Does board composition influence working

capital management? Evidence

from Thailand
Chamaiporn Kumpamool and Nongnit Chancharat

Chamaiporn Kumpamool Abstract

and Nongnit Chancharat Purpose – This study aims to investigate the influence of board composition on the working capital
are both based at the management (WCM) of Thai listed firms for the period 2010–2019.
Faculty of Business Design/methodology/approach – Probit regression and two-step system generalized method of
Administration and moments (GMM) are used to address this issue.
Accountancy, Khon Kaen Findings – The results indicate that, while a larger board size causes a lower net working capital holding,
University, Khon Kaen, it increases its efficiency. Firms with chief executive officer (CEO) duality adopt aggressive policies for
Thailand. their financing but avoid them for their investment to balance the risks and returns of implementing
the working capital (WC) policy. Conversely, firms with higher board independence prefer to use
conservative WC financing policies. The findings support using both the agency and stewardship
theories.
Research limitations/implications – The authors focus on listed non-financial firms; therefore, the
findings may not be generalizable to financial and private firms.
Practical implications – The findings provide implications for practitioners to focus more on board
composition, as it is crucial for WCM. Furthermore, they should avoid applying a single theory in isolation,
especially for CEO duality, as one theory is appropriate only for some policies. The authors also provide
guidelines for policymakers and regulators to formulate strategies that support more board diversification
in terms of size and independence, to enhance board efficiency.
Originality/value – To the best of the author’s knowledge, this study is the first to directly examine the
influence of board composition on aggressive WC policies in Thailand.
Keywords Working capital management, Corporate governance, Board composition, Aggressive policy,
Thailand
Paper type Research paper

Received 2 October 2020
Revised 16 July 2021
9 December 2021
21 December 2021
Accepted 12 January 2022
The authors would like to
express their deepest gratitude
to the Faculty of Business
Administration and
Accountancy, Khon Kaen
University, for research
funding, under grant number
006/2563. Moreover, we would
like to thank Editage (www.
editage.com) for English
language editing. Any errors
are ours.
1. Introduction
Working capital management (WCM) refers to a business’s short-term investment and
financing decisions, with a potential influence on firm liquidity (Gill and Biger, 2013).
Components of working capital (WC) include current assets and liabilities. Current assets
include cash, accounts receivable (AR) and inventory, while current liabilities, including
accounts payable (AP) and accrued expenses, become the main financing sources for
these assets if firms match the maturities of their investment and financing (Kim and Chung,
1990). A firm that invests heavily in current assets will face a large financing requirement,
increasing its financing expenses, which may stimulate financial distress and ultimately lead
to bankruptcy (Kieschnick et al., 2013). Moreover, WC is a vital factor for firms’ day-to-day
operations; three reasons for WC holding include transaction, precaution and speculation
(Gill and Shah, 2012). Thus, WCM is crucial for firm survival because if firms inefficiently
manage their WC, they may become illiquid. However, compared to long-term assets and

