THE EFFECT OF WORKING CAPITAL PRACTICES ON RISK MANAGEMENT: EVIDENCE FROM JORDAN

Working capital does not receive a great deal of attention in financial decision making. Perhaps this is because it involves investment and financing for the short term. Nevertheless, it is an important component of firm financial management. This study investigates the relationship between aggressive/conservative working capital practices and profitability as well as risk. The sample includes 59 industrial firms and 14 banks listed on the Amman Stock Exchange for the period of 2004-2008. The results indicate a negative relationship between profitability measures and working capital aggressiveness, investment and financing policy. Firms have negative returns if they follow an aggressive working capital policy. In general, there is no statistically significant relationship between the level of current assets and current liabilities on operating and financial risk in industrial firms. There is some statistically significant evidence to indicate a relationship between standard deviation of return on investments and working capital practices in banks.