Iranian Journal of Finance

Working Capital Management Model for Listed Companies on the Tehran Stock Exchange

Document Type : Original Article

Authors

Abdolrahim Kamranzadeh Ezmareh 1
Younes Badavar Nahandi 2
Mahdi Zeinali 3

1 Ph.D. Candidate, Department of Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran.

2 Associate Prof., Department of Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran.

3 Assistant Prof., Department of Accounting, Tabriz Branch, Islamic Azad University, Tabriz, Iran.

10.61186/ijf.2024.465894.1479
Abstract
This study aims to develop a working capital management model for companies listed on the Tehran Stock Exchange. The proposed model determines the expected level of working capital for a company, enabling it to create the highest possible value. Additionally, this model can be used to assess the efficiency of working capital management. The discrepancy between the actual level of working capital and the expected level serves as an indicator of inefficiency in working capital management. Initially, based on theoretical foundations and expert opinions, 28 variables affecting working capital were selected. Then, using the operational working capital index, the research models were estimated using multiple regression and genetic algorithm techniques for data from 156 companies over the period from 2011 to 2022. Influential variables were identified and filtered. Finally, suitable working capital management models were identified based on two criteria: (1) the strong correlation between the errors of the fitted models and the working capital efficiency of the company, and (2) the model’s accuracy in identifying companies prone to excess or shortage of working capital. In total, after estimating 119 different models using regression and genetic algorithm methods, four suitable working capital management models were determined. The regression method resulted in models with an average accuracy of 77.27% and 79.54% for the dependent variable of working capital and the cash conversion cycle, respectively. The genetic algorithm method resulted in models with an average accuracy of 89.03% and 82.08%. The final model, with the cash conversion cycle as the dependent variable, was identified as the best model. It includes the variables of the previous year's cash conversion cycle, company-specific risk, gross profit margin, trade credit, growth opportunities, operating cycle, economic policy uncertainty, and exchange rate changes.

