The quadratic relationship between working capital management and firm performance: Evidence from the Nigerian economy

Abstract

Optimal investment in working capital is vital to provide liquidity and enhance firm performance. This paper seeks to determine the quadratic relationship between working capital management (WCM) and firm performance. Also, this paper examines the effect of deviation from optimal WCM on firm performance. Therefore, the study uses a sample of 75 non-financial firms listed on the Nigerian Stock Exchange from 2007 to 2015. It adopts the cash conversion cycle component of working capital management to evaluate the quadratic assumption using panel regression. The empirical results from the sample of the study indicate that the relationship between working capital management and firm performance is quadratic. This study also found that an optimal level exits at which investments in working capital will yield the maximum return. This study concludes that deviation from the optimal level of investments in WCM (either above or below) affects the performance of firms. The study, therefore, recommends that firms should promote best practices for maintaining optimal working capital investment level to enhance their performance and sustain growth.