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Working
Working capital management capital
and firm’s valuation, management

profitability and risk

Evidence from a developing market 191

Ben Le Received 11 January 2018

Revised 22 May 2018
College of Business and Public Management, Accepted 14 June 2018
Kean University, Union, New Jersey, USA

Abstract
Purpose – The purpose of this paper is to examine the effects of working capital management on firm
valuation, profitability and risk.
Design/methodology/approach – The paper uses a panel data set of 497 firms covering the period 2007 to
2016. The authors test the effects of working capital management on firm valuation, profitability and risk
using the panel data methodology that includes firm and year fixed effects regressions.
Findings – The authors find a significantly negative relationship between net working capital (NWC) and
firm valuation, profitability and risk. The results suggest that, in managing working capital, firm managers
must make a trade-off between their objectives for profitability and risk control. Working-capital
management is of particular importance in firms with less access to capital; it is also important when firms are
expanding their investments during periods of economic recovery.
Originality/value – This paper contributes to the literature in several ways. First, to my knowledge, it
provides the most comprehensive investigation, to date, on the relationship between working capital
management and firm valuation, profitability and risk in an emerging market. Second, this study documents
the existence of an optimal level of NWC in an emerging market. Third, firm performance, as measured in
both market and accounting value, can be improved with efficient working capital management. Finally, the
study includes the impact of the business cycle in an analysis of the effects of working capital management on
firm performance.
Keywords Vietnam, Firm performance, Business cycle, Risk, Working capital management, Access to capital
Paper type Research paper

1. Introduction
The literature on working-capital management (WCM) has found that efficient management
can enhance profitability and increase firm value. Shin and Soenen (1998) are one of many
studies that have found a negative relationship between the cash conversion cycle (CCC) and
firm profitability. The results imply that a reduction in the CCC is directly associated with
an increase in profitability. Havoutis (2003) argues that firms have control over their WCM
and that, with efficient control, they can increase their economic value. One measure of firm
value is the total present value of its expected future free cash flows (FCF). Net working
capital (NWC) is a determinant of FCF. Berk et al. (2009) note that efficient WCM can
increase FCF, and consequently enhance the value of a firm. Few studies investigate the
relationship between NWC and firm value. Wasiuzzaman (2015) documents a negative
relationship between the level of NWC and firm value for firms in Malaysian markets.
Aktas et al. (2015) find a negative relationship between firm value and excess NWC in firms
with abnormally high levels of NWC in US markets. However, this relationship is positive in
firms with low levels of NWC.
International Journal of Managerial
Jensen Michael (2001) notes that a firm’s goal is to maximize its total market value, and Finance
that it is impossible for a firm to have multiple goals. Maximizing a firm’s value is not Vol. 15 No. 2, 2019
pp. 191-204
always the same as maximizing its profits. Unfortunately, current studies only test the © Emerald Publishing Limited
1743-9132
influence of WCM on either a firm’s profitability or its value by using separate data sets. DOI 10.1108/IJMF-01-2018-0012
IJMF There is a lack of research that examines the effects of WCM on firm profitability and firm
15,2 valuation, using the same data set. Further, few studies address the effect of a change in
NWC on firm risk.
The results of existing studies imply that a firm can increase its profitability by reducing
its CCC. A lower CCC is usually associated with a lower level of NWC. This paper attempts
to answer the following questions: in a market, if the CCC is negatively related to
192 profitability, then will a decrease in NWC be associated with a higher firm value? What is
the effect on firm risk of reducing NWC?
On a global equity-investment perspective, emerging markets have been attracting
considerable attention from international investors. This paper aims to extend the research
of WCM on an emerging economy and provide to the literature new evidence on the impact
of WCM on firm value. In particular, this study uses a panel data set from stock markets in
Vietnam over the period 2007 to 2016 to investigate the effects of WCM on firms’ value,
profitability and risk over the most recent decade for which data is available. Vietnamese
stock exchanges present a unique opportunity for a case study on WCM. Over this period,
current assets represent 62.06 percent of firms’ total assets and current liabilities represent
80.78 percent of their total liabilities; these values, in turn, are equal 98.00 percent of their
total equity. Vietnamese firms are heavily dependent on short-term financing and
short-term assets account for the major portion of these firms’ balance sheets. Hence,
appropriate WCM and financing policies are tools a firm can use to increase their valuation.
Campos and Kinoshita (2003) note that former communist countries provide an
extremely valuable but are underutilised opportunity for research. As a former communist
country, Vietnam opened its economy in the early 1990s, which was a decade of market
liberalization globally. The country now has two stock exchanges: the Ho Chi Minh Stock
Exchange, which was established in 2000, and the Hanoi Stock Exchange, which was
launched in 2005. Demigurc-Kunt and Maksimovic (2002) find that the development of a
country’s legal system as it pertains to capital markets predicts its firms’ access to
external capital: “[T]he development of securities markets is related more to the
availability of long-term financing, whereas the development of the banking sector is
related more to the availability of short-term financing.” Vietnam’s securities markets
have only recently been established. The country’s firms have limited alternative sources
of external capital, a situation that is consistent with their very high percentages of
short-term liability to total liability.
In November 2006, Vietnam joined the World Trade Organization. Since 2007, the
country’s firms have become more integrated into global markets. The market-value-
weighted foreign ownership of Vietnamese listed firms was 27.56 percent, on average,
during the period 2007 to 2016, the US ranking second among the countries investing in
Vietnamese stock markets[1]. Foreign investment provides an important source of capital to
domestic firms. Their integration into global markets provides benefits but also pushes
these firms’ management to improve their firms’ performance. In addition to foreign
investors providing financing, the government also finances several Vietnamese listed
firms. During the period 2007 to 2016, the government-owned 50.00 percent or more of the
total shares outstanding of over 36 percent of all listed firms, accounting for an important
source of these firms’ capital.
This paper contributes to the WCM literature in several ways. First, to my knowledge, it
provides the most comprehensive investigation, to date, on an emerging market and the
relationship between working capital management and firm performance as measured by firm
valuation, profitability and risk. Second, this study documents the existence of an optimal level
of NWC in an emerging market. This finding is comparable with Baños-Caballero et al. (2014)
and Aktas et al. (2015), who documented the existence of optimal working-capital-investment
levels in UK and US markets, respectively. However, this paper uses different research methods.
First, whereas Aktas et al. (2015) use abnormal returns as a measure of firm value, this Working
paper uses the market-to-book ratio; it also tests for the effects of NWC on firm profitability. capital
Second, whereas Baños-Caballero et al. (2014) utilize a non-linear model to examine the effects of management
the net trade cycle on a firm’s market-to-book ratio, this paper uses a linear model that includes
firm and year fixed effects in all of the regression analyses.
Third, this paper indicates that firm performance, as measured in both market and
accounting value, can be improved with efficient WCM. Finally, the study includes the 193
impact of the business cycle in an analysis of the effects of WCM on firm performance.
The remainder of the paper is organized as follows: Section 2 reviews the existing
literature. Section 3 includes the models and hypotheses, Section 4 provides a description of
the data. Section 5 discusses the results and Section 6 concludes.

