Evaluation the impact of working capital management on...

International Research Journal of Applied and Basic Sciences © 2013 Available online at www.irjabs.com ISSN 2251-838X / Vol, 6 (12): 1817-1828 Science Explorer Publications

Evaluation the impact of working capital management on firms performance

(case study: firms accepted in Tehran stock exchange)

Mohsen Mohammad Nourbakhsh Langroudi 1, Shaer Biabani 1, Mehrdad Kakaali Somesaraei 2

1.Assistant Professor in Accounting, Islamic Azad University

2.M.A in Accounting, Islamic Azad University

Corresponding Author email: [email protected]

ABSTRACT: The purpose of this paper is to examine the effect of working capital management on firms’ performance for a sample of firms listed on a small emerging market, namely Tehran Stock Exchange. The paper includes a conceptual as well as empirical analysis, in which data from a sample of listed firms for the period from 2006 to 20011 are analyzed to examine if more efficient working capital management improves firms’ accounting profitability and firms’ value. Cash conversion cycles as well as its components are used as measures of working capital management skills. In this study, two performance measures are used: one accounting and one market measure, believing that wealth maximization is shareholders’ main concern. To bring up more robust results, this study used more than one estimation technique, including panel data analysis, fixed and random effects, and generalized methods of moments. Using robust estimation techniques this study found that profitability is affected positively with the cash conversion cycle. This indicates that more profitable firms are less motivated to manage their working capital. In addition, financial markets failed to penalize managers for inefficient working capital management in emerging markets. The paper’s originality and value lies in suggesting that policy makers in emerging markets need to motivate and encourage managers and shareholders to pay more attention to working capital through improving investors’ awareness and improving information transparency. Keywords: Working capital, Profit, Cash management, Market value, emerging markets, Working capital management, Profitability, Cash conversion cycle

INTRODUCTION

The current financial crisis and the recession that took speed through 2008 have brought more focus to the

investment that firms make in short-term assets, and the resources used with maturities of under one year which represent the main share of items on a firm’s balance sheet. This inflamed the importance of short-term working capital management at companies all over the world and stimulates researchers’ attention. Where one group of practitioners and researchers believed that efficient management of working capital is essential for companies during the booming economic periods (Lo, 2005) and can be managed strategically to improve competitive position and profitability, others emphasized on that improving working capital management is reasonably important for companies to withstand the impacts of economic turbulence (Reason, 2008).

Liquidity or profitability and the balance between both are challenging decisions while conducting a firm day to day operation. Liquidity is a precondition to ensure that firms are able to meet their short-term obligations and their continued flow can be guaranteed from a profitable venture. The importance of cash as an indicator of continuing financial health should not be surprising in view of its crucial role within the current issue and full text archive of this journal is available at Working capital management the business. This requires that business must be run both efficiently and profitably. Given the pressure due to lower credit limits and rising interest rates, a rapid decrease in demand and turnover on firms’ products and services occurred. This led to a steep build-up of stocks and the capital tied up in these stocks. Thus, in the medium term, many firms switch their focus from growth to

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Intl. Res. J. Appl. Basic. Sci. Vol., 6 (12), 1817-1828, 2013

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internal efficiency and cash management. An asset-liability mismatch may occur which may increase firm’s profitability in the short run but at a risk of its insolvency. On the other hand, too much focus on liquidity will be at the expense of profitability. Thus, the manager of a business entity is in a dilemma of achieving desired tradeoff between liquidity and profitability in order to maximize the value of a firm (Padachi, 2006).

According to Wilner (2000) most firms extensively use trade credit despite its apparent greater cost, and trade credit interest rates commonly exceed 18 percent. In 1993 US firms extended their credit toward customers by 1.5 trillion dollars. Deloof (2003) found by analyzing data from the National Bank of Belgium that in 1997 accounts payable were 13 percent of their total assets while accounts receivables and inventory accounted for 17 and 10 percent, respectively. Summers and Wilson (2000) argued that in the UK corporate sector more than 80 percent of daily business transactions are on credit terms.