Keywords

Optimal working capital
Excess working capital
Working capital shortage
Working capital efficiency
Cash conversion cycle
Afrifa, G. A. & Tingbani, I. (2018). Working capital management, cash flow, and SME's performance. International Journal Banking, Accounting, and Finance, 9(1), 19-43.
Afza, T., & Nazir, M. S. (2009). Working Capital Requirements and the Determining Factors in Pakistan, IUP Journal of Applied Finance, 7 (4), 23-30.
Aktas, N., Croci, E., & Petmezas, D. (2015). Is working capital management value-enhancing? Evidence from firm performance and investments, Journal of Corporate Finance, 30, 98-113, North-Holland.
Alipour, M. (2023). Working capital management and corporate profitability: Evidence from Iran; World Applied Sciences Journal, 12 (7) (2011), pp. 1093–1099.
Amin, V., & Salehnezhad, S. H. (2020). The impact of company sustainability performance on economic value-added during the company life cycle. Financial Accounting Knowledge, 7(2), 1-30. doi: 10.30479/jfak.2020.11879.2568
Anvari Rostami, A. A., Sajjadpour, R., & Yablouyi, M. (2014). Investigation of factors affecting working capital management of companies listed on the Tehran Stock Exchange. Financial Accounting Research, 1(6), 15–26.
Badavar Nahandi, Y., & Taghizadeh Khanqah, V. (2016). The Relationship between Working Capital Management and Investment Inefficiency”, Journal of Asset Management and Financing, 4 (3), 17-38.
Bahar moghaddam, M., & Salari, M. (2011). The relationship between accounting depreciation and economic depreciation and the role of conservative depreciation reporting in providing insider information. Experimental Studies in Financial Accounting, p. 9.
Banerjee, P., & Deb, G. S. (2023). Working capital management efficiency, managerial ability, and firm performance: New insights, Applied Economics. https://doi.org/ 10.1080/00036846.2023.2208857
Baños-Caballero, S., Garcıa-Teruel, P.J, & Mart ınez-Solano, P. (2010), Working capital management in SMEs, Accounting and Finance, 50 (3), 511-527.
Baños-Caballero, S., Garcıa-Teruel, P.J. & Martinez-Solano, P. (2016). Working capital management, corporate performance, and financial constraints, Journal of Business Research, 67 (3), 332-338.
Baños-Caballero, S., Garcıa-Teruel, P.J, & Martınez-Solano, P. (2012). How does working capital management affect the profitability of Spanish SMEs? Small Business Economics, 39 (2), 517–529, Springer US. Borsa Istanbul Review,
Caballero, S. B., Garcia-Turel, P. & Martinez-Solano, P. (2010). Working capital management in SMEs, Accounting and Finance, 50, 511-527.
Caballero, S. B., Garcia-Turel, P. & Martinez-Solano, P. (2013). Working capital management, corporate performance, and financial constraints, Journal of Business Research, 67 (3), 332-338.
Deloof, M. (2003). "Does working capital management affect profitability of Belgian firms?” Journal of Business Finance and Accounting, 30 (3/4), 573–588.
Deloof, M., & Jegers, M. (1996). Trade credit, product quality, and intragroup trad. : Some European evidence, Financial Management, 25 (3), 33–43.
Ding, S., Guariglia. A., & Knight, J. (2013), Investment and financing constraints in China: does working capital management make a difference? Journal of Banking and Finance, 37 (5), 1490–1507.
Ebben, J.J, & Johnson, A.C. (2011). Cash conversion cycle management in small firms: relationships with liquidity, invested capital, and firm performance, Journal of Small Business and Entrepreneurship, 24 (3), 381-396, Taylor and Francis.
Emery, G. (1984). A pure financial explanation for trade credit, Journal of Financial and Quantitative Analysis, 19 (3), 271–285.
Eskandarnezhad, S., Baradaran Hassanzadeh, R., & Taheri, H. (2020). The impact of working capital management on the profitability capability of companies listed on the Tehran Stock Exchange during business cycles based on the production gap. Asset Management and Financing, 8(2), 31-48.
Fazzari, S. and Petersen, B. (1993). Working capital and fixed investment: new evidence on financing constraints, The RAND Journal of Economics, 24 (3), 328-342
Ganesan, V. (2007). An Analysis of working capital management efficiency in telecommunication, equipment industry, River Academic Journal, 3 (2), 23–34.
Garcia – Teruel, P. J., & P. M. Solano, (2007), Effects of Working Capital Management on Profitability, International Journal of Managerial Finance, 3 (2), 164 – 177
Gill, A., Biger, N., & Mathur, N. (2010). The relationship between working capital management and profitability: evidence from the United States, Business and Economics Journal, 10 (1), 1-9.
Hashemi Tilehnouei, M., & Nikkar, J. (2024). The Role of Firm Characteristics in Predicting Cash Flows from Operating Activities. Iranian Journal of Finance, 8(1), 26-46. doi: 10.30699/ijf.2023.344433.1338
Hill, M.D., Kelly, G.W., & Highfield, M.J. (2010). Net operating working capital behavior: a first look, Financial Management, 39 (2), 783–805.
Howorth, C., & Westhead, P. (2003). The Focus of Working Capital Management in UK Small Firms, Management Accounting Research, 14(2), 94–111.
Izadinia, N., & Taki, A. (2010). Investigating the impact of working capital management on the profitability capability of companies listed on the Tehran Stock Exchange. Financial Accounting, 2(1), 120-139.
Jafari, S. M., & Ahmadvand, M. (2015). Credit rating of companies listed on the Tehran Stock Exchange using the emerging market score approach. Business and Economics Research Journal, 6(10), 37–56.
Jani, S. (2015). Analysis and review of the impact of market structure on the technology gap in Iran's manufacturing industries. Quarterly Journal of Economic Research and Policies, 23(76), 7–32.
Kengatharan, Lingesiya & Tissera, W. (2019). Do Corporate Governance Practices Influence Working Capital Management Efficiency? Evidence from Listed Manufacturing Companies in Sri Lanka. Research in World Economy. 10. 205. 10.5430/rwe.v10n3p205.
Khodabakhshi, N., & Soleimani Amiri, G. (2018). Explaining Factors and Consequences of Working Capital Management Using Content Analysis Approach. Iranian Journal of Finance, 2(2), 29–58. doi: 10.22034/ijf.2018.88417 