2. Literature review
WCM is important to a firm’s overall management. The level of NWC influences a firm’s
profitability and value; it is determined by the inventory level, the value of accounts
receivable and accounts payable. Blinder and Maccini (1991), Fazzari and Petersen (1993)
and Corsten and Gruen (2004), among others, argue that a high inventory level (thus, a high
NWC) increases profits by lowering supply costs and the potential loss of sales due to stock
outages; it also provides a hedge against variations in the prices of inputs. With respect to
the management of accounts receivable, on the one hand, Brennan et al. (1988), Long et al.
(1993) and Summers and Wilson (2002), among others, propose that granting credit to
customers and, thus, increasing the level of accounts receivable can foster long-term
relationships with customers, which can potentially increase sales and profits. On the other
hand, Kieschnick et al. (2013) argue that an increase in NWC requires additional financing.
Firms that hold too much working capital may incur high-interest expenses and potentially
the risk of bankruptcy (see, Aktas et al., 2015). Eljelly (2004) includes the concept of an
efficient WCM that requires a current asset level that is sufficient to meet short-term
obligations but also to avoid excessive investment in current assets. Berk et al. (2009) imply
that efficient WCM redeploys FCF or underutilised resources to pursue higher-value
projects so as to create value for the firm.
The effects of the CCC, and its components, on profitability are well documented. Most
studies find a negative relationship between CCC and the profitability of firms around the
world, for example, for the USA (see Jose et al., 1996; and Shin and Soenen, 1998); for Japan
and Taiwan (see Wang,2002); for Greece (see Lazaridis and Tryfonidis, 2006); for Spain,
during the period 1996 to 2002 (see García-Teruel and Martínez-Solano, 2007); for Pakistan
(see Raheman and Nasr, 2007); for Turkey (see Karaduman et al., 2010; and for Germany,
see (Wöhrmann et al., 2012). Deloof (2003) finds a negative relationship between CCC and
profitability in Belgian markets; however, these results are insignificant. He also finds a
negative impact on profitability of days sales outstanding (DSO), days sales inventory
(DSI), and days payable outstanding (DPO). However, Baños-Caballero et al. (2012) use
data on Spanish firms for the period 2002 to 2007 and Baños-Caballero et al. (2014)
use data on UK firms for the period 2001 to 2007 and find a concave relationship between
CCC and profitability and argue that there exits an optimal level of NWC that maximizes
a firm’s value.
Cash holdings is a component of NWC. Existing studies provide different effects of cash
holdings on firm value. On the one hand, Luo and Hachiya (2005), Pinkowitz et al. (2006),
Kalcheva and Lins (2007), Harford et al. (2008) and Lee and Lee (2009) find a negative
relationship between cash holdings and firm value. On the other hand, Faulkender and
Wang (2006), Bates et al. (2009) and Isshaq et al. (2009) find positive results from cash
holdings on firm value. Martinez-Sola et al. (2013) find a concave relationship between cash
holdings and firm value, and verify the existence of an optimum level of cash holdings.
IJMF Although there are numerous studies on the effects of cash holdings on firm value, there
15,2 is little research related to the effects of NWC on firm value. Wang (2002) finds that, in the
Japanese and Taiwanese markets, higher-valued firms invest less in NWC than lower-
valued firms. Wasiuzzaman (2015) finds that a reduction in NWC increases firm value in
Malaysian markets. In US markets, using a model similar to that in Faulkender and Wang
(2006), Kieschnick et al. (2013), Wasiuzzaman finds that the incremental dollar held in cash is
194 worth more than the incremental dollar invested in NWC. For US markets, Aktas et al. (2015)
show that, among firms that underinvest in working capital, there is a positive relationship
between the level of NWC and stock performance. However, for firms with abnormally high
levels of NWC, excess NWC is negatively related to stock performance.

