Working Capital Policy and Operating Risk

In: Business and Management

Submitted By masmas
Words 7133
Pages 29
Investment Management and Financial Innovations, Volume 7, Issue 2, 2010

Faris Nasif Al-Shubiri (Jordan)

Analysis of the relationship between working capital policy and operating risk: an empirical study on Jordanian industrial companies
Abstract
The study analyzes the working capital management practices and their impact on profitability and risk of industrial
Jordanian firms for the period of 2004 to 2007. The total sample of the study consists of 59 industrial firms listed on
Amman Stock Exchange.
The working capital management practices examine the impact of aggressive/conservative working capital investment and financing policy and analyze through cross-sectional regression models the relationship between working capital policies and profitability as well as risk of the firms. Efficient management of working capital is a fundamental part of the overall corporate strategy aiming to create the shareholders’ value. Firms try to keep an optimal level of working capital that maximizes their value.
The optimal level of working capital is determined to a large extent by the methods adopted for the management of current assets and liabilities. It requires continuous monitoring to maintain proper level in various components of working capital, i.e. cash receivables, inventory and payables, etc.
The result indicates a negative relationship between the profitability measures of firms and degree of aggressiveness of working capital investment and financing policy. The firms yield negative returns if they follow an aggressive working capital policy. Moreover, the present study validates the findings of Carpenter and Johnson (1983) that there is no relationship between the level of current assets and liabilities and risk of the firms.
Keywords: degree of aggressiveness/conservativeness, working capital policies, Tobin’s q, operating risk and financial risk.
JEL…...

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