Working capital management and corporate governance: A new pathway for assessing firm performance in developed markets : A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy at Lincoln University

Abstract

Today’s corporate world faces dynamic challenges, based on various factors, including working capital management and corporate governance. These factors are challenging, especially in the aftermath of the 2008 global financial crisis (2008 GFC). Working capital management is considered to be one of the most important features of corporate management and deals with short-term management of investment and financing decisions. Working capital management aims to achieve the firm’s financial objectives with efficient management of working capital components. However, to achieve these objectives, firms need to have systematic frameworks in place, with efficient monitoring devices and policies. This systematic framework is known as corporate governance, which is designed to ensure the transparency and accountability of those who are part of the firm’s policy implementation group, so as to achieve better firm performance. Prior studies have investigated the working capital management–firm performance and corporate governance–firm performance relationship separately. No attempt has been made to investigate the collective effect of working capital management and corporate governance on firm performance in a single study. This study aims not only to fill this gap but also to empirically support the theoretical basis that WC and CG both are important for getting full picture of firm performance. It investigates the individual impact of working capital management and corporate governance on firm performance, as well as the collective effect of working capital management and corporate governance on firm performance. It examines six developed markets over the period of 2007-2016. This research also explores the relationship between working capital management–firm performance and corporate governance–firm performance, during the 2008 GFC. Prior studies on working capital management, corporate governance and firm performance are typically measured using a static approach, which ignores the possibility of endogeneity. In addition to Ordinary Least Squares (OLS) and Fixed-Effects (FE), this research uses the System Generalised Method of Moments (GMM) to address the potential endogeneity problem. The findings reveal that efficient management of working capital components and corporate governance determinants affect a firm performance. More specifically, the cash conversion cycle, average collection period, and inventory conversion period have negative relationship with firm performance whereas, average payment period reports a positive relationship with firm performance for all markets. The results also show that the number of independent directors has a negative relationship with firm performance. The average age of board members and executive compensation exhibit a positive relationship with firm performance. Audit committee meetings have an insignificant relationship with firm performance. Similarly, the collective effect of working capital management and corporate governance on firm performance complements the results produced by the working capital management–firm performance and corporate governance–firm performance relationships. The main results are also consistent with other performance indicators for robustness tests.