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liabilities, WCM has received marginal attention from researchers in corporate finance,
although current assets and liabilities are as important as long-term assets and liabilities
(Nazir and Afza, 2009). Hence, studying WCMs is interesting and important.
Normally, there are three WCM policies, including conservative, moderate and aggressive
policies (Pandey and Parera, 1997); however, the most appropriate policy for WCM is still
under debate. An aggressive policy poses the highest risk for both WC investment and
financing. Firms that have this policy hold a minimum level of current assets, especially low
investment in cash, inventories and account receivables, to reduce costs, such as carrying
or opportunity costs. However, this poses high risks due to the increased probability of
having insufficient WC for daily operations. Moreover, high level of finance is procured from
short-term sources, which increase risks of overdue debts. Thus, although this policy offers
high returns to compensate for these risks, it increases firms’ risks of financial distress (Van
Horne and Wachowicz, 2004; Ukaegbu, 2014). In contrast, firms that apply the conservative
policy hold a high level of current assets and finances with high levels of long-term financing
sources. Therefore, this policy reduces firms’ risks but provides low returns (Nazir and Afza,
2009). Conversely, firms with moderate policies hold the middle WC level and match the
maturities of their assets and financing sources; thus, these policies have mid-level risks
and returns (Ehrhardt and Brigham, 2011). However, the aggressive policy could lead to
firm bankruptcy.
Generally, managers play a vital role in deciding what WC policies to apply. Moreover,
because of conflict of interest between managers and shareholders, based on agency
theory, managers may select inappropriate policies to benefit themselves rather than
maximize shareholders’ wealth (Jensen and Meckling, 1976). Thus, misalignment between
managers and shareholders may motivate managers to use the resilience of accounting
standards to conduct opportunistic income management by distorting their financial
statements (Healy and Palepu, 1993). Conversely, Jiraporn et al. (2008) argue that earnings
management is not opportunistic. Although this behavior is not always beneficial, it is not
harmful to firm value. While inefficient WC management causes financial distress, and firm
survival is more important than earnings, studies on WC policies are rare. Only Weinraub
and Visscher (1998) and Nazir and Afza (2009) examine these policies in the context of firm
profitability; however, their findings address topical issues.
Corporate governance (CG) is a key mechanism for mitigating conflict of interests between
firms’ managers and shareholders, especially the board of directors who are perceived as
the backbone of CG (Mehran, 1992; Assenga et al., 2018). Further, a strong CG mechanism
increases firm value in the long-term (Gompers et al., 2003; Peris et al., 2017). Thus, CG
may be associated with appropriateness of managers’ decision-making in WCM. After the
1997 Asian financial crisis, research on CG has covered numerous broad areas, including
corporate finance. It is widely accepted that CG contributed to the 1997 crisis. Board
composition is widely used as an indicator of the internal governance mechanism needed
to eradicate conflicts of interest between managers and shareholders in firms (Kang et al.,
2007). Most importantly, the crisis caused by the outbreak of the coronavirus disease 2019
(COVID-19) currently impacts economies across industries and countries (Fernandes,
2020) and may lead to another financial crisis in the near future. Therefore, investigating
internal governance is important. However, evidence regarding the impact of CG on WCM
is either scarce or ambiguous. For instance, Gill and Biger (2013) and Fiador (2016) found
that strong CG enhances WCM efficiency. Conversely, Kajananthan and Achchuthan (2013)
argued that CG is related only to short-term financing and has no association with short-
term investment.
The 1997 Asian financial crisis started in Thailand, which has weak CG, high ownership
concentration and low investment protection (Claessens and Fan, 2002; Fairchild et al.,
2014). Thai small and medium enterprises also rely on current liabilities. However, the
literature on CG and WCM in Thailand is scant; to the best of the author’s knowledge, only

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 Appuhami (2008) investigated the relationship between WCM and capital expenditure in
Thailand. In addition, Appuhami (2009) tested the association between firms’ investment
and WC in Thailand. Thus, it is essential to provide further evidence for this issue in
Thailand.
Consequently, this study aims to achieve two objectives: to investigate the effect of board
composition on the level and efficiency of net working capital (NWC) and to examine the
impact of board characteristics on the aggressive policy of WC investing and financing.
Using probit regression and two-step system generalized method of moments (GMM)
methods, we found that board size has a significantly negative influence on NWC levels and
net trade cycle. Furthermore, firms with chief executive officer (CEO) duality tend to adopt
aggressive policies in their WC financing but avoid this policy in their WC investing to
balance their risks and returns of implementing the WC policy. In contrast, firms with more
independent directors adopt conservative policies for their WC financings. These findings
imply that firms apply both agency and stewardship theories of CG in their WCM because a
single theory may be suitable for some policies and harmful for others.
This study contributes to the literature on WCM in five ways. First, we provide incremental
evidence on the impact of board composition on the level and efficiency of NWC. Second,
we are the first to directly investigate the influence of board composition on aggressive
WCM policies. Third, we are the first to study this issue in Thailand, which is a unique
country. Fourth, we reveal that applying only one theory may be insufficient to explain the
sophisticated structures of firms; thus, firms should apply several theories to reach their
objectives. Finally, the two-step system GMM method is used to address the endogeneity
problem between board composition and WCM.