While working capital management is of importance to all firm size operating in both developed and emerging countries, working capital management is of particular importance to the business firms operating in emerging markets. Firms in emerging markets are mostly small in size with limited access to the long-term capital markets. These firms tend to rely more heavily on owner financing, trade credit and short-term bank loans to finance their needed investment in cash, accounts receivable and inventory (Chittenden et al., 1998; Saccurato, 1994). However, the failure rate among small businesses is very high compared to that of large businesses. Previous studies have shown that weak financial management particularly poor working capital management and inadequate long-term financing is a primary cause of failure among small businesses (Berryman, 1983; Dunn and Cheatham, 1993; Lazaridis and Tryfonidis, 2006).

Given the significant investment in working capital and the effect of working capital policy on firm risk in most firms, working management policy choices and practices could have important implications not only for accounting profitability but also for market performance. Successful management of resources will lead to corporate profitability. Given that management success might be measured by market value we argue in this study that efficient working capital management should bring more shareholders market value. We study the effect of working capital management policies in emerging market on both firms’ accounting and market performance. Since working capital management is best described by the cash conversion cycle we will try to establish a link between accounting as well as market performance and management of the cash conversion cycle. This linkage will include all three very important aspects of working capital management. It is an indication of how long a firm can carry on if it was to stop its operation or it indicates the time gap between purchase of goods and collection of sales. The optimum level of inventories is expected to have a direct effect on profitability since it will release working capital resources which in turn will be invested in the business cycle, or will increase inventory levels in order to respond to higher product demand. Similarly both credit policy from suppliers and credit period granted to customers will have an impact on profitability. In order to understand the way working capital is managed, cash conversion cycle and its components effect on firms’ market and accounting performance will be statistically analyzed. In this paper, we investigate the relationship between working capital management and firms’ profitability for firms listed on the Tehran Stock Exchange for the period 2006-2011. Conceptual framework and previous literature As one of the basic decisions in corporate finance, besides the capital structure decisions and capital budgeting decisions, working capital management is a very important component of corporate finance since efficient working capital management will lead a firm to react quickly and appropriately to unanticipated changes in market variables, such as interest rates and raw material prices, and gain competitive advantages over its rivals (Appuhami, 2008). Managers spend a considerable time on day-to-day working of capital decisions since current assets are short-lived investments that are continually being converted into other asset types (Rao, 1989). In the case of current liabilities, the firm is responsible for paying obligations mentioned under current liabilities on a timely basis. Liquidity for the on-going firm is reliant, rather, on the operating cash flows generated by the firm’s assets (Soenen, 1993). As a result, working capital management of a company is a very sensitive area in the field of financial management (Joshi, 1995). Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them. Not being able to maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy. Altman’s (1968) multivariate predictor model based on US companies includes working capital as one of the model components. Using data drawn from the UK companies, Taffler (1982) developed a four-variable model of failure prediction. All the four variables include a variant on working capital as a component. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each of the current assets must be managed efficiently in order to maintain the liquidity of the firm


