Effects of Working Capital and Financial Flexibility on Competitive Ability of Companies in Tehran Stock Exchange

Abstract

Working capital management is one of the most important issues for financial managers, and they always try to determine the rational level of working capital to manage their activities. Cash conversion cycle is the indicator used for measuring working capital. When a firm uses its sources rationally to react to unexpected financial situation, sources of working capital may provide competitive ability for the firm. In this study, a sample of 257 companies listed in the Tehran Stock Exchange in a period of11 years from 2002 to 2012 was selected to assess the expected effects of working capital and financial flexibility on competitive ability of the firms. Data analysis was carried out by the generalized momentum method. The results indicated that there exists a positive and significant relationship between current asset turnover period and competitive ability, and that there are negative and significant relationships between the three variables of receivables collection period, payable turnover period, and cash conversion cycle, and the variable of competitive ability. Also, the results showed that there are not significant relationships between the three variables of inventory turnover period, current ratio, and quick ratio, and the variable of competitive ability. The results of this study revealed that working capital management has widely effects on the competitive ability in market and the functional efficiency of the firms, and that working capital ability has positive effects on the competitive ability in products market, but such effects reduce when working capital ability decreases below a certain level.

Keywords

• working capital
• financial flexibility
• competitive ability
• cash conversion cycle