Research On Effects Of Working Capital Financing To Corporate Profitability In China

The current study discusses the relationship between working capital financing strategies and profitability of Chinese manufacturing firms.The study further explores this relationship under the influence of several firm-specific and macro-economic factors.Contrary to existing studies,the current study calculates several proxies for the variables involved and merges these proxies to develop a master proxy of each variable to improve the accuracy of results.The current study uses panel data of Chinese manufacturing firms.Further,the study appliesa two-step system generalized method of moment(GMM)estimator in the main analysis and spline regression for robustness.The findings reveal that a non-linear and inverted U-shaped relationship exists between working capital finance and profitability.The results further explore that this relationship is significantly influenced by firm size and leverage level.Specifically,results explain that aggressive financing strategy in working capital leads to profit optimization in small firms while conservative financing strategy is better for large firms to optimize the profit.Similarly,low leverage firms may lead to profit optimization by adopting aggressive financing strategy while conservative financing strategy is best suited for high leverage firms.In the firm-specific factors,this study also examines the moderating role of the cash conversion cycle.Findings of the study reveal that aggressive financing strategy in working capital leads to profit optimization in the firms having extended cash conversion cycle while conservative financing strategy is better for firms having reduced cash conversion cycle.On segregating the three elements of CCC,results explain that an aggressive financing policy is a better choice for the firms with reduced account receivable days,extended account payable days,or extended inventory days.Among the macro-economic indicators,we use the gross domestic product,interest rate,and inflation rate to measure the influence of these factors in the working capital financing and Profitability relationship.We divide these years as per the high and low values of these macroeconomic factors.The findings reveal that aggressive financing strategy is better for low gross domestic product periods while conservative financing strategy leads to profit optimization in a period of high gross domestic product.Similarly,during the period of high-interest rate,aggressive financing strategy leads to profit optimization but a conservative financing strategy is preferable in a low-interest rate period.Results further explore that a high inflation period favors the aggressive financing strategy but a conservative financing strategy is a better choice during the low inflation period.The current study also focuses on the global recession period(2008-10)to explore how the non-linear and concave relationship between working capital finance and profitability behaves in this period.The results of this study explain that this non-linear and concave relationship between working capital finance and profitability turns to be linear and negative.The results further show that this linear and negative relationship is strong and across the board irrespective of the firm size,leverage level,and cash conversion cycle duration.The results also stated that gross domestic product,interest rate,and inflation fluctuations also do not affectthis linear and negative relationship.Several policy suggestions are presented at the end.These suggestions might be very helpful for researchers,firm managers,lending agencies,and governments in the scenario of the current economic crisis caused by corona virus disease.