3. Model and hypotheses

Firm value can be estimated by discounting its expected future FCF. Brigham et al. (2015)
note that firm value can be estimated by discounting the FCF the firm generates, as follows:
X
1
FCFt
V0 ¼ ; (1)
t¼1 ð1 þWACCÞt

where FCFt ¼ EBITDAt – CAPEXt – ΔNOWCt. WACC is the weighted average cost of
capital. CAPEX is the total cost of long-term assets and ΔNOWC is the change in net
operating working capital. Wasiuzzaman (2015) notes that “NWC is an important
component of free cash flow.” Existing studies typically measure firm value, using either the
market-to-book ratio (Fama and French, 1998, among others) or the stock’s excess return
(Faulkender and Wang, 2006, among others). In this paper, I modify the models used by
Fama and French (1998) and Wasiuzzaman (2015), and use the market-to-book ratio as the
dependent variable that measures firm valuation as follows:
MTBi;t ¼ b0 þb1 CAPEXi;t þb2 INTERESTi;t þb3 CASHDi;t þb4 GROWTHi;t
þb5 CFOSALESi;t þb6 LOG ðSIZEÞi;t þb7 WCi;t þb8 f ei;t þei;t ; (2)
where MTB is the market-to-book ratio and WC is the interest variable that is either
NWC ¼ (accounts receivable + inventory – accounts payable)/total book assets or CCC.
Table I presents the descriptions and calculations of the variables.
In Equation (2), the MTB is the ratio between the year-end market value per share and the
book value per share. A firm’s goal is to maximize its market value. In this model, I focus on
the effects of a change in NWC on a firm’s value. The CAPEX is capital expenditure scaled by
total book assets; INTEREST represents the interest expenses a firm incurs during a year,
scaled by total book assets; CASHD is the total cash dividends paid out during a year, scaled
by total book assets; GROWTH represents the growth rate of sales; CFOSALES is the
operating cash flow, divided by sales for the year; SIZE is the total book value of assets that
controls for firm size. Cash dividends, cash flows from operations, and sales growth rate
represent the firm’s generated cash flows. In all of the regressions, I include fei,t, which
represents firm and year fixed effects, to control for the time-invariant firm characteristics and
to reduce issues related to missing variables (see also, Aktas et al., 2015). The focus of my
model is the effects of NWC and CCC on firm value.
In order to examine the effects of WCM on a firm’s profitability, this paper uses the
following model:

