Is profitability driven by working capital management? evidence for high-growth firms from emerging Europe

Abstract

Despite the importance of high-growth firms (HGFs) for job creation, innovation, and economic development in transition economies, current knowledge on the role of financial decisions in explaining their profitability is limited. The aim of this paper is to examine the relationship between working capital management and firm profitability. Using a panel data set on HGFs from Central, Eastern, and South-Eastern Europe during the time span 2006–2015, we found an inverted U-shape relationship between working capital level and firm profitability. Our findings indicate that HGFs should find and maintain the optimal working capital level that maximizes their profitability. Our results proved to be robust when we employ different methodology (quantile regression), different sub-samples as well as alternative measures of profitability and working capital management. The study highlights the importance of short-term financial decisions in enhancing HGFs’ profitability, with significant implications for academics and practitioners. We contribute to the extant literature by providing empirical evidence on the existence a concave relationship between working capital level and firm profitability for a cross-country sample of firms.

Keywords:

• working capital management
• profitability
• high-growth firms
• emerging economies
• short-term financing policy
• Generalized Method of Moments

JEL Classification:

• G31
• G32
• L25

Additional information

Notes on contributors

Claudiu Boțoc

Claudiu BOŢOC PhD is Lecturer at West University of Timişoara, Faculty of Economics and Business Administration, Finance Department. He completed a post-doctoral and doctoral programme in Finance. The main areas of research are: capital structure theories, risk – return linkage, corporate governance characteristics, financial market efficiency and volatility. His articles have been published in various international journals, such as Emerging Markets Finance and Trade, Prague Economic Papers, Journal of Economic Computation and Economic Cybernetics Studies and Research, Journal of Applied Economic Sciences, and others.

Sorin Gabriel Anton

Sorin Gabriel ANTON PhD is an Associate Professor of Finance at the Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iasi, Romania. He graduated with a Master’s degree in Bank Management from the University of Rostock and took his doctorate in Finance at Alexandru Ioan Cuza University of Iasi. His research interests include international finance, risk management, and corporate finance. He has published more than 30 articles in peer-reviewed journals and 5 books.