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The effect of the working capital level on firm profitability : evidence from Dutch private small- to medium sized enterprises

Berkel, M. J. (2021) The effect of the working capital level on firm profitability : evidence from Dutch private small- to medium sized enterprises.

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Abstract:This study investigates the relationship between working capital management (measured by the cash conversion cycle) and firm profitability among a previously unstudied sample of Dutch private small- to medium sized enterprises. Small private firms experience financial constraints which make them more dependent on short-term financing, and on working capital practices in particular. Moreover, supported by the finance gap theory, agency theory, and the pecking order theory, this study proposes an optimal working capital level exists that optimizes firm profitability, and that deviation from this optimal point decreases firm profitability. To find support for this so-called progressive WCM theory, a fixed effects panel regression and a pooled OLS-regression are performed. The results, however, indicate that a U-shaped relationship between the cash conversion cycle and firm profitability does not exist among the sample of unlisted SMEs from The Netherlands. Though, the days inventories outstanding, days sales outstanding, and the days payables outstanding (which are components of the cash conversion cycle) are negatively related to firm profitability.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
Link to this item:http://purl.utwente.nl/essays/86135
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