THE WORKING CAPITAL MANAGEMENT ON THE CORPORATE PROFITABILITY OF LISTED FIRMS: EVIDENCE FROM CREDIT RATINGS ON FTSE 100 COMPANIES

Year 2021, Volume: 4 Issue: 2, 145 - 154, 30.12.2021

Saygun Kerem Boren Sargon

https://doi.org/10.46737/emid.989502

Cited By: 1

Abstract

Underlying research tries to assess the impact of the credit rating monitoring on the working capital management and thus the impact on the overall profitability of the non-financial FTSE 100 firms. We used Return on Assets (ROA), Return on Equity (ROE), and Tobin Q as the profıtabiliy proxies. The first two measures represent the accounting firm's performance, while the latter is used as market profitability. The Cash Conversion Cycle (CCC) was used in this study to proxy working capital like many others in the preceding literature. Our findings suggest that aggressive working capital management is still the key to corporate profitability for non-financial FTSE100 firms when ROE is used. However, it supports the conservative working capital policy when Tobin Q is employed as a profitability measure. Nevertheless, when credit rating agency monitoring is in place, we can disclose a different story. Findings from this study using the System GMM methodology outline that when credit rating agencies' credit rating monitoring is in place, firms tend to spread the time for CCC. Relative to the previous statement, the firms that are not monitored are likely to shorten the CCC for attaining a higher profit level for the accounting measures of ROA and ROE. Nevertheless, we could not be able to find similar results with the Random effect (RE) models. We believe that the endogenous nature of the variables used in this study could trigger the insignificant impact of credit rating monitoring while using the RE models.

Keywords

Cash Conversion Cycle, Working Capital Management, Credit Rating Monitoring

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