ROICi;t ¼ b0 þ b1 CAPEXi;t þb2 GROWTHi;t þb3 LEVi;t þb4 LOG ðSALESÞi;t

þb5 VOLi;t þb6 WCi;t þb7 f ei;t þei;t (3)
Variable Description Unit n Mean SD
Working
capital
AGE The number of months from IPO to date Months 3,358 57.905 36.291 management
CAPEX Capital expenditure. Total amount spent for Percent 3,358 6.047 7.891
purchasing capital assets
CASHD Total cash dividend paid during the year Percent 3,358 2.574 4.385
scaled by total book assets
CCC Cash conversion cycle ¼ DSO+DSI−DPO Days 3.358 143.94 138.08 195
DPO Days payable outstanding ¼ (Accounts Days 3,358 52.91 50.04
payable × 365)/cost of goods sold
DSI Days sales inventory ¼ (Inventory × 365)/ Days 3,358 108.935 103.088
cost of goods sold
DSO Days sales outstanding ¼ (Accounts Days 3,358 87.911 89.404
receivable × 365)/sales
DUMMY Equal 1 for period 2007–2012 ( financial crisis 3,358 0.558 0.497
period), 0 otherwise
CFOSALES Net operating cash flows scaled by sales Percent 3,358 7.98 14.596
GOV Government ownership ¼ Percentage of Percent 3,358 28.77 23.48
shares owned by the government
GROWTH Growth rate of sales ¼ (Current year Percent 3,358 13.338 36.713
sales−previous year sales) × 100/previous
year sales
INTEREST Total interest expenses of the year scaled by Percent 3,340 2.2605 2.1098
total book assets
LEV Leverage ¼ (Debt/equity) × 100 Percent 3,358 98.015 149.88
MTB Market to Book ratio ¼ Market value/Book 3,358 1.175 1.32
value per share
NWC Net working capital scaled by total book Percent 3,358 32.27 19.26
assets. Net working capital ¼ accounts
receivable + inventories – accounts payable
OWNa Percentage of shares owned by foreigners Percent 3,358 9.458 13.047
ROIC Return on invested capital ¼ (Net income + Percent 3,358 11.487 9.545
interest expenses) × 100/(total capital + short
term debt + current portion of long term debt)
SALES Total revenue of a year VND billion 3,358 1,416.14 3,370.96
SIZE Firm size, equal total book assets VND billion 3,358 1,574 5,604
VOL Stock return volatility ¼ Standard deviation Percent 3,079 11.984 5.775
of stock return
Notes: This table summarizes the statistics all of the variables used in this paper. The sample includes
non-financial firms from DataStream over a decade from 2007 to 2016. The data are obtained from
DataStream. The data are winsorised at the 1 percent level for the following variables: NWC, CCC, DSO,
DSI and DPO. The final data set includes 497 unique firms over 10 years, with a total of 3,358 firm-year
observations, except for interest expenses (3340 observations) and stock return volatility (3,079
observations). aThis is the equally weighted average foreign ownership. The market capitalization value
weighted average of foreign ownership is 27.56 percent. The evidence shows that foreigners invest more in Table I.
firms with large market capitalization Summary statistics

In Equation (3), the dependent variable is the return on invested capital (ROIC); WC is the
focused variable, that is, CCC, NWC or the components of CCC, including DSO, DSI and DPO
(where CCC ¼ DSO + DSI –DPO). Shin and Soenen (1998) and Baños-Caballero et al. (2014),
among others, use CCC to test the effects of WCM on firm profitability. Stock-return
volatility (VOL) is utilized to control for firm risk. Following Deloof (2003), I use total
revenue (SALES) to control for firm size. Table I provides descriptions and calculations of
these variables:
H1. A lower NWC and CCC positively affect firm performance.
IJMF Firm performance is measured using either market value (in this paper, I use market-to-book
15,2 ratio) or accounting value (profitability). I expect that a reduction in NWC or CCC is
associated with an increase in MTB and ROIC. WCM is related to a firm’s management of its
FCF, inventory and accounts payable; thus, WCM affects firm value and profitability.
A higher FCF increases firm value. Current research has found significant effects of CCC on
firm profitability and also effects of NWC on firm value. In markets in Vietnam, I also expect
196 that CCC and NWC have significant influences on firm profitability and value.
There is a direct relationship between NWC and CCC. Controlling for other information,
an increase in inventory and accounts receivable, and/or a decrease in accounts payable
are associated with an increase in DSI and DSO and a decrease in DPO. Consequently,
both NWC and CCC increase. Suppose a firm has excessive NWC; that is, levels of
inventory and accounts receivable are higher and/or accounts payable are lower than
necessary. In either case, both NWC and CCC are too high. We may expect a negative
relationship between the level of NWC and firm value and a negative association between
firm profitability and CCC. A firm can improve its performance by reducing the level of its
NWC level and its CCC:
H2. For firms with better access to capital, firm value is less sensitive to changes
in NWC.
Wasiuzzaman (2015) uses firm size as a proxy for constraints on financing. He argues that
large firms are more reputable and, therefore, have better access to capital markets than
small firms. In this paper, I utilize the total percentage of government and foreign ownership
(GOVOWN ¼ foreign ownership + government ownership) of a firm as a proxy for ease
of access to sources of financing. Sun and Tong (2003) find for China and Le et al. (2018)
find for Vietnam that the cost of borrowing is lower for state-owned enterprises (SOEs)
(either implicit or explicit cost) than for other firms because SOEs carry government
guarantees. Blenman and Le (2014) find that foreigners that invest in Vietnam target
a long-term horizon, thereby helping provide financing to the firms they invest in. However,
Teach notes the negative effect of easy capital access; he coins the term barely working:
“The availability of cheap debt has reduced companies’ incentive to improve
working-capital management” (2015). Hence, I expect firm value is less sensitive to
changes in NWC in firms that have higher GOVOWN.
The following model is used to test the effects of NWC on firm risk:

VOLi;t ¼ b0 þb1 LOG ðSIZEÞi;t þb2 MTBi;t þb3 LOG ðAGEÞi;t þb4 NWCi;t þb5 OWNi;t

þb6 GROWTHi;t þb7 LEVi;t þb8 DUMMY þb9 f ei;t þei;t ; (4)