Kieschnick, R., Laplante, M. & Moussawi, R. (2013). Working capital management and shareholders' wealth, Review of Finance, 17 (5) 1827-1852.
Kim, Y.H. & Chung, K.H. (1990). An integrated evaluation of an investment in inventory and credit: a cash flow approach, Journal of Business Finance and Accounting, 17 (3), 381-389.
 Kiymaz, H., Haque, S., & Ahmed Abir Choudhury, (2024). Working capital management and firm performance: A comparative analysis of developed and emerging economies, Borsa Istanbul Review, 24 (3), 634-642.
Lamberson M. (1995). Changes in working capital of small firms in relation to changes in economic activity, Mid-American Journal of Business, 10 (2), 45–50.
Mahdian, S.A., & Noravesh, B. (2017). Providing a Model for Explaining Working Capital Management: Structural Equation Modeling Approach. Journal of Investment Knowledge, 6(24), 167-185.
Maleki Kaklar, H., & Molaei Gholanji, I. (2021). The mutual relationship between working capital management, financial leverage, and performance indices in Tehran Stock Exchange companies, Islamic Economics and Banking, 39, 279-300.
Mathuva, D.M. (2013). "Determinants of corporate inventory holdings: evidence from a developing country," The International Journal of Applied Economics and Finance, 7 (1), 1-22.
Mathuva, D.M. (2014). An empirical analysis of the determinants of the cash conversion cycle in Kenyan listed non-financial firms, Journal of Accounting in Emerging Economies, 4 (2), 175-196, Emerald.
Mohamad, B.N.E.A. & Saad, N.B.M. (2010). Working Capital Management: The Effect of Market Valution and Profility in Malaysia. International Journal of Business and Management, 5 (11), 140- 147.
Mohammad, B. A. & Saad, B. M. (2010). Working Capital Management: The Effect of Market Valuation and Profitability in Malaysia, International Journal of Business and Management, 5 (11), 21-29.
Mohammadi, M. (2009). The impact of working capital management on the profitability of companies listed on the Tehran Stock Exchange. Management Quarterly, 6(14).
Molina, C.A. and Preve, LA (2009). Trade receivables policy of distressed firms and its effect on the costs of financial distress, Financial Management. Financial Management Association International, 38 (3), 663-686.
Moradi, M. A., Najjar, M., & Izadpour, M. (2015). The relationship between working capital management and criterions for value-based performance of the companies listed in Tehran Stock Exchange. Asset Management and Financing, 3(2), 97-114.
Mun, S. & Jang, S. (2015). "Working capital, cash holding, and profitability of restaurant firms," International Journal of Hospitality Management, 48, 1-11.
Myers, S.C. (1984). "The capital structure puzzle, The Journal of Finance, 39 (3), 574–592.
Nazir, M. Sajid & Afza, T. (2009). Impact of Aggressive Working Capital Management Policy on Firm’s Profitability. The IUP Journal of Applied Finance, 15(8), 19-30.
Norouzi, M., & Aflatooni, A. (2019). Optimal Level of Working Capital Management and Financial Constraint. Empirical Research in Accounting, 9(1), 1-22. doi: 10.22051/jera.2017.8410.1150
Onaolpo, A. & Kajola, S. (2015). What are the Determinants of Working Capital Requirements of Nigerian Firms? Research Journal of Finance and Accounting, 6 (6), 118-129.
Palombini, N.V.N. and Nakamura, W.T. (2012). "Key factors in working capital management in the Brazilian market," Business Administration Magazine, 52 (1), 55-69.
Parvaneh, F., Darabi, R., & Chaharmahali, S. (2023). Comparing the Effect of Information Quality on Economic Profit and Accounting Profit with the Artificial Intelligence Approach. Iranian Journal of Finance, 7(2), 22-47. doi: 10.30699/ijf.2022.328066.1308
Petersen, M., & Rajan, R. (1997). Trade credit: Theories and evidence, Review of Financial Studies, 10 (3), 661–691.
Raheman, A. & Nasr, M. (2007). Working capital management and profitability: case of Pakistani firms, International Review of Business Research Papers, 3 (1), 279-300.
Setayesh, M. H., & Salehinia, M. (2015). The impact of ownership structure and capital structure on free cash flows. Financial Accounting and Auditing Research.
Seth, H., Chadha, S. & Sharma, S. (2020). Benchmarking the efficiency model for working capital management: data envelopment analysis approach, International Journal of Productivity and Performance Management, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJPPM-10-2019-0484
Sharma, R.K., Bakshi, A. & Chhabra, S. (2020). Determinants of the behavior of working capital requirements of BSE listed companies: an empirical study using co-integration techniques and generalized method of moments, Cogent Economics and Finance, 8 (1).
Shin, H. H., & Soenen, L. (1998). Efficiency of working capital and corporate profitability, Financial Practice and Education, 8 (1), 37– 45.
Taghizadeh Khaneqah, V., Badavar Nahandi, Y., Motaghi, A. A., & Taghizadeh, H. (2019). Presenting a model for evaluating investment efficiency of companies in Tehran Stock Exchange. Financial Research, 21(2), 237-264.
Vaez, S. A., Ghalambor, M. H., Ghanavati, N., & Rahmani, F. (2014). Investigating the relationship between ownership concentration and board structure with the efficiency of working capital management. Asset Management and Financing, 2(4), 113-128.
Valipour, H., Moradi, J. & Farsi, FD (2012). "The impact of company characteristics on working capital management", Journal of Applied Finance and Banking, Vol. 2 (1), 105-125.
Wasiuzzaman, S. and Arumugam, VC (2023). Determinants of working capital investment: a study of Malaysian public listed firms, Australasian Accounting, Business and Finance Journal, 7 (2), 63-83.
Yousefzadeh, N. & Azami, Z. (2015). The effects of working capital management on the company's profitability in different business cycles. Accounting Knowledge, 6(23), 147-171.
Iranian Journal of Finance
Volume 9, Issue 1
Winter 2025
Pages 89-133

Home

Submit Manuscript

Reviewers

Contact Us

Journal Metrics

Article Processing Charges

Call for Papers