2. Literature review and hypothesis development

2.1 Working capital management
WCM is defined as the decision-making by financial managers regarding a suitable level of
WC and the appropriate financing sources for it (Ehrhardt and Brigham, 2011). The
components of gross working capital are cash, AR and inventory (Kim and Chung, 1990),
while NWC is the difference between current assets and liabilities (Fazzari and Petersen,
1993). Alternatively, if these accounts are used only in operating activities, they are defined
as net operating working capital (Berk and DeMarzo, 2009).
Furthermore, there are three crucial policies for investment and financing decisions
regarding WC: aggressive, moderate and conservative (Pandey and Parera, 1997). A
manager with an aggressive policy invests less WC than a manager with a conservative
policy and have higher returns because of the higher risks (Baños-Caballero et al., 2012). In
contrast, if a moderate policy is implemented, the returns and risks are lower than those
associated with an aggressive policy but are higher than those associated with a
conservative policy (Weinraub and Visscher, 1998).
However, there is insufficient evidence regarding which WCM policy is the most efficient
option for corporate operations. Weinraub and Visscher (1998) claimed that firms use
different policies in their WCM, depending on the characteristics of their industry. Later,
Nazir and Afza (2009) argued that managers who employed conservative policies for their
WC could enhance profitability.
In addition, NWC relates to short-term assets, requiring a one-year wait for their returns and
liabilities, requiring a one-year commitment to their discharge (Ehrhardt and Brigham, 2011).
Therefore, inefficient management of WC may cause liquidity problems for corporations
(Richards and Laughlin, 1980). Moreover, several researchers claim that the efficiency of
WCM influences firm performance. Deloof (2003) found that the efficient management of NWC
enhanced profitability. Additionally, Garcı́a-Teruel and Martinez-Solano (2007) provided

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supporting evidence that a decrease in the cash conversion cycle (CCC) improves firm
performance. Thus, WCM is an essential element that drives firm operations.
WC is also an essential element for Thai firms’ investment and financing sources. However,
research on WCM in Thailand is scarce. Appuhami (2008) found that the efficiency of WCM
in Thai firms increased with investment in capital expenditure. Appuhami (2009) further
found that net liquidity balance is positively related to corporate investment, whereas WC
requirement has a negative effect on corporate investment. Although the evidence is
ambiguous, the limited studies on WCM in Thailand make it an interesting subject to
examine.

2.2 Board composition and working capital management

CG can alleviate the agency problem (Johnson et al., 2000), as it mitigates the conflicts of
interest between managers and shareholders; firms use the policy to pursue shareholders’
wealth (Roe, 1996). Similarly, CG is an efficient mechanism to reduce managers’
inappropriate behaviors. This enhances the quality of financial reporting and improves
corporate value (Chen et al., 2009).
Bebchuk and Weisbach (2010) categorized CG into seven aspects: shareholders, board of
directors, executive compensation, controlling shareholders, international comparison,
cross-border investing and politics. However, the ownership structure and board of
directors are mainly used to capture the efficiency of CG (Hidalgo et al., 2011). These
instruments are potential measures to support managerial behavior in organizations (Ahn
and Walker, 2007).
Board composition is the most crucial indicator of CG in modern corporations (Carter et al.,
2003). The board of directors plays an important role in decisions regarding firms’ policies.
However, the different characteristics of boards may lead to firms using dissimilar policies
(Yarram and Dollery, 2015). Moreover, the internal governance mechanism of firms can be
indicated by the composition of the board, for example, to determine whether managers
and shareholders have the same interests regarding a firm’s management and whether they
organize their firms efficiently (Park and Shin, 2004). Thus, it is interesting to use board
composition as an indicator of CG.
Lately, several firms are operated by executive managers, and some may not be firm
shareholders. Consequently, a conflict of interest may exist regarding firms’ management to
reach their objective in terms of maximizing firm performance. Thus, board-monitoring
efficiency is crucial. Based on this issue, three main theories are used to explain the
relationship between board structure and firm performance, which WCM is one of vital
element of firm performance, including agency theory, stewardship theory and resource
dependence theory.
Regarding agency theory, executive managers in firms cannot be trusted to maximize
shareholder wealth, as they are not firm shareholders and do not benefit from this action.
Instead, they operate firms to optimize their wealth at the expense of shareholders’ wealth.
Thus, managers should be monitored by an efficient board of directors (Jensen and
Meckling, 1976; Fama and Jensen, 1983). Boards with large sizes, high proportions of non-
executive directors, high proportions of diversification and non-CEO duality improve firm
performance (Muth and Donaldson, 1998). Conversely, stewardship theory argues that
managers can be trusted as “stewards” of firms’ assets because they not only aim to benefit
themselves but also, they respect their authority and work ethics. Therefore, they use high
skills, knowledge and expertise levels, as well as in-depth operating information to generate
the highest benefits for their shareholders. Hence, firms dominated by insiders, small
boards, low levels of board diversity and CEO duality on the board improve firm
performance (Muth and Donaldson, 1998). Finally, regarding resource dependence theory,
boards and their structures are important as they provide access to external resources such