In Equation (4), the volatility of daily stock returns (VOL) is the dependent variable; AGE is
the number of months, to date, since a firm’s IPO; OWN is the percentage total ownership of
foreign investors at year end; NWC is scaled by the book value of total assets. Table I
provides descriptions and calculations of the variables:
H3. The relationship between stock-return volatility and the level of NWC is negative.
As discussed in studies, a high inventory level can reduce potential stock outages, provide
protection against input price variations and foster long-term relationships with customers
by granting them credit (Blinder and Maccini, 1991; Fazzari and Petersen, 1993; Corsten and
Gruen, 2004; Brennan et al., 1988; Long et al., 1993; Summers and Wilson; 2002). I also expect
a negative relationship between volatility and firm size and age.
In the above equations, the subscript i means firm i, and t means year t.
4. Description of the data Working
The sample data were obtained from DataStream, which consists of financial information for capital
the Vietnamese companies listed on the Ho Chi Minh and the Hanoi stock exchanges. The management
Hanoi Stock Exchange launched in 2005 with only seven listed stocks; its number of stocks
increased to 105, in 2007. The sample data cover the period 2007 to 2016. Financial institutions
are excluded from the sample. The data are winsorised at the 1.00 percent level for the
following variables: NWC, CCC, DSO, DSI and DPO. The final data set includes 497 unique 197
firms, over 10 years, with a total of 3,358 firm-year observations, except for interest expenses
(3,340 observations) and stock-return volatility (3,079 observations).
Table I summarizes the statistics of all of the variables used in the paper. I refer to the
period 2007 to 2012 as it was a period of financial crisis and stock markets in Vietnam saw
prices drop over these six years. The stock market then started to recover in 2013, so I refer to
2013 to 2016 as the recovery period. The ratio of NWC to sales, on average, is 37.15, 35.33 and
39.45 percent, for the full sample, the crisis period, and the recovery period, respectively.
Among the 3,358 observations, 3,279 firm-years show positive NWCs, and 79 firm-years show
negative NWCs. NWC over sales amounted to 38.16 and −4.54 percent for the positive and
negative NWC firm-years, respectively. In comparison with total assets, over the period 2007
to 2016, on average, NWC was 32.37 percent. The average NWC was 33.18 percent for positive
NWC firms, and −5.77 percent for negative NWC firms.
Figure 1 presents the variations of the CCC and its components, from 2007 to 2016. On
average, DSI and DSO are significantly higher than DPO, causing CCC to almost triple DPO.
Among the three components of CCC, DSI is the longest. The CCC tends to increase from
2007 to 2013 and then decrease in 2013.

200.0 200.0

180.0 180.0

160.0 CCC CCC CCC 160.0

CCC
CCC
140.0 CCC 140.0

CCC CCC
120.0 CCC 120.0
DSI DSI DSI
CCC DSO
DSI DSI DSI DSI
Days

Days

DSI DSI 100.0

100.0 DSO
DSI DSO DSO
DSO DSO
80.0 DSO 80.0
DSO
DSO DSO
60.0 60.0
DPO DPO DPO DPO DPO
DPO DPO DPO
DPO DPO
40.0 40.0

20.0 20.0

0.0 0.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
CCC = Cash conversion cycle DSO = Days sales outstanding DSI = Days sales inventory DPO = Days payable outstanding Figure 1.
Notes: This figure presents yearly average CCC, DSO, DSI and DPO. The sample includes 497 Cash Conversion
unique non-financial firms with 3,358 firm-year observations, obtained from DataStream over a Cycle and Its
Components
decade from 2007 to 2016. The descriptions of CCC, DSO, DSI and DPO are summarised in 2007–2016
Table I
IJMF 5. Regression analysis
15,2 5.1 The effects of WCM on firm profitability and value
Table II reports the effects of NWC, CCC and other factors on the firm valuation for the
period 2007 to 2016. Firm and year fixed effects are included in all models. The market-to-
book ratio at year end is the dependent variable. The evidence shows that CASHD,
GROWTH, CFOSALES and CAPEX have positive impacts on firm value. The coefficient
198 of CASHD and CFOSALES are statistically significant at the one percent level, in all of the
regression models. The results suggest that firms with higher cash flows have higher
values. The interest variables NWC and CCC have negative coefficients that are
significant at the one percent level, in all of the specifications. The empirical evidence
suggests that a decrease in NWC is strongly associated with an increase in firm value.
As a one-period lagged value of NWC is included in the model, this coefficient is also
negative and significant at the one percent level, but the magnitude is lower than that of
NWC. The R2 is higher for the NWC models than for the NWC model with a one-period lag.
Table III documents the effects of NWC and CCC and its components on firm
profitability. The dependent variable is ROIC. Table III shows evidence of a strong negative
relationship between profitability and NWC, and CCC and its components, including DSO,
DSI and DPO. On average, as a firm reduces its CCC by 100 days, its ROIC[2] increases by
1.05 percent. A reduction of 100 days in DSO, DSI and DPO is associated with an increase in
ROIC by 1.35, 1.17 and 1.23 percent, respectively. A decrease of 1.00 percent in NWC is
associated with an increase of 2.03 percent in ROIC.
The results in Tables II and III verify H1. The results are consistent with Shin and
Soenen (1998), among others, in finding a negative association between firm performance
and CCC. The results are also consistent with Aktas et al. (2015) in that this study
finds a negative relationship between firm performance and NWC. More importantly,
the evidence in this paper indicates that firm performance, as measured by either
market or accounting value, is negatively associated with a firm’s investment in NWC.
The results imply a significant necessity of reducing the NWC level and the CCC in
markets in Vietnam.

