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Abstract

This study aims to empirically explore the effect of working capital management (WCM) efficiency on the market value of the firms. The study also aims to examine the role of cash holdings in the nexus between WCM efficiency and the market value of the sample firms. The generalized method of moments (GMM) has been used for empirical investigation based on data collected for 700 Indian-listed firms for ten years (2012-2021). We have found that firms with WCM efficiency {shorter net trade cycle (NTC)} have generated higher market value {higher earnings price (EP) ratio} in the Indian context. Cash holdings are observed to have an interactive impact on the positive connection between efficient WCM and the market value of the sample firms. In the case of firms with above-median operating working capital (OWC), this relationship is steeper if they have positive cash holdings instead of negative cash holdings. However, there is no interactive impact of cash holdings on this relationship in the case of firms with below-median OWC.

Keywords: Efficient Working Capital Management, Market Value, Cash Holdings, Nexus, Indian Listed Firms

JEL Classification: G31, G32

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Investment in working capital (WC) pertains to corporate finance's most crucial short-term decisions (Ben-Nasr, 2016). WC is traditionally viewed as the difference between current assets and current liabilities, where elements of current assets and current liabilities can be further categorized as operational and financial (Hawawini et al., 1986). The operational portion of WC is a measure of firms' liquidity, whereas the financial aspect of WC represents the sources of liquidity (Mazlan & Leng, 2018). Operating working capital (OWC) typically comprises components (inventories, receivables, and payables) pertaining to the day-to-day operations of firms (Kieschnick et al., 2013). The management of OWC has made a vital contribution to the enhancement of the market value of firms (Wasiuzzaman, 2015). A sound working capital management (WCM) policy can improve the competitive advantages of firms on a sustainable basis (Boisjoly et al., 2020). With an efficient WCM, a firm can decrease its dependency on external funding options and utilize the freed-up funds for its investments in growth assets and improve financial flexibilities (De Almeida & Eid Jr, 2014). Efficient WCM impedes the riskiness of a firm and...

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