Working capital management, corporate performance, and financial constraints

A large part of organization’s capital is dedicated to working capital and its management has great importance. There is an invert U-shaped relation between working capital management and firm’s financial performance. Regarding to this point that financing conditions may play important role in this relation, the aim of this study is to investigate the impact of financial constraints on the relationship between working capital management and financial performance. It’s a descriptive-correlation study and is based on analysis of panel data. Our sample includes the financial data of 90 listed companies in Tehran Stock Exchange during the period 1386 to 1392. Using cost of external financing as a proxy of financial constraints, it is shown that these financial constraints have meaningful impact on the relationship between working capital management and firm’s financial performance. And the optimal level of working capital is lower for firms that are more constrained financially. Our results suggest that because of cost of recede from it, managers should pay attention to the optimal level of working capital.