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 as outside directors and network connections and link them to internal firm resources to
improve firm performance (Pfeffer and Salancik, 1978). Hence, higher levels of board
network connections are crucial for firms to generate sustainable firm value (Hillman et al.,
2009). Consequently, it is not clear which theory best describes the relationship between
board structure and firm performance.
Boards of directors also play a vital role in decisions regarding WC policies, which is an
important component that enhances firm performance. Since WC is both a crucial firm asset
that generates cash flow and an internal source of capital for firms, the appropriate WC
policy facilitates high cash flows and reduces the cost of financing, leading to an increase in
firm value. Thus, the distinctive characteristics of a board may influence WCM. Surprisingly,
evidence on this issue is limited for both CG and board composition. Gill and Biger (2013)
found that board size, board audit committee, CEO tenure and CEO duality influenced
WCM efficiency. Fiador (2016) also found that board size, external directors and CEO
duality influenced WCM competency. Recently, Ali and Shah (2017) found that board size,
gender diversification and the audit committee of the board influenced WCM efficiency. In
contrast, Kajananthan and Achchuthan (2013) argued that board leadership, board size,
board committee and the number of board meetings were associated with WC financing
but not with WC investment. Moreover, Kamau and Basweti (2013) found that board size,
board meetings, director remuneration, board committees, CEO duality and tenure were not
related to WCM efficiency. Hence, the evidence on this issue is inconclusive.
Based on the literature, three research gaps are evident in the WCM context. First, it is
ambiguous whether board composition influences WCM and which theory (i.e. agency,
stewardship and resource dependence theories) can appropriately explain this issue.
Second, no study has examined the impact of board composition on aggressive WC
policies. Finally, no evidence indicates the effect of board composition on WCM in Thailand.
Therefore, this study aims to investigate the effect of board composition on WCM in terms of
WC level and efficiency and its policy in Thailand. We focus on four elements of board
composition: board size, board independence, women on the board and CEO duality. We
developed our hypotheses based on agency theory to document the relationship between
board composition and WCM, which is a crucial element of firm performance and from
financial and economic perspectives, as this theory tends to dominate the others (L’Huillier,
2014), as shown in the subsequent sections.
2.2.1 Board size. Board size is preferred over board composition as a representative CG
mechanism and the level of board independence. Yermack (1996) claimed that board
decisions are more efficient in firms with smaller board sizes since this promotes potential
communication and consensus while making decisions in boardrooms (Kyereboah-
Coleman, 2008; Jansen, 2021). In contrast, managers may acknowledge that small boards
can be dominated and operated comfortably because of the efficiency in social cohesion
(Shaw, 1981). Additionally, a larger board size is more diversified and requires more rigid
monitoring of the board’s decision-making process, based on agency theory (Kiel and
Nicholson, 2003). For bigger boards, managers dominate others on the board, leading to
more independent decisions and improved firm performance (Abor and Biekpe, 2007).
Moreover, some evidence indicates that larger boards enhance WCM efficiency. Gill and
Biger (2013) found that board size negatively affects CCC and current ratio. This means
that larger boards have lower NWC levels because of minimized opportunity costs, which
increases the WCM efficiency estimated by the net trade cycle. We expect that:
H1. A larger board has a lower NCW level and a shorter net trade cycle period.
H2. A larger board increases the likelihood of adopting an aggressive working capital policy.
2.2.2 Board independence. In modern corporations, the independence of boards’ decision-
making has been widely investigated (Kang et al., 2007). Moreover, this factor is popularly
used as an indicator of a firm’s internal governance to prevent conflicts of interest between