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while not keeping too high a level of any one of them. Each of the short-term sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The basic ingredients of the theory of working capital management focused on the trade-off between profitability and risk which is associated with the level of current assets and liabilities. Subsequently, working capital management decisions are not taken as long-term decisions. Managers apply different criteria in decision making: the main considerations are cash flow or liquidity and profitability or return on capital (of which cash flow is probably the more important). Smith (1980) first signaled the importance of the trade-offs between the dual goals of working capital management, particularly between liquidity and profitability. He states that decisions which tend to maximize profitability tend not to maximize the chances of adequate liquidity. Conversely, focusing almost entirely on liquidity will tend to reduce the potential profitability of the company. Measuring firms’ liquidity is an empirical question. While the most conventional measures of corporate liquidity are the current ratio and the quick ratio, many (see e.g. Emery, 1984; Kamath, 1989) have argued that liquidity for the on-going firm is not really dependent on the liquidation value of its assets but rather on the operating cash flow generated by those assets. Gitman (1974) introduced the cash cycle concept as a crucial element in working capital management. The total cash cycle is defined as the number of days from the time the firm pays for its purchases of the most basic form of inventory to the time the firm collects for the sale of its finished product. Richards and Laughlin (1980) operationalized the cash cycle concept by reflecting the net time interval between cash expenditures on purchases and the ultimate recovery of cash receipts from product sales. The cash conversion cycle is an additive measure of the number of days funds are committed to inventories and receivables less the number of days payments are deferred to suppliers. Previous literature studies the integration between the cash conversion cycle components. They are divided into three categories. Integration between receivables and inventory (see e.g. Beranek, 1963; Shapiro, 1973; Bierman et al., 1975; Sartoris et al., 1983), integrate inventory and payable (see Hadley, 1964; Haley and Higgins, 1973), or integrate all of working capital components (see Damon and Schramm, 1972; Crum et al., 1983). The correlation of working capital components means that the decisions made in any one component will impact on other units within the organization (Sartoris et al., 1983). For example, the inventory manager’s decision on the level of raw materials, if the amount of inventory is excessively high, other working capital components (receivables and payables) will share the risk and should react to reduce the volume of finish goods in order to stretch the profit margin. As a consequence, ineffective inventory management will have an impact on company’s profitability, by holding cost and risk of unused products. Unfortunately the connection between the working capital management by researchers previously did not have an attractive conclusion; McInnes (2000) for example showed that 94 percent of companies did not integrate their working capital components as proposed by the theory. In general, researchers studied factors affecting the working capital management. These are classified as external and internal factors. While external macro-factors are affecting all companies, regardless industry, only companies within a particular industry are affected from external micro-factors. Some of the external factors which are examined are: politics (Carey, 1949), business and economic environment (Ben-Horim and Levy, 1983), between industries effect (Hawawini et al., 1986) and legislation (Peel et al., 2000). However, internal factors examined in the previous literature are management system/method/practice (Garcı´a-Teruel and Martı´nez- Solano, 2007), organizational behavior (Krishna et al., 1993), investment policy (Seidner, 1990) and management financial capability (Abdul Rahman and Mohamed Ali, 2006). While a large number of studies examined factors affecting working capital management less number directly examined the affect on firms’ performance. The empirical question whether a short cash conversion cycle is beneficial for the company profitability has been questioned in the previous literature. Shin and Soenen (1998) argued that firm can have larger sales with a generous credit policy, which extends the cash cycle. In this case, the longer cash conversion cycle may result in higher profitability. However, the traditional view of the relationship between the cash conversion cycle and firms’ profitability is that, ceteris paribus, a longer cash conversion cycle hurts the profitability of a firm. Lazaridis and Tryfonidis (2006) investigated the relationship between corporate profitability and working capital management using listed companies on the Athens Stock Exchange. They discovered that a statistically significant relationship existed between profitability and the cash conversion cycle. They concluded that businesses can create profits for their companies by handling correctly the cash conversion cycle and keeping each component of the cash conversion cycle (that is accounts receivable, accounts payable and inventory) to an optimum level. Deloof (2003) also found that the way working capital is managed has a significant impact on the profitability of businesses. He used a sample of 1,009 large Belgian non-financial firms for the period of 1992-1996. However, used trade credit policy and inventory policy are measured by number of day’s accounts receivable, accounts payable and inventories, and the cash conversion cycle as a comprehensive measure of working capital


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management. He founds a significant negative relation between gross operating income and the number of day’s accounts receivable, inventories and accounts payable. Thus, he suggests that managers can create value for their shareholders by reducing the number of day’s accounts receivable and inventories to a reasonable minimum. He also suggests that less profitable firms wait longer to pay their bills. Smith and Begemann (1997) conducted their work on the industrial firms listed on the Johannesburg Stock Exchange, indicated that a decrease in the total current liabilities divided by gross funds flow led to an improvement in return on investment and vice versa. The relationship between working capital management and performance has been conducted using data from individual industry. Ghosh and Maji (2004) made an empirical study on the relationship between utilization of current assets and operating profitability in the Indian cement and tea industry. The study concluded that the degree of utilization of current assets was positively associated with the operating profitability of all the companies under study. Chakraborty (2008) and Mallik et al. (2005) carried out a study on the relationship between working capital and profitability with reference to selected companies in the pharmaceutical industry and noticed that the joint influence of the liquidity, inventory management and credit management on the profitability were statistically very significant in nine out of 17 pharmaceutical companies selected for the study. Zariyawati et al. (2009) study the relationship between profitability and the length of the cash conversion cycle using six different economic sectors which are listed in Bursa Malaysia. Their analysis provides a strong negative significant relationship between cash conversion cycle and firm profitability. Lyroudi and Lazaridis (2000) used food industry in Greece to examined the cash conversion cycle as a liquidity indicator of the firms and attempts to determine its relationship with the current and the quick ratios, with its component variables, and investigates the implications of the cash conversion cycle in terms of profitability. The results of their study indicate that there is a significant positive relationship between the cash conversion cycle and the traditional liquidity measures of current and quick ratios. The cash conversion cycle also positively related to the return on assets and the net profit margin but had no linear relationship with the leverage ratios. Conversely, the current and quick ratios had negative relationship with the debt to equity ratio, and a positive one with the times interest earned ratio. Bringing evidence that selecting the measures of liquidity and profitability is an important issue. Working capital management While firms’ profitability is important factor in assessing management performance, the direct concern of shareholders isov wealth maximization and firm value. We argue in this study that the linkage between net operating working capital management and firm value can differ from that between net operating working capital management and firm profitability because of the main difference between accounting profits which deals with historical periods revenue and sales and the firm value which is mainly a prediction and estimation of the future sales and revenues. Although this is an important empirical issue, it is less studied in the previous literature. Therefore, in this study we examined the effect of the efficient working capital management on both accounting and market value using a data from a small emerging market believing that the result of this study will help managers and policy makers improve their efficiency and protect their firms from failure in such environment with limited access to external funding and powerful effect of firms performance on the overall economic growth and welfare.

