Is Working Capital Management Value-Enhancing? Evidence from Non-Listed Chinese Firms' Performance and Financial Constraints

Abstract

Financial factors have been found to influence firms' real activities and promote aggregate growth. However, the linkage between net working capital and firm performance (e.g., firm-level total factor productivity and profitability) has been overlooked in the literature. In this study, we bridge this gap, using data on 147, 310 non-listed Chinese firms over 1999-2007 to estimate a firm performance model augmented with net working capital. We find that productivity and profitability are strongly and significantly associated with net working capital for private and foreign firms, but not for state-owned enterprises. More specifically, an increase in net working capital has a negative (positive) effect on productivity and profitability in firms with positive (negative) net working capital. Furthermore, highly external financially constrained, highly internal financially constrained, and small private and foreign-owned firms are more sensitive to net working capital.