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managers and shareholders (Chiang and He, 2010). Hence, firms with high board
independence tend to implement appropriate policies, leading to improved WCM efficiency
and, eventually, firm performance, based on agency theory (Chong et al., 2018; Duppati
et al., 2019; Barros et al., 2021). Additionally, Fiador (2016) found that more non-executive
directors in boards reduced CCC and AR periods. This implies that firms with high board
independence decrease NWC holdings to minimize their opportunity costs for WC,
increasing NWC efficiency over a shorter net trade cycle. We hypothesize that:
H3. Higher board independence leads to a lower NWC level and a shorter net trade
cycle.
H4. Higher board independence increases the likelihood of adopting an aggressive
working capital policy.
2.2.3 Women on the board. Gender diversification in boards has also been an issue of
concern in recent studies (Kang et al., 2007). More women on boards enhance firm
monitoring efficiency and increase firm value (Coffey and Wang, 1998; Alazzani et al., 2017;
Leyva-Townsend et al., 2021). Furthermore, board diversification increases board
independence and creativity, leading to low corporate risks, high investing efficiency and
high stock liquidity (Carter et al., 2003; Loukil et al., 2019; Bhat et al., 2020; Ullah et al.,
2020). In addition, boards with higher diversification reduce the dominance of insiders,
which leads to more aligned interests between managers and shareholders and results in
higher board monitoring efficiency, based on agency theory (Carter et al., 2003).
Additionally, more women on the board increase the diversification of experiences, skills
and knowledge, improving firms’ decisions based on resource dependence theory
(Hillman, 2015). In addition, as women are more cautious than men, they avoid aggressive
policies (Alves et al., 2015). Moreover, Ali and Shah (2017) found that the gender effect
increases WCM efficiency within shorter CCCs. We expect that:
H5. More women on a board lead to lower NWC levels and a shorter net trade cycle.
H6. More women on the board reduce the likelihood of adopting an aggressive working
capital policy.
2.2.4 Chief executive officer duality. CG literature focuses mainly on CEO duality, which
reflects a separation of ownership from a firm’s management (Elsayed, 2007). This
indicator, defined as a CEO, has a double role as both the chief officer of a firm and the
chairman of the board of directors (Yang and Zhao, 2014). Some corporations use a CEO
as an agent to manage the firms, and the CEO is assigned the authority to make decisions
on firms’ crucial policies, on behalf of shareholders. Hence, agents may not have incentives
to maximize shareholders’ wealth, as they are not shareholders themselves, raising the
agency problem (Jensen and Meckling, 1976). Consequently, such CEOs may dominate
the decisions of other directors on the board and choose a policy that benefits their own
wealth. Further, CEO duality decreases board monitoring efficiency, causing firm
performance to deteriorate, based on agency theory (Finkelstein and D’aveni, 1994; Duru
et al., 2016; Tang, 2017; Kusi et al., 2018). Therefore, CEO duality tends to deteriorate WCM
efficiency. Moreover, Gill and Shah (2012) suggested that firms with CEO duality prefer to
hold less NWC. We hypothesize that:
H7. CEO duality leads to a lower NWC level but a shorter net trade cycle.
H8. CEO duality increases the likelihood of adopting an aggressive working capital policy.

3. Research methodology
3.1 Sample construction
We constructed a sample of listed firms on the Stock Exchange of Thailand (SET) from
the DataStream database over 10 years, from 2010 to 2019, to mitigate the effects of

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 the 2008–2009 financial crisis and the COVID-19 crisis. We excluded the financial
industry because their financial statements differ from those of other industries.
Moreover, firms with incomplete data for the 10-year period were excluded. Overall,
our sample comprised 3,190 firm-year observations from 319 companies. Other data
were obtained from the DataStream, SETSMART databases and the official website of
the Securities and Exchange Commission, Thailand. All variables are winsorized at
the 1st and 99th percentiles to alleviate the impact of outliers.

