables, board size (BSIZE) was still negatively
and statistically significant at 5 percent with coef-
ficient of -0.253, the other four CGI (LNINDD,
CDUA, AUCO, and AUPU) were non-significant.
This implies that firms which are operating aggres-
sive working capital policy have the influence of
board size in determining the achievement of
stated objective. In models 3 and 4, which assess
the influence of CGI on conservative working cap-
ital policy, without the control variables all the
CGI were statistically significant but in model 4
with the inclusion of the control variables only
number of independent directors was insignificant
together with firm age and growth. This reject the
study by researchers like Akram et al. (2018),
which specifies that board structure has a negative
and insignificant relationship with current ratio.
Table 6 investigates the effect of CGI on working
capital efficiency index of firms which had adopted
aggressive working capital policy. The result shows
that CEO duality (CDUA) is negatively and
statistically significant with ARR, INV, APR with
coefficient of −70.15, −71.67, and −60.03,
respectively but had no statistical significance in
CCC. Audit reputation (AUPU) is positively and
negatively statistically significance in both CCC
and APP but had no significance in ARR and INV.
Number of independent directors (LNINDD) on the
Coleman et al.
board is negatively and statistically significance in
all the four models (ARR, INV, APP, and CCC) at 1
percent, 5 percent, 5 percent and 10 percent
respectively. Board size had no statistical
significance in all the four models. This shows that
the control mechanism of corporate governance
provides measures to monitor the operational
efficiency of the firm. Aggressive working capital
policy always seeks to reduce investment in the
current assets as against fixed assets therefore
control mechanisms are put in place by board of
directors to achieve the stated objective. For the
control variables Leverage (LEV) is negatively and
statistically significance in inventory management
(INV) but no significance relationship in account
receivable (ARR), account payables (APP) and
cash conversion cycle (CCC). Growth is having
negative significant relationship in both INV and
APR but there is no statistical significance
relationship in CCC and ARR. Firm size is
negatively and statistically significance in INV and
APP but no statistical relationship in ARR and CCC.
Firm age is negatively and statistically significance
in ARR but no statistical relationship in INV, APR,
and CCC. This reject the result of some prior
research for example Gill and Biger (2013) find out
that there is no significant relationships between
board size and accounts receivable, It shows that
firms with a high score in board structure can
proficiently manage their inventory board size and
inventory, board size and accounts payable, board
size and cash conversion efficiency.
Table 7 presents the result for firms that had
adopted conservative working capital policy. The
result shows that the entire corporate governance
index had no statistical significance relationship in
all the four models except board size which is
negatively significance at 10 percent in CCC and
Audit reputation is positively and statistical
significance with APP at 5 percent. Leverage is
having significant relationship in INV, APP and
CCC. GROWTH is negatively and statistically
significance at 10 percent in INV but there is non-
significance with ARR, APP, and CCC. Firm size
115
is negatively and statistically significance in INV,
ARR, and CCC but no significant relationship
with APP. Firm age is positively and statistical
significance with ARR, INV and CCC but no had
no statistical significance relationship with APP.
Conclusion and Policy Implication
The present study investigated into the effect of cor-
porate governance on working capital efficiency of
firms listed on Nigeria and Ghana stock exchange.
We construct a firm-level index of corporate govern-
ance index based on aspects of board composition
following the research of Sanjai Bhagat and Brian
Bolton (2007). Firms were grouped into two main
groups according to the working capital policy adap-
tation (aggressive and conservatism). Single equa-
tion estimate was undertaken for each of the working
capital efficiency indexes (ARR, INV, APP, CCC)
regress on corporate governance indexes with the
control variable inclusive. Also effect of corporate
governance on financial performance was examined
another single equation construct. The overall effect
of corporate governance on working capital effi-
ciency for both countries was established by con-
structing a single equation. A test for endogeneity
was examined by undertaking VIF, and the result
shows that all variables were having less than 3,
therefore multicollinearity do not exist in the model
From the study, the result shows that board size
(BSIZE), CEO duality (CDUA), firm size (LNFS),
and leverage (LEV) are negatively and statistically
significant at 1 percent, implying that a change in
these variable influence the efficiency of working
capital. Audit committee on the board is positively
and statistically significant at 10 percent in three
models (OLS, FE, GMM) but in RE is positively and
statistically significant at 5 percent. Growth is
positively and statistically significant in OLS, RE
and GMM at 10 percent but had no statistical
significance in FE. Audit reputation (AUPU) had no
influence on working capital efficiency in all the
four models, consistent with (Jackling & Johl, 2009).
Table 3. Pearson Correlation

