THE IMPACT OF WORKING CAPITAL MANAGEMENT ON THE FIRM’S PROFITABILITY AND THE MARKET VALUE: EVIDENCE FROM AN EMERGING CAPITAL MARKET

Mohamed Masry
Heba El Menshawy
Arab Academy for Science and Technology, Egypt

Abstract
This study contributes to the literature on the determinants of firm value in
emerging capital markets by examining the role of working capital management
(WCM) in the Egyptian context. Given the unique characteristics of emerging
economies, such as underdeveloped financial systems, heightened economic
volatility, and institutional deficiencies, the relationship between WCM and firm
value is expected to differ significantly from that in developed markets.
In this study we investigate the impact of WCM measured by four
components (cash conversion, average collection period, average payment period,
and inventory turnover) on the firm’s profitability measured by gross operating
margin, and on the market value measured by Tobin Q. Using a sample of non-
financial firms and a robust estimation technique, the study results reveal a
partially significant relationship between the WCM components and profitability.
The results did not reveal a significant relationship between the WCM components
and the market value.

Keywords: working capital management, profitability, gross operating margin, firm value, Tobin’s Q, panel data
analysis, Egyptian stock market, emerging capital market.