3.2 Variable definition

We used two WCM metrics, including the level and efficiency of NWC and the aggressive
WC policies, as dependent variables. Gill and Biger (2013) and Fiador (2016) included
several variables: cash holding, AR, inventory and AP days and cash conversion efficiency.
However, we focused on the overall NWC holding and efficiency. Hence, we estimated the
NWC level by comparing NWC to sales (Aktas et al., 2015), reflecting the average NWC
level per year for firms to reserve their cash and support NWC operations. NWC efficiency is
measured using the net trade cycle (Baños-Caballero et al., 2014) or the CCC, which
presents the period (in days) in which firms need to hold cash for day-to-day WC
operations. Thus, these measurements assess the overall WCM of firm in terms of both level
and efficiency. In particular, Deloof (2003) claims that CCC is an inclusive and popular
WCM metric and Gilman (1974) also perceives CCC as the key estimation of WCM
performance. Our study focuses on the aggressive WC policies because they have the
highest risks, as measured by Nazir and Afza (2009). An aggressive investing policy entails
a low level of current assets to total assets ratio, while aggressive financing policy entails a
high level of current liability to total assets ratio. However, these ratios may differ depending
on the industry, as different industries have specific and distinctive WC operations based
on the nature of their product line (Weinraub and Visscher, 1998; Boisjoly et al., 2020).
Consequently, we classify this policy based on the mean industry value rather than by using
full samples to control for industry effects. The independent variables include board
diversification: board size, board independence, and women on the board and board
leadership structure: CEO duality. We also include control variables such as sales growth,
profitability (Gill and Biger, 2013), firm size and age (Fiador, 2016). The variables are
defined in Table 1.

3.3 Empirical methods

Panel data analysis was used to test the influence of board composition on WCM. This
analysis allows us to control for unobservable heterogeneity (Hsiao, 1985) and to mitigate
the issue of possible endogeneity. However, there are two types of dependent variables:
continuous, NWCS and NTC, and discrete variables: AIP and AFP. Hence, we separately
run the regression models using two different methods.
For the model with continuous variables, endogeneity may increase in our estimators
owing to simultaneity. It is likely that the observed relationships between WCM and
board composition, including firm-specific characteristics, reflect not only the impact of
independent variables on WCM but also the impact of WCM on independent variables.
The GMM method can address the existence of different types of endogeneity and
provide consistent results for panel data sets (Wintoki et al., 2012). Arellano and Bond
(1991) initially offered a first-difference GMM to address this issue. However, Blundell
and Bond (1998) argue that the lag variable is inappropriate for the first-order
difference GMM method. Arellano and Bover (1995) and Blundell and Bond (1998)
claim that the system GMM method is more efficient than the difference GMM method.
Additionally, a two-step approach is superior to a one-step approach owing to the use
of Monte Carlo simulations.

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 Table 1 Definition of variables
Variables Notation Definition

Dependent variables
The level and efficiency of NWC
Net working capital NWCS Net working capital (NWC) is divided by sales, where NWC is inventories plus AR minus AP
to sales         
AR Inventories AP
Net trade cycle NTC  365 þ  365   365
Sales Sales Sales
Aggressive policies of WC
Aggressive AIP The dummy variable is detecting the aggressive policy in the investment of current assets = 1 when
investing policy the ratio of current assets holding (CAH) is less than the mean value of each industry and = 0 otherwise.
Where CAH is current assets divided by total assets
Aggressive AFP The dummy variable is detecting the aggressive policy in the financing of current liabilities = 1 when
financing policy the ratio of current liabilities financing (CLF) is higher than the mean value of each industry and = 0 otherwise.
Where CLF is current liabilities divided by total assets
Independent variables
Board size BS The number of directors on the board
Board BI The proportion of independent directors on the board
independence
Women on the WB The proportion of female directors on the board
board
CEO duality CD The dummy variable, which is equal to 1 when CEO is the chairman of the board and 0 otherwise
Control variables
Sales growth SG Sales at t minus sales at t1 divided by sales at t1
Firm size FS The logarithm of total assets
Profitability Profit Net income after tax divided by revenue
Firm age Age The logarithm of the number of established years
Year effect Year Time dummy variable from 2010 to 2019
Industry effect Indus Industry dummy variables for seven industry groups, including argo and food, consumer products, industrial,
property and construction, resources, services and technology

