Working capital allocations and productivity : empirical issues and role of asset utilization

Purpose: The article highlights potential mismeasurement in working capital allocations among academicians and practitioners and revisits the relationship between firms' working capital and productivity, as evident from their values. Design/methodology/approach: The research design acknowledges the relative role of firms' working capital vis-a-vis other assets in generating revenue, thereby effectively accounting for the overall asset efficiency in influencing firm value. The authors use a multivariate framework to draw inferences from the marginal impact of working capital and its components on firm value while controlling for asset utilization. Findings: The authors find that, after accounting for asset utilization, the marginal impact of working capital and its components on firm value is quite weak. The results are consistent with the hypothesis that firms' trade-off between short-term and long-term assets per se should not have any value implications. After controlling for their asset turnovers, the authors find that higher allocations to working capital relative to other assets are not necessarily value-destructive. The findings contrast with the past literature. Research limitations/implications: The article, through its analytical and empirical insights, suggests that working capital allocations should be measured by managers and academicians relative to firms' other asset rather than their sales. Firm values should, therefore, be compared based on firms' overall asset utilization rather than inter-temporal allocations to short-term versus long-term assets. Originality/value: Contrary to the existing literature so far, the article explicitly acknowledges the relative role of firms' other assets, and hence the overall asset utilization, to infer the marginal impact of working capital on firm value.