Working capital management and financial performance of UK listed firms: a contingency approach

Abstract

Existing empirical research findings generally suggest that working capital management (WCM) affects and the firms’ financial performance. This paper adopts contingency theory framework to investigate how the relationship between WCM and financial performance is affected by the firms’ environment, resources and management capability. Our sample consist of an unbalanced panel of 802 firms listed on the London Stock Exchange (LSE) from 2004 to 2014 on which a dynamic panel data analysis was performed using a series of interactive models to estimate the relationship. The findings suggest that the impact of WCM on financial performance changes to reflect number contingency variables such as environmental, resources and management capabilities of the firm. These findings are significant because they demonstrate for the first time how the firms’ ability to enhance performance through investment in working capital is influenced by contingent factors such as environmental, resource and management capabilities of the firm. Our results are also important as they show that contingency theory helps to provide an understanding on the conditions under which investment in working capital can be an effective tool in enhancing financial performance and the relevant contingencies.

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Identifiers

ORCID for Ishmael Tingbani: orcid.org/0000-0002-4012-1224

ORCID for Venancio Tauringana: orcid.org/0000-0002-1433-324X

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