Working Capital Management and Corporate Performance: Evidence from Indonesia

Abstract

Purpose: The purpose of this paper is to examine the relationship between working capital management and firm performance for firms listed on the Indonesian Stock Exchange. Prior works have employed many indicators of the working capital. The results of previous studies, however, have been inconsistent. This study is an attempt to find out the best proxy of working capital in explaining firm’s performance.

Methodology: This study employs regression panels for five measures of working capital to model the data for fifty-four firm-year observations that meet the sampling criteria, covering the time 2010–2014. This study also uses adjusted R-squared as the criteria to select the strongest relationship between measures of working capital and firm performance.

Findings: The findings indicate that all proxies of working capital management met expected signs and statistical significance. Hence, working capital management significantly improves firms’ performance. The proxy of inventory turnovers is the best measure of working capital in explaining firm performance.

Originality: To the author’s knowledge, this is the first study examining the relationship between five measures of working capital management and firm performance in Indonesia or in any emerging markets; hence, this study contributes to the scarce literature on the management of working capital.