Firm value and working capital decisions: Further evidence from an emerging market

Abstract

This study investigates the effects of working capital management decisions on market values using a sample data set containing annual measurements for 317 Turkish publicly traded companies between 2010 and 2018. Cash ratio, Current ratio, Net Working Capital, and Cash Conversion Cycle are used as indicators of the liquidity policies of the sample firms. The specified dynamic model is estimated using the System GMM estimator. The findings show that firms can affect their market values by managing their liquid assets efficiently. However, this relationship weakens as cash holdings increase. In other words, a long cash conversion cycle and a large amount of net working capital are not considered negative signals by investors if accompanied by sufficient cash holdings. Hence, it can be said that cash management can help reduce the negative impact of working capital investments on firm value. This study found no evidence of the effects of the current ratio and net working capital on firm value.

Keywords

• liquidity management
• firm valuation
• emerging market
• working capital
• cash holdings
• system GMM