Hence, our study implemented a two-step system GMM method. This estimator allows us to
address endogeneity problems using instruments. Moreover, we used lagged values of
dependent variables, up to two lags, as our instruments, following some researchers who
suggest that two lags are appropriate for capturing the existence of dependent variables
(Schultz et al., 2010; Wintoki et al., 2012). The equation model was analyzed following
Baños-Caballero et al. (2014):

Qit ¼ b 0 þ b 1 BSi;t þ b 2 BIi;t þ b 3 WBi;t þ b 4 CDi;t þ b 5 SGi;t þ b 6 FSi;t þ b 7 Profiti;t

þ b 8 Agei;t þ ƛt Year þ hi Indus þ « i;t (1)

where, Qit is the level and efficiency of NWC, NWCS and NTC. The main independent
variables are board size (BS), board independence (BI), women on the board (WB) and
CEO duality (CD). The remaining variables are control variables. Parameter ƛt is a time
dummy variable from 2010 to 2019. hi is an industry dummy variable for seven industry
groups. « i;t is random distribution.
The probit regression model is appropriate for the model with discrete variables. The
equation model is estimated as follows:

P Zi;t ¼ 1 ¼ b 0 þ b 1 BSi;t þ b 2 BIi;t þ b 3 WBi;t þ b 4 CDi;t þ b 5 SGi;t þ b 6 FSi;t
þ b 7 Profiti;t þ b 8 Agei;t þ ƛt Year þ hi Indus þ « i;t (2)


where P Zi;t ¼ 1 is the probability of using aggressive policy in WCM, which is equal to 1 if
a manager uses this as their WC policy. The other variables are the same as those in
equation (1).

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 3.4 Preliminary analysis

3.4.1 Descriptive statistics. Table 2 reports descriptive statistics for all variables. The
average of NWCS and NTC are 0.68 and 228.50 days, respectively. On average, Thai firms
use an aggressive policy for their investment WC at 51% and financing WC at 43%.
Moreover, the mean board size, board independence and women on the board are 10
members, 40% and 17%, respectively. Besides, CEO duality for Thai companies is
approximately 15%.

3.4.2 Correlation matrix. Table 3 provides the correlation matrix of all variables. The highest
correlation occurs between NWCS and NTC at 46% owing to the use of different WCM
measurements. However, these variables were not included in the same model. Moreover,
the highest variance inflation factor (VIF) value of our models was 1.69, which is
substantially less than 10. Therefore, our analysis is not affected by multicollinearity.

4. Findings
4.1 The effect of board composition on the level and efficiency of net working capital
Table 4 shows the results from the two-step system GMM obtained from equation (1).
Before using the GMM method, we conducted the Durbin-Wu-Hausman test to check for
endogeneity in our models’ ordinary least squares (OLS) regressions. We conducted a
significant F-statistic test and found residual board size with F = 36.44 and F = 151.19 on
NWCS and NTC at the 1% level, respectively. This indicates that board size is endogenous,

Table 2 Descriptive statistics

Variable Observations Mean Minimum Maximum SD

NWCS 3,190 0.68 0.78 55.31 2.76

NTC 3,190 228.50 284.66 9,236.53 651.02
AIP 3,190 0.51 0.00 1.00 0.50
AFP 3,190 0.43 0.00 1.00 0.50
BS 3,190 10.10 5.00 25.00 2.42
BI 3,190 0.40 0.10 0.85 0.10
WB 3,190 0.17 0.00 0.67 0.15
CD 3,190 0.15 0.00 1.00 0.36
SG 3,190 0.13 0.96 15.28 0.87
FS (Thousand baht) 3,190 26,300.00 60.86 2,440,000.00 126,000.00
Profit 3,190 0.02 11.48 2.68 0.60
Age 3,190 32.77 5.00 143.00 15.28