BSIZE LNINDD AUCO CDUA AUPU LNWC CCC APP INV ARR LEV FGTH LNFS LNFA
BSIZE 1
LNINDD 0.2288 1
AUCO 0.5735 0.1899 1
CDUA 0.0624 0.0129 –0.0544 1
AUPU 0.1948 0.1059 0.3465 –0.2555 1
LNWC –0.1666 –0.1067 0.0071 –0.1545 0.0491 1
CCC 0.1644 –0.0888 –0.1578 0.1249 –0.13 0.2613 1
APP 0.0101 –0.0568 0.0793 0.0855 0.1156 –0.2008 –0.4677 1
INV –0.1076 –0.0638 –0.0789 –0.1423 0.016 0.0477 0.6543 0.1347 1
ARR 0.1635 –0.1645 –0.0924 0.0164 –0.1088 0.1573 0.453 0.3151 0.2168 1
LEV –0.0828 –0.0275 –0.1938 0.0137 –0.1175 –0.2049 –0.0813 0.0143 –0.0827 –0.0341 1
FGTH 0.1031 –0.0016 0.0471 –0.0426 0.1061 0.0567 –0.0481 0.1223 –0.1387 –0.0898 –0.0341 1
LNFS 0.4234 0.0891 0.3243 –0.0873 0.2663 –0.1107 –0.1941 0.0388 –0.1455 0.1357 –0.03158 0.157 1
LNFA 0.0119 –0.2014 –0.0262 –0.257 0.0676 0.0758 0.1362 –0.0334 0.133 0.0508 0.0173 0.0531 –0.0744 1
Source: The authors.
Coleman et al. 117

Empirical Result
Table 4. Effect of Corporate Governance Index on Working Capital Management

Variables (OLS) (RE) (FE) (GMM)

BSIZE –0.203*** –0.203*** –0.204*** –0.203***
(0.0681) (0.0651) (0.0686) (0.0681)
LNINDD –1.035 –1.035 –1.035 –1.035
(0.721) (0.700) (0.724) (0.721)
AUCO 0.299* 0.299** 0.299* 0.299*
(0.159) (0.151) (0.160) (0.159)
CDUA –1.708*** –1.708*** –1.708*** –1.708***
(0.615) (0.575) (0.618) (0.615)
AUPU 0.161 0.161 0.163 0.161
(0.279) (0.269) (0.280) (0.279)
LNFA 0.102 0.102 0.103 0.102
(0.213) (0.208) (0.214) (0.213)
LNFS –0.439*** –0.439*** –0.437*** –0.439***
(0.131) (0.129) (0.132) (0.131)
FGTH 0.401* 0.401* 0.381 0.401*
(0.218) (0.220) (0.232) (0.218)
LEV –0.465*** –0.465*** –0.463*** –0.465***
(0.0855) (0.0773) (0.0859) (0.0855)
Constant 6.493*** 6.493*** 6.481*** 6.493***
(0.910) (0.835) (0.915) (0.910)
No. of observations 510 510 510 510
R-squared 0.130 0.130 0.128
Number of Years 5 5 5 5
Source: The authors.
Notes: Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.

