THE IMPACT OF WORKING CAPITAL MANAGEMENT ON FIRM PROFITABILITY IN DIFFERENT BUSINESS CYCLES: EVIDENCE FROM FINLAND
Abstract
The recent economic downturn of 2007-2008 has brought renewed focus on
working capital policies. In this paper we examine the role of business
cycles on the working capital-profitability relationship using a sample of
Finnish listed companies over an 18 year period. We find the impact of
business cycle on the working capital-profitability relationship is more
pronounced in economic downturns relative to economic booms. We
further show that the significance of efficient inventory management and
accounts receivables conversion periods increase during periods of
economic downturns. Our results demonstrate that active working capital
management matters and, thus, should be included in firms’ financial
planning.
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