METHODOLOGY Population and statistical sample The statistical society investigated in the present research is Tehran Stock Exchange. In this research we have used systematic deletion method (sifting technique) to choose our statistical sample. To select our statistical sample, the companies with following characteristics were chosen and others were deleted: Due to their different nature in activities, investing companies, insurance companies, leasing companies and banks were deleted and manufacturing companies were chosen. To choose a convergent sample, those chosen were among the companies accepted in Tehran Stock Exchange since the year 2006 and their stocks have been transacted from the beginning of the year 2006. To choose active companies, their transactions should not have been stopped during the years between 2006 and 2011. In other words, the stocks of these companies should have been active during the years mentioned and their stop should not last more than 6 months. To be able to compare the data and avoid divergence, the companies' fiscal year should end on 29

th of

Esfand and they should not have had fiscal year changing during the years between 2006 and 2011. The companies should not have negative owners' equity.


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Financial statements and the descriptive notes about them should be available. By applying the conditions above, the number of the sample selected from among statistical sample was 86 companies and 430 (years- firm). Data collection and data categorization The transaction system in bourse and informing software in first step the data needed to calculate the variables related to stock market were extracted by using bourse software (mainly Rahaward-e-Novin and Tadbirpardaz). Then the final amounts of these data were compared with the information in stock transaction system. Statistical software and economical measuring Excel software was used in collecting, categorizing, and primary processing of the data. In this phase, the data related to stock market extracted from informing and transaction software of bourse were directly entered into Excel. After proper categorization of the data and carrying out the calculations and primary processing, the output data were used to administer the model and test the research hypotheses by using Eviews7 software. Introducing the multi-variable regression pattern to test research hypotheses H1. There is a significant relationship between Cash Conversion Cycle and firm value in Tehran Stock Exchange.

H2. There is a significant relationship between Days in Accounts Receivable period and firm value in Tehran Stock Exchange. H3. There is a significant relationship between Days of Inventory and firm value in Tehran Stock Exchange. H4. There is a significant relationship between Days in Accounts Payable period and firm value in Tehran Stock Exchange. H5. There is a significant relationship between Cash Conversion Cycle and Gross Operating Profit in Tehran Stock Exchange. H6. There is a significant relationship between Days in Accounts Receivable period and Gross Operating Profit in Tehran Stock Exchange. H7. There is a significant relationship between Days of Inventory and Gross Operating Profit in Tehran Stock Exchange. H8. There is a significant relationship between Days in Accounts Payable period and Gross Operating Profit in Tehran Stock Exchange. The issues considered in estimating the models The fundamental criticism towards the estimation of the regression models we encounter is related to classic presupposition rejection (variance Heteroskedasticity, Auto-correlation, co-linearity, and proper Torque. Normality To study the normality of the data we have used normality tests. These tests are generally divided into two groups of graphical methods and numerical methods. Graphical methods present only a sketch of the random distribution of the variable but numerical methods are able to prepare an objective and quantitative criterion to judge about the normality of random distribution of the variables. In numerical methods we can use both descriptive statistics and different techniques and tests of inferential statistics. Variance Heteroskedasticity One of the classic presuppositions of the regression analysis is regarding the convergence or similarity of the error variance distribution and if it is rejected there would be heteroskedasticity elements of variance. In fact variance heteroskedasticity is caused due to lack of equality of the dependent variable's variance in different periods. When the dependent variable's variance is not equal, the variance of heteroskedasticity elements will not


