Open Access Open Access  Restricted Access Subscription or Fee Access
Total views : 3299

Impact of Corporate Governance Practices on Working Capital Management Efficiency: A Structural Equation Modelling Approach

Affiliations

  • Research Scholar, Department of Management Studies, Indian Institute of Technology Roorkee, Roorkee - 247 667, Uttarakhand, India
  • Research Scholar, Department of Management Studies, Indian Institute of Technology Roorkee, Roorkee - 247667, Uttarakhand, India
  • Associate Professor, Department of Management Studies, Indian Institute of Technology Roorkee, Roorkee - 247 667, Uttarakhand, India

Abstract


Working capital management and corporate governance are two important issues of overall firm management. The purpose of this study was to explore the impact of corporate governance practices on working capital management (WCM) efficiency of firms in a growing economy like India. We used data from 127 large Indian manufacturing sector firms and employed structural equation modelling to study this relationship. The period of the study is from 2004-2013 (10 years). We found that corporate governance indicators like board size, number of independent directors in a board, and percentage of independent members in an audit committee do significantly affect the efficiency of working capital management. We also found that an increase in independence of the board and audit committee compels the management to be conservative in managing short term capital, which in turn negatively affects WCM efficiency. It was observed that an increase in board size weakens control and allows the management to follow aggressive WCM strategies. The results also revealed that the size and independence of a board has more effect on WCM efficiency than the independence of the audit committee. The results of the study will help the practitioners, investors, and analysts to better understand the relation between effective corporate governance and short term funds management and enable them to take better and informed decisions.

Keywords

Working Capital Management, Corporate Governance, Board Size, Audit Committee, CEO Duality, Cash Conversion Cycle, Net Trade Cycle

G310, G320, G340

Paper Submission Date : September 17, 2014 ; Paper sent back for Revision : December 8, 2014 ; Paper Acceptance Date : December 12, 2014.


Full Text:

 |  (PDF views: 5)

References


  • Ahamed, N. (2014). Multiple directorship & interlock: An empirical study of its impact on firms' financial performance. Indian Journal of Finance, 8 (10), 48 - 61.

  • Berryman, J. (1983). Small business failure and survey of the literature. International Small Business Journal, 1(4), 47 - 59. DOI: 10.1177/026465608300100404

  • Chandra ,B., Chouhan, V., & Goswami, S. (2012). Analyzing trends and profitability vis-à-vis working capital management (WCM): A study of select information technology (IT) organizations in India. Indian Journal of Finance, 6 (7), 13 - 26.

  • Chandra, H., & Selvaraj, A. (2012). Working capital management in selected Indian steel companies. Indian Journal of Finance, 6 (11), 5 - 15.

  • Chen, Y. - R., & Chuang, W.-T. (2009). Alignment or entrenchment? Corporate governance and cash holdings in growing firms. Journal of Business Research, 62 (11), 1200 - 1206. DOI:10.1016/j.jbusres.2008.06.004

  • Chiou, J.-R., Cheng, L., & Han-Wen, W. (2006). The determinants of working capital management. Journal of American Academy of Business, Cambridge, 10 (1), 149 - 155.

  • Cotter, J. F., Shivdasani, A., & Zenner, M. (1997). Do independent directors enhance target shareholder wealth during tender offers? Journal of Financial Economics, 43 (2), 195 - 218.

  • Drobetz, W., & Grüninger, M. C. (2007). Corporate cash holdings: Evidence from Switzerland. Financial Markets and Portfolio Management, 21 (3), 293 - 324.

  • Erasmus, P. D. (2010). Working capital management and profitability: The relationship between the net trade cycle and return on assets. Management Dynamics, 19 (1), 2 - 10.

  • Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. Journal of Law and Economics, 26, 327 - 349.

  • Filbeck, G., & Krueger, T. M. (2005). An analysis of working capital management results across industries. Mid - American Journal of Business, 20 (2), 11 - 20. DOI: http://dx.doi.org/10.1108/19355181200500007

  • Gill, A. S., & Biger, N. (2013). The impact of corporate governance on working capital management efficiency of American manufacturing firms. Managerial Finance, 39 (2), 116- 132. doi:10.1108/03074351311293981

  • Gill, A., & Shah, C. (2012). Determinants of corporate cash holdings: Evidence from Canada. International Journal of Economics and Finance, 4 (1), 70 -79.

