The impact of working capital management on credit rating

Abstract

This study investigates the possible nonlinear relationship between working capital and credit rating. Furthermore, it examines the relationship between the three components of working capital (inventory, accounts receivable, and accounts payable) and a firm’s credit rating. Employing data for U.S listed firms for the period between 1985 and 2017, the results of our ordered probit model show a nonlinear relationship between working capital and its components and credit rating. Finally, we find that the deviation from the optimal working capital adversely affects the credit rating. The results of this study are of significant importance for policy makers, managers, decision makers, and credit-rating agencies, as they help highlight the importance of working capital management for a firm’s credit rating.