MTB I II III IV

CAPEX 0.19187 (0.129) 0.18276 (0.154) 0.174269 (0.174) 0.25655 (0.004)

INTEREST −3.07332 (0.00) −2.80802 (0.00) −2.8668 (0.003) −2.5585 (0.00)
CASHD 1.28688 (0.00) 1.37024 (0.00) 1.351732 (0.00) 1.7418 (0.00)
GROWTH 0.000062 (0.821) 0.000263 (0.330) 0.000251 (0.352) 0.000285 (0.074)
CFOSALES 0.00197 (0.005) 0.00197 (0.005) 0.00338 (0.00)
LOG(SIZE) −0.02622 (0.068) −0.035856 (0.013) −0.03600 (0.013) −0.02754 (0.015)
CCC −0.04154 (0.00)
NWC −0.243358 (0.001) −0.22856 (0.003)
LAG (NWC) −0.14875 (0.005)
Firm- and year-fixed effects Yes Yes Yes Yes
2
R 0.4123 0.4098 0.4088 0.2443
Number of observations 3,317 3,317 3,317 2,659
Notes: This table reports the fixed effects regression results of firm’s market to book ratio against net
working capital and other factors. MTB the market to book ratio ¼ market value divided by book value per
share at year-end. CAPEX total capital expenditure of the year scaled by total book assets. INTEREST the
total interest expenses scaled by total book assets. CASHD total cash dividend paid during the year scaled by
total book assets. GROWTH the growth rate of sales. CFOSALES the ratio of net operating cash flow over
Table II. sales. SIZE the total book assets. CCC the days of cash conversion cycle divided by 100. NWC ¼ (accounts
Net working capital receivable + inventory – accounts payable)/total book assets. LAG (NWC) is one period lagged value of NWC.
and firm valuation Numbers in parentheses represent the p-value
ROIC I II III IV IV
Working
capital
CAPEX 2.47400 (0.168) 3.15070 (0.079) 3.01755 (0.092) 3.93997 (0.028) 3.07482 (0.095) management
GROWTH 0.02769 (0.00) 0.02865 (0.00) 0.02996 (0.00) 0.03203 (0.00) 0.03225 (0.00)
LEV −0.01353 (0.00)) −0.01369 (0.00) −0.01324 (0.00) −0.01345 (0.00) −0.01393 (0.00)
LOG(SALES) 1.74468 (0) 1.77493 (0) 1.89166 (0) 2.00106 (0) 2.10945 (0)
VOL 0.28184 (0.00) 0.28482 (0.00) 0.28617 (0.00) 0.28837 (0.00) 0.27851 (0.00) 199
CCC −1.048 (0.00)
DSO −1.345 (0.00)
DSI −1.167 (0.00)
DPO −1.231 (0.00)
NWC −2.02925 (0.057)
Firm- and year- Yes Yes Yes Yes Yes
fixed effects
2
R 0.2606 0.2523 0.2606 0.2515 0.2536
Number of
observations 3,079 3,079 3,079 3,079 3,079
Notes: This table reports the fixed time effects firm’s profitability regression. The dependent variable, ROIC
is the return on invested capital. CAPEX total capital expenditure scaled by total book assets, GROWTH the
growth rate of sales, LEV leverage. SALES the total revenue, VOL the standard deviation of firm’s daily stock Table III.
returns, CCC cash conversion cycle, DSO days sales outstanding, DSI days sales inventory, DPO days Cash conversion cycle,
payable outstanding, and NWC ¼ (accounts receivable + inventory – accounts payable)/total book assets. net working capital
The days are divided by 100. Numbers in parentheses represent the p-value and profitability