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be the same during different periods and thus the estimation of the model will be damaged and inefficiency will be resulted. If the regression model is considered as the following equation:

White's test model will be as follows:

F statistics and Kai2 statistics test will be calculated for the result of multiplying the observations and identification coefficient for this model. Variables' Consistency Because it is possible that the economic variables having integrative data be inconsistent before utilizing it in the model the needed studies should be carried out to recognize their consistency and consistency or inconsistency of these variables should be well documented. In fact, some operations such as using the ordinary least square (OLS) is done in experimental researches regarding the consistency of the variables. Consistency can be studied in the two forms of absolute consistency and weak consistency. To avoid using inconsistent data in the models, we can test the present variables in the model using three methods below:

a) Graphical method b) Co-correlation (which presents correlation type against a specified software) c) Unit root testing method

Also there are 3 tests to study and test the unit root test in statistical software which are usually used in the following forms:

A) Dicky-Fuller Test (DF) B) Added Dicky-Fuller Test (ADF) C) Phillips-Perron test (PP)

In testing another Dicky-Fuller method, the variable having time series will regress with a delay. Then we can conclude that the series Y is a consistent series if the delay for it in the regression above is -1<ρ<1. If ρ=1, we can say that the series is not consistent. If we have a random walk with drift during the process started in some points of the dependent variable variance we continuously will encounter increases and it will move forwards to the infinity. In Dicky-Fuller’s test the additive of the regression equation will be devised as follows: ∑ In this regression the consistency requirement of the regression is the lower than zero amount of sigma (ρ). Also by observing the existence of a less delay, we should delay the model until self-correlation is removed. In economic measurement software usually the critical area testing of the unit is done in three assurance points including %99, %95, and & 90. Zero hypothesis and H1 in testing consistency are as follows:

DATA ANALYSIS METHODS

In regression statistics there is a type of mathematical function which is applied between the dependent variable from one hand and the independent variable on the other hand. To test the hypothesis, the effect of the independent variable on the dependent variable is tested.

∑( ̅)( ̅)

∑( ̅) ̅

Regarding total regression and linear relationship in meaningfulness test we have: Zero hypotheses shows that the total coefficients of the regression equals zero. Research hypothesis shows that at least one of the independent variable's coefficients is meaningful. If the statistics calculated for the test is bigger than the critical statistics or the meaningfulness level calculated is less than 0.05, at least one of the independent variables has a meaningful regression coefficient or there is a linear relationship between the two variables . The recognition coefficient is analyzed as follows: Independent variable does not create any changes in dependent variable. (r

2 = 0)

All changes of the dependent variable can be expressed by the independent variable. (r2 = 1)


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The bigger amount of the absolute amount of the identification coefficient than zero and close to 1, shows that the relationship between independent and dependent variables is stronger. Descriptive study of the research data To enter data analysis step, the descriptive statistics of the data including the indexes of centralization, dispersion indexes, and deviation from the symmetry and also Jarque-Bera's test which approves the normal distribution of the wastes is calculated and the results are shown in table 1.

Table 1. The descriptive statistics of the dependent variables

THE RESULTS OF TESTS AND ESTIMATIONS In the present research we have used static integrative data to test the hypothesis. In this method we can use a test entitled Chow to select from among the two integrated models and it is called structural changes test. To test the research hypotheses, first fixed t ime effects outcomes are estimated and then structural changes test will be used to study the existence of fixed effects as follows: H0: lack of existence of fixed effects >> pooled model H1: existence of fixed effects >> fixed effects model Regarding P-Value gained for the zero hypotheses considering the width equal from the focal points is rejected. Therefore, in this phase the fixed effects model is chosen as a priority for the first and second main hypotheses and their related minor hypotheses (due to the lack of space in the present paper we have not brought the tables related to Chow's tests here).

