Working Capital Management and Financial Performance of UK Listed Firms: A Contingency Approach.

Abstract

Existing literature has made several theoretical and empirical contributions on the relationship between working capital management (WCM) and financial performance (Aktas, Croci, and Petmezas 2015; Baños-Caballero, García-Teruel, and Martínez-Solano 2010; Deloof 2003; de Almeida and Eid 2014). Evidence from these studies supports the traditional belief that WCM affects firm’s financial performance, risk and consequently its value (Aktas et al., 2015). Despite the strengths of these theoretical and empirical arguments, a number of empirical studies indicate that firms policies change over time as they adjust to the demands of their environment (Rueda-Manzanares, Aragón-Correa and Sharma, 2008; Ambrosini, Bowman and Collier, 2009; Otley, 2016), their resource (Mol and Wijnberg, 2011) and management capabilities (Luo, Kanuri and Andrews, 2014) with the view influencing their financial performance. For example, according to the structure-conduct-performance (SCP) model, the degree of concentration in the industry determines firm behaviour and performance. This is because higher concentration enables collusion between firms which leads to higher profits. It has also been suggested that industrial characteristics such as industry concentration often results in barriers to entry for new firms and enable established firms to share industry profits among themselves (Porter, 1980).