5.2 The effects of ease to capital and business cycle

In order to examine the effects of access to capital, I divide the full sample into two groups,
based on the firm’s total government and foreign ownership. Due to government support,
firms with high government ownership have better access to capital and lower borrowing
costs (see, Sun and Tong, 2003; Le et al., 2018). In addition, foreign investment in Vietnam’s
listed companies targets a long horizon. The availability of combined government and
foreign ownership (GOVOWN) provides firms with access to capital.
Table IV shows evidence of a strong negative effect of NWC and CCC on firm
value for firms whose GOVOWN is less than 50.00 percent. In the sub-sample of these
firms, the coefficient of CCC is negative and significant at the one percent level,
and the coefficient of NWC is negative and marginally significant at the one percent level.
Nevertheless, these coefficients are insignificant in models that consist of firms
whose GOVOWN is equal to or more than 50.00 percent. The absolute magnitudes
of these coefficients are significantly higher for models of firms with a GOVOWN
level that is less than 50.00 percent. The results verify H2 and are consistent with
Teach (2015). The results in this paper are also similar to findings in Malaysian markets
(see Wasiuzzaman, 2015).
Table V includes regression results for ROIC as it is influenced by the business cycle.
Stock markets in Vietnam declined from 2007 to 2012, and then recovered beginning in 2013.
DUMMY is a dummy variable equal to 1 for the period 2007 to 2012 and zero for the period
2013 to 2016. I examine the effects of the business cycle by multiplying all of the
explanatory variables on Table III by DUMMY; the regression results are summarized on
Table V. All of the coefficients except for CAPEX × DUMMY and NWC × DUMMY
are significant at the one percent level. The absolute magnitudes of product variables
NWC × DUMMY, and CCC × DUMMY and its components are lower in Table V than are the
variables themselves on Table III. For instance, the evidence in Table III shows that a
decrease in CCC by 100 days is associated with an increase of 1.05 percent in ROIC.
IJMF GOVOWN ⩾ 50% GOVOWN o 50%
15,2 MTB I II I II

CAPEX 0.17660 (0.216) 0.19170 (0.183) 0.15657 (0.256) 0.13976 (0.318)

INTEREST 0.52999 (0.554) 0.52331 (0.56) −2.78973 (0.00) −2.66468 (0.00)
CASHD 0.81089 (0.00) 0.82395 (0.00) 2.19465 (0.00) 2.28025 (0.00)
GROWTH 0.00102 (0.01) 0.00112 (0.003) −0.00021 (0.419) −0.00003 (0.919)
200 CFOSALES 0.00008 (0.931) 0.00011 (0.906) 0.00091 (0.168) 0.00100 (0.133)
LOG(SIZE) −0.12704 (0.00) −0.12869 (0.00) −0.02086 (0.188) −0.02768 (0.08)
CCC −0.01423 (0.345) −0.03792 (0.00)
NWC 0.03128 (0.781) −0.20003 (0.012)
Firm- and year-fixed effects Yes Yes Yes Yes
2
R 0.5792 0.5794 0.4699 0.463
Number of observations 1,396 1,396 1,921 1,921
Notes: This table reports the fixed effects regression results of firm’s market to book ratio against net
working capital and other factors. The sample is divided in two groups to examine the effects of ease to
capital. Due to the government’s support, firms with high government ownership have much better access to
sources of financing: easy access, lower cost of borrowing. GOVOWN is the total of government ownership
and foreign ownership. MTB the market to book ratio ¼ market value divided by book value per share at
Table IV. year end. CAPEX total capital expenditure of the year scaled by total book assets. INTEREST the total
Net working capital interest expenses scaled by total book assets. CASHD total cash dividend paid during the year scaled by total
and firm valuation: book assets. GROWTH the growth rate of sales. CFOSALES the ratio of net operating cash flow over sales.
effects of ease SIZE the total book assets. NWC ¼ (accounts receivable + inventory – accounts payable)/total book assets.
to capital Numbers in parentheses represent the p-value

ROIC I II III IV IV

CAPEX × DUMMY 1.30522 (0.553) 2.03248 (0.353) 1.99627 (0.363) 3.00618 (0.169) 2.56458 (0.264)
GROWTH × DUMMY 0.02380 (0.00) 0.02373 (0.00) 0.02563 (0.00) 0.02651 (0.00) 0.02720 (0.00)
LEV × DUMMY −0.01161 (0.00) −0.01181 (0.00) −0.01132 (0.00) −0.01144 (0.00) −0.01192 (0.00)
LOG(SALES) × DUMMY 0.68307 (0.00) 0.67620 (0.00) 0.75172 (0.00) 0.78281 (0.00) 0.83896 (0.00)
VOL × DUMMY 0.39241 (0.00) 0.40380 (0.00) 0.39673 (0.00) 0.40778 (0.00) 0.39684 (0.00)
CCC × DUMMY −0.88672 (0.00)
DSO × DUMMY −1.31061 (0.00)
DSI × DUMMY −0.85900 (0.00)
DPO × DUMMY −1.11492 (0.01)
NWC × DUMMY −0.74658 (0.524)
Firm- and year-fixed effects Yes Yes Yes Yes Yes
2
R 0.1816 0.1805 0.1786 0.1764 0.1767
Number of observations 3,079 3,079 3,079 3,079 3,079
Notes: This table reports the fixed effects of business cycle. In Vietnam, the financial crisis period started
with stock value drop in 2007 until 2012, and the recovery period began in 2013. The dependent variable is the
return on invested capital. CAPEX total capital expenditure scaled by total book assets, GROWTH the
growth rate of sales, LEV leverage. SALES the total revenue, VOL the standard deviation of firm’s daily stock
returns, CCC cash conversion cycle, DSO days sales outstanding, DSI days sales inventory, DPO days
payable outstanding, and NWC the net working capital scaled by total assets at year end. The days are
Table V. divided by 100. NWC ¼ (accounts receivable + inventory – accounts payable)/total book assets. DUMMY
The effects of equal to one for the period 2007–2012 during which stock markets declined by time, and equal zero for the
business cycles period 2013–2016 where stock markets recovered. Numbers in parentheses represent the p-value