Table 5. Effect of Corporate Governance Index on Working Capital Policy (Aggressive and Conservative)

Variables AG1 AG2 CO1 CO2

BSIZE –0.227** –0.253** –0.167** –0.123*
(0.114) (0.119) (0.0709) (0.0729)
LNINDD 1.350 1.185 –1.565* –1.336
(1.031) (1.025) (0.863) (0.855)
AUCO 0.0462 –0.134 0.351* 0.367**
(Table 5 Continued)
118 Emerging Economy Studies 6(1)

(Table 5 Continued)
Variables AG1 AG2 CO1 CO2
(0.302) (0.295) (0.188) (0.184)
CDUA –0.802 –1.871 –3.290*** –2.675***
(1.290) (1.275) (0.615) (0.648)
AUPU 0.387 –0.0350 –0.578* –0.538*
(0.416) (0.418) (0.326) (0.325)
LNFA –0.715** 0.205
(0.326) (0.250)
LNFS 0.205 –0.366**
(0.207) (0.155)
FGTH 0.463 0.0365
(0.329) (0.229)
LEV –0.216** –1.125***
(0.0885) (0.297)
Constant 3.137*** 5.379*** 5.705*** 6.828***
(0.621) (1.368) (0.569) (1.049)
No. of observations 200 200 310 310
R-squared 0.040 0.131 0.122 0.168
Source: The authors.
Notes: Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.

Table 6. Effect of Corporate Governance Index on Aggressive Working Capital Policy

(1) (2) (3) (4)

Variables ARR INV APP CCC
BSIZE -2.251 4.787 -1.287 4.386
(2.440) (3.141) (3.087) (4.848)
LNINDD −55.13*** −68.27** −55.28** −72.65*
(21.09) (27.15) (26.68) (41.90)
AUCO -3.961 -1.791 7.821 –15.61
(6.069) (7.812) (7.679) (12.06)
CDUA −70.15*** −71.67** −60.03* −86.05
(26.23) (33.76) (33.19) (52.11)
AUPU −7.386 −5.008 49.10*** −63.24***
(8.609) (11.08) (10.89) (17.10)
LEV -2.712 −5.323** -3.003 −5.195
(1.821) (2.344) (2.304) (3.618)
(Table 6 Continued)
Coleman et al. 119

(Table 6 Continued)
(1) (2) (3) (4)
FGTH −6.784 -17.80** -26.59*** 0.633
(6.759) (8.699) (8.551) (13.43)
LNFS -1.861 -12.26** -11.07** -2.810
(4.264) (5.489) (5.395) (8.472)
LNFA -18.80*** -2.811 −7.405 -14.50
(6.699) (8.623) (8.475) (13.31)
Constant 172.4*** 115.6*** 162.5*** 127.7**
(28.13) (36.21) (35.59) (55.89)
Observations 200 200 200 200
R-squared 0.159 0.113 0.194 0.120
Source: The authors.
Notes: Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1

Table 7. Effect of Corporate Governance Index on Conservative Working Capital Policy

(1) (2) (3) (4)

