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Working capital efficiency across Europe: evidence from a stochastic frontier analysis

Working capital efficiency across Europe: evidence from a stochastic frontier analysis
Working capital efficiency across Europe: evidence from a stochastic frontier analysis
In this paper the stochastic frontier analysis (SFA) is used to model working capital efficiency (WCE) of firms in the European Union (EU). The main advantage of the SFA model over other measures is that it takes into account the stochastic properties of the data and decomposes the error term into random error and efficiency, enables the estimation of sales generated as a function of the three working capital elements and determines differences in efficiency levels between a firm and the best ‘practice’ WCE firm. Using the SFA model and a comprehensive dataset, factors that affect WCE in Europe are studied. It is found that (i) larger firms are more efficient with their working capital management (WCM) than smaller firms, (ii) greater cash holding contributes to WCE, (iii) high competition is less conducive to WCE than low competition, (iv) export and growth potential decrease WCE and (v) WCE increases with access to bank credit. In the analysis, a distinction is made between the “old” EU countries and the “new” EU countries, and find that the results are sensitive to the year of admission into the EU.
Working capital management, STOCHASTIC FRONTIER ANALYSIS,, Trade credit finance ,, Firm efficiency, bank accounting
0040-1625
Afrifa, Godfred Adjapong
b38efd3a-338e-4910-af21-c7f673ebf095
Tingbani, Ishmael
e6b2741a-d792-4adf-84cc-a2f64d5545ca
Adesinac, Oluseyi Oluseun
27529b21-3d0e-47b4-8ff2-090492220ee4
Afrifa, Godfred Adjapong
b38efd3a-338e-4910-af21-c7f673ebf095
Tingbani, Ishmael
e6b2741a-d792-4adf-84cc-a2f64d5545ca
Adesinac, Oluseyi Oluseun
27529b21-3d0e-47b4-8ff2-090492220ee4

Afrifa, Godfred Adjapong, Tingbani, Ishmael and Adesinac, Oluseyi Oluseun (2022) Working capital efficiency across Europe: evidence from a stochastic frontier analysis. Technological Forecasting and Social Change, 184, [122012]. (doi:10.1016/j.techfore.2022.122012).

Record type: Article

Abstract

In this paper the stochastic frontier analysis (SFA) is used to model working capital efficiency (WCE) of firms in the European Union (EU). The main advantage of the SFA model over other measures is that it takes into account the stochastic properties of the data and decomposes the error term into random error and efficiency, enables the estimation of sales generated as a function of the three working capital elements and determines differences in efficiency levels between a firm and the best ‘practice’ WCE firm. Using the SFA model and a comprehensive dataset, factors that affect WCE in Europe are studied. It is found that (i) larger firms are more efficient with their working capital management (WCM) than smaller firms, (ii) greater cash holding contributes to WCE, (iii) high competition is less conducive to WCE than low competition, (iv) export and growth potential decrease WCE and (v) WCE increases with access to bank credit. In the analysis, a distinction is made between the “old” EU countries and the “new” EU countries, and find that the results are sensitive to the year of admission into the EU.

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WORKING CAPITAL EFFICIENCY ACROSS EUROPE - EVIDENCE FROM STOCHASTIC FRONTIER ANALYSIS (1) - Accepted Manuscript
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Accepted/In Press date: 29 August 2022
e-pub ahead of print date: 11 September 2022
Keywords: Working capital management, STOCHASTIC FRONTIER ANALYSIS,, Trade credit finance ,, Firm efficiency, bank accounting

Identifiers

Local EPrints ID: 470235
URI: http://eprints.soton.ac.uk/id/eprint/470235
ISSN: 0040-1625
PURE UUID: a45d0ef5-3a7f-45de-93d4-2652332b2a9e
ORCID for Ishmael Tingbani: ORCID iD orcid.org/0000-0002-4012-1224

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Date deposited: 05 Oct 2022 16:32
Last modified: 06 Oct 2022 02:01

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Contributors

Author: Godfred Adjapong Afrifa
Author: Oluseyi Oluseun Adesinac

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