The results on Table V suggest that, during a downturn, a reduction in CCC by 100 days is
associated with an increase in ROIC of only 0.89 percent. The evidence implies that a
reduction in NWC, CCC, operating cycle and DPO have a lower effect on profitability during
a crisis than during a recovery.
5.3 The effects of WCM on stock-return volatility Working
Following Coles et al. (2006) and Aktas et al. (2015), I use the annualized standard deviation capital
of a firm’s daily stock returns as a proxy for firm risk. In this section, I run a regression of management
stock-return volatility against NWC and a set of determinants. In all of the models, firm size,
foreign ownership and NWC have strong and negative influences on stock-return volatility.
The results imply that an additional investment in working capital reduces firm risk.
Therefore, H3 is verified. The result of a strong negative effect of foreign ownership on 201
volatility is broadly consistent with previous studies (see, e.g. Li et al., 2011). Sales growth
rate and market-to-book ratio show strong positive impacts on stock-return volatility. The
results show a lower fluctuation in stock prices during periods of stock-price declines than
during periods when stock prices increase. The negative effects of investment in NWC on
stock-return volatility found in this paper are consistent with Aktas et al. (2015) (Table VI).

6. Conclusion
This paper uses a panel data set on markets in Vietnam, for the period 2007 to 2016, to
document comprehensive evidence of the relationship between WCM and firm value,
profitability and risk in an emerging market. The findings of this paper are important to
firms’ managers, investors and researchers. The paper shows that, in managing working
capital, a firm’s managers must trade-off between the objectives of profitability and risk
control. Similarly, each investor has different return objectives and levels of risk tolerance.
Hence, the levels of NWC that affect firms’ performance should be considered in investors’
decision making process. The results also imply that there exists an optimal level of NWC
that balances firm profitability and risk. Figuring out an optimal NWC level is worthy of
future research.
The direct relationship between the effects of NWC and the CCC on firm profitability and
valuation suggests that when the levels of NWC or the CCC are reduced, firm performance,
as measured by either market value or accounting value, also improves. The results of this
paper also confirm the importance of efficient WCM, particularly in firms with less access to
external financing, or during periods of economic recovery when firms expand their
investments. This is also consistent with Teach (2015). Barely working: “The availability of
cheap debt has reduced companies’ incentive to improve working capital management.”

Volatility I II

LOG(SIZE) −0.73705 (0.00) −0.72076 (0.00)

MTB 0.10130 (0.06) 0.09800 (0.071)
LOG(AGE) −0.38563 (0.132) −0.38414 (0.134)
NWC −1.61876 (0.002) −1.61653 (0.002)
OWN −0.03631 (0.00) −0.03661 (0.00)
GROWTH 0.00497 (0.002) 0.00497 (0.002)
LEV −0.00027 (0.648)
DUMMY −13.3535 (0.00)
Firm- and year-fixed effects Yes Yes
R2 0.6463 0.6454
Number of observations 3,078 3,078
Notes: This table reports the fixed effects regression results of stock volatility against net working capital
and other factors. Stock volatility is stock return’s standard deviation using daily return. SIZE the year-end
total book assets. MTB the market to book ratio at year-end. AGE the months from firm’s IPO to the date.
NWC ¼ (accounts receivable + inventory – accounts payable)/total book assets. OWN the percentage of
shares owned by foreigners. GROWTH the growth rate of sales, LEV leverage. DUMMY equal to one for the Table VI.
period 2007-2012 during which stock markets declined by time, and equal zero for the period 2013–2016 Net working capital
where stock markets recovered. Numbers in parentheses represent the p-value and firm risk
IJMF Notes
15,2 1. See Blenman and Le (2014).
2. To test for robustness, I also ran a fixed-effects regression of the net profit margin (net income/
sales) against NWC, and CCC and its components. The results also show a strong negative
relationship between the net profit margin and NWC, CCC and DSO and DPO. The coefficient of
DSI is negative but insignificant.
202
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About the author
Ben Le is Assistant Professor of Finance at Kean University. He received PhD in Finance from the
University of North Carolina at Charlotte, NC. Ben is an active Wisconsin CPA and he passed CFA
Level II exam. His research was presented at FMA Annual Meeting, American Real Estate and Urban
Economics Association National Conference, American Real Estate Society Annual Meeting where he
won the best real estate finance paper and Urban Economics Association Meeting. He has published
articles in Quarterly Journal of Finance and Accounting. Ben Le can be contacted at: ble@kean.edu

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