Int. j. econ. manag. soc. sci., Vol(4), No (2), February, 2015. pp.

244-247

TI Journals

International Journal of Economy, Management and Social Sciences

www.tijournals.com

ISSN:
2306-7276

Copyright 2015. All rights reserved for TI Journals.

The Investigating of the Relation between Working Capital and

Performance with Considering Financial Constraints in TSE
Amir Asgharian
Department of Accounting, Babol Branch, Islamic Azad University, Babol, Iran.

Iman Dadashi *
Department of Accounting, Babol Branch, Islamic Azad University, Babol, Iran.

Abas Ali Pour Aghajan

Department of Accounting, Babol Branch, Islamic Azad University, Babol, Iran.
*Corresponding author: Idadashi@gmail.com

Keywords

Abstract

Working capital
Financial constraints
Tobin Q
TSE

In this Letter, the impact of working capital management on the performance of listed companies due to
financial constrains in Tehran stock Exchange (TSE) from 2009 until 2013 has been evaluated. In this study,
we have considered NTC as a measure of low level of working capital, squared NTC as a measure of high
level of working capital, Z-SCORE as a measure of financial constraints, and Tobin Q as a criterion for
performance. Also size, financial leverage, growth and ROA have been used as a control variable. Research
results indicate that there is no significant relationship between different levels of working capital and
performance due to financial constraints.

1.

Introduction

The goal of working capital management is the balancing between maintaining liquidity to support daily operations and maximizing short-term
investment opportunities [3]. Working capital management directly affects the company's liquidity and profitability. There is a probability of
bankruptcy for a company whose exposed to improper management of working capital, even with positive profitability [6]. Maintaining working
capital in a higher level allows the company to increase its sales and makes the value of company increased [4]. However maintaining working
capital in a high level has its disadvantage. For example maintaining more inventory leads to increasing the warehousing and insurance costs and
security [2]. Kieschnick [5] stated that maintaining a higher level of working capital required to finance further, which followed by the additional
cost of financing which increase the probability of bankruptcy. Baos-Caballero et al in 2013 stated that there is a positive relationship between
low level working capital and performance. The goal of working capital management is the selection of the combination of current assets and
short-time current liabilities for the companies in order to achieve a balance between profitability and risk. Funds invested in working capital
often constitute a high proportion of the total assets of a company and companies need external financing to provide funds for working capital.
Due to capital market imperfections such as agency costs and information asymmetry companies cannot easily access to external financing and
for these reasons they experience financial constraints. Companies that have more agency and information problem have greater financial
constraints [1]. Financial constraints affect the working capital management because companies that have financial constraints are likely to hold
more cash than other firms in order to not face with the problem in payment time of debt maturity, hence keeping too much cash which is
synonymous with the policy or strategy of conservative working capital cause the company lose opportunities to invest in profitable projects [2].

2.

Methodology

2.1 Research Hypotheses

For this study, two hypotheses can be proposed as follows
The first hypothesis: There is a significant relationship between working capital management and performance of the company.
The second hypothesis: Financial constraints affect on the relationship between working capital management and performance
2.2. Research Design
2.2.1. Statistical Population and Sample
Statistical society of the present study includes all companies listed in Tehran Stock Exchange. For selecting the statistical sample, the following
conditions are considered:
1. They are listed in stock before the year 2009.
2. In order to compare the data, the end of fiscal year of companies lead up to December 31.
3. In order to information homogeneity, they are not among financial companies.
4. Their financial period has not changed during the studied fiscal year.
Considering the above conditions, 140 companies during the period 2009-2013 were selected. Required data has been collected from the site of
the Tehran Stock Exchange1 and CDs of financial information of companies listed in Tehran Stock Exchange.
2.2.2. Methods of Data Analysis and Hypothesis Testing
The present study is description in terms of nature and correlation in terms of method and it is application in terms of target and its main target is
determination of existence, the amount and type of relationship between variables. Test hypotheses are done using collected synthetic data. To
test the hypotheses, a multivariate regression model is used. Fisher F statistic is used to determine the overall adequacy of the regression model
and the adjusted R2 is used to explain changes of dependent variable by independent variables. To evaluate the significance of the coefficients of
independent variables has been used t-student statistic and to investigate lack of autocorrelation problem between sentences of model error has
been used Durbin- Watson test (DW).

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The Investigating of the Relation between Working Capital and Performance with Considering Financial Constraints in TSE
International Journal of Economy, Management and Social Sciences Vol(4), No (2), February, 2015.

2.2.3. Research Models and Variables

To test the first hypothesis the following model is used

Qit = 0 + 1NTCit + 2NTC2it + 3SIZEit + 4LEVit + 5GROWTHit + 6ROAit +it

To test the second hypothesis the following model is used

Qit = 0 + (1 + 1DFCit) NTCit + (2 + 2DFCit ) NTC2it + 3SIZEit + 4LEVit + 5GROWTHit + 6ROAit +it
Where in the above model,
Q = Performance of company
NTC= Net trade cycle as a measure for working capital
NTC2= A high level of working capital
SIZE= Company' size
LEV = Financial leverage
GROWTH= Company growth
ROE= Return on Equity
DFC= Financial constraints that are measured by ZSCORE.
In this paper, the dependent variable by means of performance is measured by using Tobin's Q: Book value of assets/ (book value of debt + the
market value of equity)
The concept of net trade cycle is used to assess the independent variable working capital. Net trade cycle is equal to the collection Period of
receivables plus inventory turnover period minus payables payment period. For calculating the collection period of accounts receivable divide by
daily sales. For calculating inventory conversion period inventory divide by daily sales. For calculating payables payment period accounts
payable divide by the daily sales. In this study, finance constraint is another independent variable that Z-SCORE index is used for it. Companies
with Z-SCORE 0.6 have financial constraints.

