A Meta-Analysis of the Impact of Working Capital on Profitability

Abstract

Working capital and profitability are two important core concepts in financial management and accounting. The management of these two concepts can affect an investor’s decision to invest in a firm. Thus, there have been many publications stressing the need to effectively manage working capital because of its significant impact on profitability. However, working capital has been hardly mentioned by any senior manager or executive as one of the value drivers that enhances profitability. Therefore, the aim of this study is to investigate the strength and the extent to which profitability depends on working capital. This study is motivated by a lack of research in this area. Using a meta-analysis of 32 published journal articles and dissertations, the study finds that working capital accounts for 37.8% of the variability in profitability. Also, the results of a Kolmogorov-Smirnov test reveal that the distribution of the coefficient of determination is not normally distributed and is not a good fit to explain the effect of working capital on profitability, hence independent of each other. The implication of this study is that research entitled “the effect of working capital management on profitability” should be scrutinized before being accepted for publication.