Is working capital management value-enhancing? Evidence from firm performance and investments

This paper examines the value effect of working capital management (WCM) for a large sample of US firms over the period 1982-2011. Taking into account omitted variables and reverse causality, we show that the decrease in working capital across time leads to increasing performance. This relationship is driven by firms that have substantial cash unnecessarily tied up in working capital. Importantly, we also show that corporate investment is the channel through which improvement in WCM translates into superior performance. Finally, the value effect of WCM is attenuated during the financial crisis, due to the contraction of the investment opportunity set.