ZSCORE=0.291(WC/TA)+2.458(RE/TA)-0.301(EBIT/TA)-0.79(BVE/TL)-0.05(TS/TA)
Where WC is working capital, TA is total assets, RE is retained earnings, EBIT is operating income, BE is book value of equity, TL is total
liability, and TS is total sell.
Control variables include:
ROA = the ratio of net income to total assets,
LEVERAGE = the ratio of debt to total assets,
SIZE = Company's size which equal with natural logarithm of firm assets
GROWTH = Growth assets of company which equal with current assets minus assets in the previous year divided by previous year assets.

3.

Research findings

Descriptive statistics of research variables are presented in table 1.

Table 1. Descriptive statistics research
variables
Performance
Low level working capital
High level working capital
Low level working capital due to limitations
High level working capital due to limitations
Size
Leverage
Growth
ROA

Ave
1.453
169.572
250859.5
145.934
243307.7
13.767
0.676
0.187
0.126

Mead
1.25
144.74
124.58
124.58
16376.32
13.51
0.61
0.14
0.11

Min
0.44
10221.390.64
10221.390.00
10.10
0.02
0.480.34-

Max
5.05
4678.57
104477017
4678.57
104477017
18.94
2.07
2.02
0.71

Sta. dev.
0.62
470.52
4058484
470.40
4058552
1.57
2.11
0.25
0.12

3.1 Test of the first hypothesis

Table 2. F test for the first hypothesis
Type of test
F Lymor

The test statistic

3.52

d. f
-139.55

Sig.
0.00

Test result
Fixed effects

Since in F test the significant level is 0.00 the methods we used are random effects or fixed effects. Hausman test is used to determine it. The
results are presented in table 3.
Table 3. Hausman test for the first hypothesis
Type of test
Hausman

The test statistic

28.85

d. f
6

The results of the analysis of the data of the first hypothesis are presented in table 4.

Sig.
0.00

Test result
Fixed effects

Amir Asgharian, Iman Dadashi *, Abas Ali Pour Aghajan

246

International Journal of Economy, Management and Social Sciences Vol(4), No (2), February, 2015.

Table 4.The results of the first hypothesis

Variable
Intercept
Low level working capital
High level working capital
Size
Financial Leverage
Company's Growth
ROA

Coefficient
-0.513752
-0.0000040
0.0000078
0.128372
0.001428
-0.084916
1.715691
Adjusted R2
Durbin-Watson stat
F-statistic
Prob (F-statistics)

T statistic
0.617689
0.50050
-0.907592
2.095205
0.170171
-0.974341
7.373984
0.646035
1.762894
6.948100
0.000000

Sig.
0.5370
0.9601
0.3645
0.0366
0.8649
0.3303
0.0000

The coefficient of determination of the above table shows that the independent variables explain 0.64 of dependent variable. The number of DW suggests that there is not correlation between the independent variables. Also F statistics and F statistics probability show that the research
model fit well and is highly significant. T statistics also show that H0 is approved for the low level working capital, high level working capital,
financial leverage and company growth. Which means that there is no relationship between these variables and firm performance. But there is a
positive and significant relationship between the size and ROA with performance. Regression model presented to explain asset returns, firm size
and financial performance is as follows:

Qit = -0.51 + 0.13 SIZEit + 1.72 ROAit + it

3.2 Test of the second hypothesis
F test statistic is shown in Table 5:
Table 5. F Lymor test for the second hypothesis
Type of test
F Lymor

The test statistic

3.517387

d. f
-139.552

Sig.
0.0000

Test result
Fixed effects

We use the Hausman test to determine it. Hausman test results are presented in Table 6.
Table 6. Hausman test for the second hypothesis
Type of test
Hausman

The test statistic

31.176146

d. f
6

Sig.
0.0000

Test result
Fixed effects

The results of the analysis of the data related to the second hypothesis state in Table 7.
Table 7.The results of the second hypothesis
Variable
Intercept
Low level working capital due to limitations
High level working capital due to limitations
Size
Financial Leverage
Company's Growth
ROA

Coefficient
0.52
-0.00
-0.00
0.12
0.00
-0.08
1.70
Adjusted R2
Durbin-Watson stat
F-statistic
Prob (F-statistics)

T statistic
-0.62
-0.21
-1.13
2.11
0.16
-0.98
7.25
0.64
1.76
6.94
0.00

Sig.
0.53
0.82
0.25
0.03
0.86
0.32
0.00

The coefficient of determination of the above table shows that the independent variables explain 0.64 of dependent variable. The number of DW suggests that there is no correlation between the independent variables. Also F statistics and F statistics probability show the total of
regression is meaningful. T statistics also show that H0 is approved for the low level working capital due to limitations, high level working
capital due to limitations financial, leverage and company growth. Then there is not a significant relationship between these variables and
company's performance. But there is a positive and significant relationship between these variables and ROA. Regression model stated for
explaining ROA, company's size and financial performance is as follow:

Qit = 0.52 + 0.13 SIZEit + 1.70 ROAit + it

4.

Conclusion

Although it was expected that there was a significant relationship between the working capital management and performance due to financial
constraints, but the statistical analysis of the data collected did not confirm this relationship. The results show that between size and return on
assets which are the control variables exist a significant and positive relationship with firm performance. The results of the present study are in
conflict with results of Baos Caballero, S., et al (2013) which showed that there is a negative relationship between high level working capital
and performance due to the limitations and a positive relationship between the low level working capital and performance due to the limitation.

247

The Investigating of the Relation between Working Capital and Performance with Considering Financial Constraints in TSE
International Journal of Economy, Management and Social Sciences Vol(4), No (2), February, 2015.

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