GOP TQ CCC DAR DAP DI SIZE GR LEV FFA VNOI GDP

Mean 0.315572 734.0857 257.5532 138.0572 69.45219 188.9482 5.572769 1.222583 0.678479 0.352298 10.07137 0.047883 Median 0.253044 466.2430 204.7845 112.2507 46.00845 139.3469 5.519701 0.116410 0.652713 0.317522 4.449511 0.047900 Maximum 3.447502 6666.527 15995.70 5330.800 2997.799 11165.01 8.405650 110.4091 3.060401 0.854744 372.5591 0.078400 Minimum -0.332021 0.281178 -99.90288 0.623396 0.000000 1.153865 3.976167 -0.992170 0.118450 0.049960 0.037511 0.008300 Std. Dev. 0.315852 777.4721 836.6970 289.9765 165.8274 599.6355 0.573353 8.834202 0.296316 0.179832 31.15450 0.025562 Skewness 3.942608 2.989521 18.25707 15.84062 15.25832 17.03007 0.640072 10.42200 3.206172 0.731562 8.533780 -0.217096 Kurtosis 32.57441 16.14349 343.9067 282.7236 267.4839 309.2493 5.070365 118.5882 22.54624 3.014043 82.96272 1.542987 Jarque-Bera 14286.54 3179.630 1792647. 1208547. 1080966. 1447968. 90.35897 210375.4 6453.399 32.64915 101951.4 35.24897 Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 Sum 115.4994 268675.4 94264.47 50528.93 25419.50 69155.04 2039.633 447.4654 248.3233 128.9410 3686.120 17.52530 Sum Sq. Dev. 36.41338 2.21E+08 2.56E+08 30691517 10037035 1.31E+08 119.9878 28485.74 32.04822 11.80395 354270.0 0.238498 Observations 366 366 366 366 366 366 366 366 366 366 366 366 Cross sections 61 61 61 61 61 61 61 61 61 61 61 61


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Table 2. The results of Chow's test of hypotheses

Hypothesis Effects Test Statistic Freedom degree P-Value Test result

1 Chi-Square Statistics 1.093609 (60,298) 0.3102

Pooled model Cross-section Chi-square 72.836325 60 0.1236















Hypotheses' test based on model To test the research hypothesis after doing chow's test and selecting the pooled model we have tried to estimate the model coefficients by using the Ordinary least squares (OLS). H1. There is a significant relationship between Cash Conversion Cycle and firm value in Tehran Stock Exchange.

Table 4. Final balance of the model by using OLS estimator for the first hypothesis

Variable Coefficient Std. Error t-Statistic Prob.

C 835.2857 588.2878 1.419859 0.1567

CCC 0.005431 0.051602 0.105254 0.9162

SIZE 47.51401 83.65501 0.567976 0.5705

GR -0.403385 5.186139 -0.077781 0.9381

LEV -689.1140 146.4442 -4.705643 0.0000

FFA -297.1681 268.2518 -1.107796 0.2688

VNOI 0.998344 1.573896 0.634314 0.5264

GDP 4078.581 7596.479 0.536904 0.5917

R-squared 0.271029 Mean dependent var 734.0857

Adjusted R-squared 0.107133 S.D. dependent var 777.4721

S.E. of regression 734.6462 Sum squared resid 16.20270

F-statistic 1.653663 Durbin-Watson stat 2.169479

Prob(F-statistic) 0.002530

H2. There is a significant relationship between Days in Accounts Receivable period and firm value in Tehran Stock Exchange.



C 886.4787 597.2000 1.484392 0.1388

DAR -0.041094 0.154941 -0.265222 0.7910

SIZE 43.22946 84.20275 0.513397 0.6081

GR -0.384548 5.185596 -0.074157 0.9409

LEV -682.9910 146.7204 -4.655051 0.0000

FFA -310.1806 269.1785 -1.152323 0.2501

VNOI 0.990632 1.573943 0.629395 0.5296

GDP 3665.922 7617.795 0.481231 0.6307







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H3. There is a significant relationship between Days of Inventory and firm value in Tehran Stock Exchange.