Variables ARR INV APP CCC
BSIZE -1.012 -2.652 1.163 −4.414*
(1.408) (1.668) (1.807) (2.344)
LNINDD −8.486 30.30 9.453 13.34
(16.51) (19.56) (21.19) (27.49)
AUCO 3.875 −6.825 1.300 −4.095
(3.561) (4.218) (4.570) (5.927)
CDUA 7.205 −8.672 25.63 -32.63
(12.50) (14.81) (16.04) (20.81)
AUPU −9.085 10.84 16.65** -14.94
(6.280) (7.438) (8.059) (10.45)
LEV 6.915 -17.27** 18.03** -28.63***
(5.727) (6.783) (7.349) (9.532)
FGTH −4.832 −9.276* −5.943 −8.459
(4.427) (5.244) (5.681) (7.369)
LNFS −5.860* -11.99*** 2.358 -20.97***
(2.990) (3.542) (3.837) (4.977)
LNFA 12.77*** 19.14*** 0.755 30.99***
(4.819) (5.707) (6.183) (8.020)
Constant 63.60*** 95.46*** 42.93* 116.3***
(Table 7 Continued)
120 Emerging Economy Studies 6(1)
(Table 7 Continued)
(1)
(20.26)
Observations 310
R-squared 0.063
Source: The authors.
Notes: Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1.
With regards to working capital policy adapta-
tion, it was revealed that in the aggressive working
capital policy CEODUA is negatively and statisti-
cally significant with ARR, INV, APP with coeffi-
cient of −70.15, 71.67, and −60.03 respectively
but had no statistical significance in CCC. Audit
reputation (AUPU) is positively and negatively
statistically significance in both CCC and APR but
had no significance in ARR and INV, consistent
with DeFond and Lennox (2011). Number of
Independent directors on the board is negatively
and statistically significance in all the four models
(ARR, INV, APR and CCC) at 1 percent, 5 per-
cent, 5 percent, and 10 percent respectively. Board
size had no statistical significance in all the four
models, consistent with Mak and Kusnadi (2005).
The objective of aggressive working capital policy
is to have less investment in current asset and com-
pared to fixed assets. Therefore, this objective is
achieved by monitoring and controlling opera-
tional efficiency index (ARR, INV, APP, CCC).
For the control variables Leverage is negatively
and statistically significance in INV but no signifi-
cance relationship in ARR, APR and CCC. Growth
is having negative significant relationship in both
INV and APR but there is no statistical signifi-
cance relationship in CCC and ARR. Firm size is
negatively and statistically significance in INV
and APP but no statistical relationship in ARR and
CCC. Firm age is negatively and statistically sig-
nificance in ARR but no statistical relationship in
INV, APR and CCC.
Firms that practice conservative working capital
policy invest more in current assets. Therefore,
monitoring and control of the liquid assets is of less
(2) (3) (4)
(24.00) (26.00) (33.72)
310 310 310
0.144 0.056 0.180
value to corporate governance decision making.
For conservative working capital policy, the result
shows that all corporate governance indexes had no
statistical significance relationship in all the four
models except board size which is negatively sig-
nificance at 10 percent in CCC and Audit reputa-
tion is positively and statistical significance with
APP at 5 percent. This is consistent with Achchuthan
et al. (2013). Leverage is having significant rela-
tionship in INV, APP, and CCC. GROWTH is neg-
atively and statistically significance at 10 percent
in INV but there is no statistical significance rela-
tionship in ARR, APR, and CCC. Firm size is nega-
tively and statistically significance in INV, ARR,
and CCC but no significant relationship in APP.
Firm age is positively and statistical significance in
ARR, INV and CCC but no had no statistical sig-
nificance relationship in APP.
For the effect of corporate governance on firm
financial performance result shows that only CEO
duality (CDUA) is negatively and statistical sig-
nificance at 1 percent, all the other indexes of CGI
are not having statistical significant effect on prof-
itability. In model 2 with the inclusion of control
variables, board size and CEO duality were having
statistical significant effect on profitability. This
rejects the studies of some researchers like
Muniandy and Hillier (2015).
In view of the above result, it can be said that
corporate governance of firms which have imple-
mented aggressive/conservative working capital
policy produced a mixed result. For policy imple-
mentation, firms should not adopt to only one
working capital policy, based on the prevailing
business environment firms can implement the
Coleman et al.
right policy to have better corporate performance.
Also West African firms should implement better
corporate governance mechanism so as to attract
other foreign investors. The limitation of the study
was lack of data to cover all firms in Nigeria and
Ghana therefore it was limited to listed firms on
stock exchange with less missing annual financial
report from Nigeria and Ghana. Also the findings
of the present study could be generalized for firms
in the same category.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest
with respect to the research, authorship, and/or
publication of this article.
Funding
The authors received no financial support for the
research, authorship, and/or publication of this article.
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