The Relationship between Working Capital Management and Profitability : evidence from Korean Shipping Industry

Abstract

Many of previous studies suggested that working capital management is an important component of firm`s financial decision and efficient working capital management affects firms` profitability and it`s value. Recently, Korean shipping firms have been suffering from financial distress by recession of shipping economy. In this point of view, this study tries to investigate the relationship between working capital management and shipping firm`s profitability, using panel data on 46 Korean shipping firms for the period of 2004-2013. As result of panel regression, it proved that average payment period, inventory turnover, cash conversion cycle and operating cycle are significantly associated with firms profitabilities such as profit margin ratio and operating profit ratio, and the manager of shipping firm can increase firms profitability by more efficient working capital management. There are strong positive relationships between average payment period and operating cycle and firm`s profitability. These results suggest that managers can create firm`s value by increasing average payment period and operating cycle. Otherwise inventory turnover and cash conversion cycle have negative relationships with firm`s profitability. It means that managers can increase firm`s profitability by reducing these variables.