C 831.5163 593.0534 1.402093 0.1619

DI 0.008655 0.075160 0.115156 0.9084

SIZE 47.83807 83.89083 0.570242 0.5689

GR -0.409911 5.186913 -0.079028 0.9371

LEV -688.8212 146.1134 -4.714292 0.0000

FFA -297.6253 267.6087 -1.112166 0.2670

VNOI 1.002993 1.574570 0.636995 0.5246

GDP 4113.051 7627.508 0.539239 0.5901






H4. There is a significant relationship between Days in Accounts Payable period and firm value in Tehran Stock Exchange.



C 947.5707 601.5829 1.575129 0.1163

DAP -0.163232 0.271062 -0.602195 0.5475

SIZE 36.93578 84.72406 0.435954 0.6632

GR -0.284306 5.186241 -0.054819 0.9563

LEV -692.1070 145.8215 -4.746263 0.0000

FFA -296.0299 266.5452 -1.110618 0.2676

VNOI 0.890533 1.582969 0.562571 0.5741

GDP 3284.373 7611.975 0.431474 0.6664






H5. There is a significant relationship between Cash Conversion Cycle and Gross Operating Profit in Tehran Stock Exchange.



C -0.730287 0.233756 -3.124142 0.0020

CCC 4.98E-05 2.05E-05 2.430428 0.0157

SIZE 0.106929 0.033240 3.216848 0.0014

GR -0.000608 0.002061 -0.295060 0.7682

LEV 0.056377 0.058190 0.968855 0.3334

FFA 0.641347 0.106590 6.016961 0.0000

VNOI 0.000993 0.000625 1.588575 0.1132

GDP 3.418217 3.018461 1.132437 0.2584







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H6. There is a significant relationship between Days in Accounts Receivable period and Gross Operating Profit in Tehran Stock Exchange.



C -0.685378 0.239259 -2.864581 0.0045

DAR 6.22E-05 6.21E-05 1.001245 0.3175

SIZE 0.103939 0.033735 3.081081 0.0023

GR -0.000577 0.002078 -0.277765 0.7814

LEV 0.063558 0.058781 1.081254 0.2805

FFA 0.627677 0.107842 5.820322 0.0000

VNOI 0.000997 0.000631 1.581424 0.1148

GDP 2.914409 3.051958 0.954931 0.3404






H7. There is a significant relationship between Days of Inventory and Gross Operating Profit in Tehran Stock Exchange.



C -0.758383 0.235444 -3.221070 0.0014

DI 7.57E-05 2.98E-05 2.537675 0.0117

SIZE 0.109386 0.033305 3.284381 0.0011

GR -0.000663 0.002059 -0.321844 0.7478

LEV 0.059595 0.058008 1.027370 0.3051

FFA 0.636016 0.106242 5.986508 0.0000

VNOI 0.001034 0.000625 1.653846 0.0992

GDP 3.674769 3.028147 1.213537 0.2259






H8. There is a significant relationship between Days in Accounts Payable period and Gross Operating Profit in Tehran Stock Exchange.



C -0.501558 0.240163 -2.088409 0.0376

DAP -0.000200 0.000108 -1.850498 0.0652

SIZE 0.086909 0.033823 2.569495 0.0107

GR -0.000418 0.002070 -0.201759 0.8402

LEV 0.064933 0.058215 1.115404 0.2656

FFA 0.617941 0.106410 5.807184 0.0000

VNOI 0.000855 0.000632 1.353462 0.1769

GDP 1.605061 3.038839 0.528182 0.5978







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CONCLUSION Most firms have a large amount of cash invested in working capital. It can therefore be expected that the way in which working capital is managed will have a significant impact on the profitability of firms. Shin and Soenen (1998) find a strong negative relation between the cash conversion cycle and corporate profitability for a large sample of listed American firms for the 1975-1994 periods. In this paper, I find a significant negative relation between gross operating income and the number of days accounts receivable, inventories and accounts payable of Belgian firms. These results suggest that managers can create value for their shareholders by reducing the number of day’s accounts receivable and inventories to a reasonable minimum. The negative relation between accounts payable and profitability is consistent with the view that less profitable firms wait longer to pay their bills.

Research limitations One of the leading factors of research projects in all countries is the existence of abundant information resources in time and accessible. But in developing countries and due to the lack of having organized information centers and the lack of ability to used the power of computer broadly and the fear of revealing the information prevent the researchers and research centers to have access to the information on the part of the information resources.

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