Abstract:
Purpose – The purpose of this paper is to assess the impact of deviation from the target investment in
working capital (WC) (measured by net trade cycle (NTC)) on the profitability (measured by gross operating
income (GOI) and net operating income (NOI)) of the listed non-financial Indian firms.
Design/methodology/approach – The study is based on the data collected on NTC, GOI, NOI and other
variables pertaining to 242 listed non-financial Indian firms that form part of the Bombay Stock exchange 500
Index for the period 2012–2017 (1,452 firm-year observations). Following Banos-Caballero et al. (2010), the
authors use a firm fixed effect regression as the benchmark regression for finding out the determinants of
NTC of the sample firms. Furthermore, this study explores the impact of deviation (above and below target)
from the target investments in WC on the firm profitability (GOI and NOI) employing fixed effect regression.
Findings – The result of this study reveals that Indian firms maintain a target NTC and try to converge in
case of any deviations to it. Furthermore, the profitability of the sample firms was observed to be influenced
by the deviation from the target NTC irrespective of whether the deviation was above or below the target
investment level in WC.
Practical implications – This study highlights the importance of good WC management for firms due to
the negative impact of the over- and under-investments in WC and contributes to the existing body of
knowledge by suggesting that managers should keep close to the target WC and not deviate from this in
order to maximize the firms’ profitability.
Originality/value – To the best of the knowledge of the researchers, this is perhaps the first study to
examine the impact of firms’ deviation from their target investment in WC on the profitability for nonfinancial firms listed and operating in India.