  • Gitman, L. J. (1974). Estimating corporate liquidity requirements: A simplified approach. Financial Review, 9 (1), 79 - 88. DOI:10.1111/j.1540-6288.1974.tb01453.x

  • Harford, J., Mansi, S. A., & Maxwell, W. F. (2008). Corporate governance and firm cash holdings in the U.S. Journal of Financial Economics, 87 (3), 535 - 555. DOI:10.1016/j.jfineco.2007.04.002

  • Hellman, T., & Puri, M. (2000). The interaction between product market and financing strategy: The role of venture capital. Review of Financial Studies, 13 (4), 959 - 984. DOI: 10.1093/rfs/13.4.959

  • Hu, L. - T., & Bentler, P. M. (1999). Cutoff criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling: A Multidisciplinary Journal, 6 (1), 1 - 55. DOI:10.1080/10705519909540118

  • Hyun-Han, S., & Soenen, L. (1998). Efficiency of working capital management and corporate profitability. Financial Practice & Education, 8 (2), 37 - 45.

  • Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48 (3), 831 - 880. DOI:10.1111/j.1540-6261.1993.tb04022.x

  • John, K., & Senbet, L. W. (1998). Corporate governance and board effectiveness. Journal of Banking & Finance, 22 (4), 371 - 403. DOI:10.1016/S0378-4266(98)00005-3

  • Kajananthan, R., & Achchuthan, S. (2013). Corporate governance practices and its impact on working capital management efficiency : Evidence from Sri Lanka. Research Journal of Finance and Accounting, 4 (3), 23 - 31.

  • Kaur, N. & Arora, R. S. (2013). An empirical investigation of the association between company attributes and disclosure score of Indian companies. Indian Journal of Finance, 7 (9), 44 - 54.

  • Kyereboah-Coleman, A. (2008). Corporate governance and firm performance in Africa: A dynamic panel data analysis. Studies in Economics and Econometrics, 32 (2), 1 - 24.

  • Lau, J., & Block, J. H. (2012). Corporate cash holdings and their implications on firm value in family and founder firms. Corporate Ownership and Control, 9 (4), 309 - 326.

  • Lei, P.-W., & Wu, Q. (2007). Introduction to structural equation modeling: Issues and practical considerations. Educational Measurement: Issues and Practice, 26 (3), 33 - 43. DOI: 10.1111/j.1745-3992.2007.00099.x

  • Palombini, N. V. N., & Nakamura, W. T. (2012). Key factors in working capital management in the Brazilian market. Revista de Administração de Empresas, 52 (1), 55 - 69. DOI: http://dx.doi.org/10.1590/S0034-75902012000100005

  • Rechner, P. L., & Dalton, D. R. (1991). CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12 (2), 155 - 160. DOI: 10.1002/smj.4250120206

  • Richards, V. D., & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management, 9 (1), 32-38.

  • Rosseel, Y. (2012). Lavaan: An R package for structural equation modeling. Journal of Statistical Software, 48 (2), 1 - 36.

  • Satorra, A., & Bentler, P. M. (1994). Corrections to test statistics and standard errors in covariance structure analysis. In A. Von Eye & C. C. Clogg (Eds.), Latent variables analysis: Applications for developmental research (pp. 399 - 419). Thousand Oaks, CA: Sage.

  • Sharma, A. K., & Kumar, S. (2011). Effect of working capital management on firm profitability: Empirical evidence from India. Global Business Review, 12 (1), 159 - 173. DOI:10.1177/097215091001200110

  • Smith, K. V. (1980). Readings on the management of working capital (pp. 14-15). Eagan, Minnesota: West Pub. Co.

  • Vafeas, N. (1999). Board meeting frequency and firm performance. Journal of Financial Economics, 53 (1), 113 - 142.

  • Xu, X., & Wang, Y. (1999). Ownership structure and corporate governance in Chinese stock companies. China Economic Review, 10 (1), 75 - 98.

  • Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40 (2), 185 - 211.


Refbacks

  • There are currently no refbacks.