Construction Enterprises’ Working Capital Management Based On The Theory Of Behavioral Finance

The working capital management is becoming more and more important to the construction companies’survival and development. As China’s economy entering into new normal and increasing competition in the industry, irrational financial behavior has become a key factor in the management of working capital. Two scientific questions are needed to be clarified in the research on this theme:how the financial behavior of the non-rational influence the management of working capital and how the exogenous factors adjust this kind of influence. At present, the academic circles have not yet explained the above questions. Based on the China’s special urbanization and the related literature, this paper explores the above two questions aiming at the working capital management in construction enterprises from the respective of behavioral finance and combines theoretical research and empirical tests as the main method supplemented by case studies.Due to different influence mechanism and degree of financial behavior on working capital management, this paper mainly studies the effect of the representativeness heuristic on short-term loan, the effect of mental accounting on monetary fund management and the herding effect on the management of accounts receivable and inventory in construction industry. This paper gets some enlightenment of how to improve the management level of working capital. The main conclusions are as follows:First, the irrational behaviors such as the representativeness heuristic, mental accounting and herding effect influence company’s management of short-term loan, monetary funds, accounts receivable (and inventory) and working capital. This paper analyzes the working mechanism of the representativeness heuristic, mental accounting and herding effect on the management of working capital and uses the case of China Communication Construction Company Ltd and the 2000-2014 data of construction enterprises listed in Shanghai and Shenzhen Stock Exchange to test the relationship between the irrational behaviors and the management of working capital. The paper finds that, the representativeness heuristic is one of the main factors affecting the level of short-term loan and the greater the bias degree is, the higher the level of short-term loan will be, namely, there is a significant positive correlation between them; In daily management of enterprise group, the trade-off of interests between the enterprise group and the secondary units results in mental accounting and then influences the management of the group’s cash account. Under the unified administrative requirements and the examination pressure from the enterprise group, the secondary units will eventually converges to a mean of the capital concentration and find a balance point; The herding effect expanses accounts receivable and inventory relatively and decreases the accounts receivable turnover rate and the inventory turnover rate, so that undermines their qualities. But compared with decreasing investment, increasing investment will have more expanding effect on accounts receivable and the inventory scale and stronger negative influence on the accounts receivable and the turnover rate, namely, the increased herding effect results in more severe damage to management quality of the accounts receivable and the inventory.Second, the influence of the representativeness heuristic on short-term loan level and the influence of the herding effect on accounts receivable inventory management are adjusted by the listed age and the nature of controller. The listed age of firm can adjust positively the influence of the representativeness heuristic on short-term loan level. Compared with the younger companies, the elder companies’representativeness heuristic will have a stronger influence on the short-term loan; Compared with the state-owned companies, the non-state-owned companies have less expanding effect on accounts receivable and the inventory scale caused by herding effect due to increase investment, and weaker negative influence on the accounts receivable and the turnover rate, namely, the increased herding effect in the investment of non-state-owned firms is less harmful to the quality of the accounts receivable than that of the state-owned firms.Third, the improvement of marketization can weak the negative effect of the above irrational behaviors on the management of working capital. Marketization level adjusts negatively the effect of the representativeness heuristic on short-term loan. Compared with constructions companies located in the low marketization level region, the constructions companies located in the high marketization level region have weaker effect on short-term loan which caused by the representativeness heuristic. In the high marketization level region, the listed age can significantly influence the effect of the representativeness heuristic on short-term loan and the improvement of marketization can reduce the negative adjustment of the listed age. High marketization level not only reduces the expansion effect of increased herding effect on accounts receivable and the inventory, but also reduces the inhibitory effect of increased herding effect on accounts receivable and the turnover rate, namely, improving marketization level can mitigate the damage caused by the increased herding effect to accounts receivable and inventory management.On the basis of the above conclusions, this paper puts forward to some suggestions on:how to reduce the representativeness heuristic to make decisions more scientifically on short-term loan, how to reduce the mental accounting to better play the role of monetary funds, how to reduce the herding effect in investment to improve the accounts receivable and inventory management.The main innovation and contribution of this paper are as follows:(1) it establishes the theoretical relations between the irrational behaviors such as representativeness heuristic, psychological accounting and herding effect in investment and various main operation capitals, and gives the empirical testing and case analysis. Existing researches on the management of working capital are mostly based on the assumption of rational man and mainly focus on the capital market which lack necessary exploration for the irrational behavior in the enterprises’ production and operation. This paper analyzes the working capital from the respect of behavioral finance and finds that the greater the representativeness heuristic is, the higher the level of short-term loan will be, the increased herding effect results in more severe damage to the accounts receivable and the inventory management, and mental accounting has important influences on the monetary fund management in group, which establishes the theoretical framework of the relations between the irrational behaviors and the various main operation capitals. (2) It finds the adjustment function of the listed age and the nature of controller in the relations between the irrational behaviors and the various main operation capitals. Previous studies did not consider exogenous variables on the basis of the assumption of irrational man. This paper takes the listed age and the nature of controller into account and finds that, compared with younger companies, the elder companies’ representativeness heuristic will have a stronger influence on the short-term loan; the increased herding effect in the investment of non-state-owned firms is less harmful to the quality of the accounts receivable and inventory management than that of the state-owned firms, which shows the conduction path of the effect of irrational behavior on the main working capital.(3) It puts forward and demonstrates the special role of the improvement of marketization aiming at reducing the adverse effects of the two types of irrational behavior on working capital management. This paper takes the degree of market variables into consideration and finds that increased marketization process can reduce the damage of the representativeness heuristic to the short-term loan level and reduce the damage of the increased herding effect to the quality of accounts receivable and the inventory management, which provides the market basis for improving the quality management of working capital.