Investigating the relationship between working capital management and business performance: evidence from the 2008 financial crisis of EU-28

This study examines the relationship between working capital management and business performance.

The relationship between the working capital management and business performance is examined using panel data analysis for a sample of EU-28 listed firms for the period from 2003 to 2012. To examine this relationship, an ordinary least squares (OLS) regression model is used to analyze the data obtained from the sample. The dependent variable consists of three measurements, namely return on asset (ROA), return on equity (ROE) and earnings before interest and taxes margin (EBITM), which are used as proxies for accounting-based measures of performance.

The authors examined the aforementioned relationship during the 2008 financial crisis. The OLS regression analysis suggests that there is a negative relationship between gross working capital and business performance for code law countries. The results also show that liquidity measures estimated by current ratio have a statistically significant impact on business performance indicated by ROA for all EU countries. The 2008 financial crisis had a significantly negative impact on ROA. Additionally, the findings regarding financial inclusion show a negative relationship between gross working capital and business performance among EU and other performer countries.

Overall, the empirical findings are consistent with Afrifa's (2016), who suggests that cash flow should increase investment in working capital to improve performance indicated by EBITM for old EU members.

While many empirical studies investigate the relationship between working capital and firm profitability, most do not consider the impact of the 2008 financial crisis apart from Tsurate (2019). The authors examine whether legal origins are important determinants of working capital management policies and business performance. Thus, empirically, the code law countries have a negative relationship between gross working capital, business performance and EBITM.