Table 3 Correlation matrix

Variables NWCS NTC AIP AFP BS BI WB CD SG FS Profit

NTC 0.46
AIP 0.07 0.25
AFP 0.04 0.04 0.18
BS 0.10 0.22 0.13 0.03
BI 0.06 0.06 0.04 0.05 0.20
WB 0.02 0.00 0.03 0.00 0.11 0.00
CD 0.00 0.04 0.07 0.05 0.16 0.06 0.16
SG 0.01 0.05 0.01 0.01 0.04 0.01 0.00 0.02
FS 0.00 0.01 0.24 0.07 0.35 0.15 0.21 0.06 0.01
Profit 0.44 0.16 0.01 0.06 0.05 0.02 0.01 0.01 0.02 0.14
Age 0.02 0.04 0.06 0.08 0.24 0.09 0.01 0.01 0.03 0.06 0.03
Note:  ,  and  indicate significance at the 1, 5 and 10% levels, respectively

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 Table 4 Effect of board composition on NWCS and NTC
Panel A: NWCS Panel B: NTC
(1) (2) (3) (1) (2) (3)
NWCS NWCS NWCS NTC NTC NTC
Variables OLS FE Two-step system GMM OLS FE Two-step system GMM

L.1NWCS 0.431 (4.41)

L.1NTC 0.569 (12.13)
L.2NTC 0.150 (3.41)
BS 0.086 (3.83) 0.134 (2.11) 0.027 (2.00) 0.027 (6.91) 0.003 (0.35) 0.009 (2.62)
BI 0.265 (0.40) 0.081 (0.08) 0.086 (0.32) 0.114 (1.30) 0.097 (0.81) 0.053 (0.77)
WB 0.067 (0.21) 0.821 (0.89) 0.035 (0.15) 0.002 (0.03) 0.109 (0.88) 0.021 (0.46)
CD 0.059 (0.69) 0.573 (1.97) 0.056 (0.79) 0.027 (1.29) 0.011 (0.34) 0.008 (0.60)
SG 0.131 (1.26) 0.330 (3.73) 0.515 (1.94) 0.010 (0.91) 0.020 (1.57) 0.052 (4.10)
FS 0.175 (2.10) 0.921 (1.67) 0.121 (2.15) 0.009 (0.61) 0.235  (3.15) 0.008 (0.63)
Profit 2.019 (3.31) 1.985 (3.04) 1.394 (3.42) 0.129 (5.77) 0.099  (3.64) 0.082 (4.12)
Age 0.172 (0.97) 1.805 (1.13) 0.043 (0.18) 0.090 (1.50) 0.646 (1.28) 0.078 (1.49)
2011.Year 0.158 (0.55) 0.085 (0.64) 0.032 (0.59) 0.032 (0.83) 0.010 (0.62) 0.032 (1.98)
2012.Year 0.066 (0.36) 0.213 (1.22) 0.071 (1.15) 0.046 (1.25) 0.001 (0.03) 0.049 (3.18)
2013.Year 0.135 (0.77) 0.354 (1.92) 0.123 (2.64) 0.037 (0.99) 0.039 (1.23) 0.031 (1.88)
2014.Year 0.244 (1.39) 0.514 (2.69) 0.159 (2.92) 0.042 (1.13) 0.054 (1.46) 0.019 (0.99)
2015.Year 0.240 (0.95) 0.581 (2.29) 0.209 (3.22) 0.029 (0.74) 0.085 (1.92) 0.019 (1.10)
2016.Year 0.311 (1.51) 0.679 (2.64) 0.183 (3.00) 0.026 (0.66) 0.103  (1.99) 0.021 (1.29)
2017.Year 0.218 (1.15) 0.639 (2.94) 0.189 (3.34) 0.044 (1.13) 0.101 (1.77) 0.029 (1.62)
2018.Year 0.084 (0.40) 0.534 (1.98) 0.169 (2.70) 0.049 (1.19) 0.110 (1.70) 0.044 (2.31)
2019.Year 0.065 (0.29) 0.542 (2.40) 0.141 (2.03) 0.059 (1.52) 0.105 (1.48) 0.036 (2.08)
Consumer products industry 0.020 (0.09) 0 (.) 0.124 (1.88) 0.300 (10.04) 0 (.) 0.088 (3.31)
Industrial industry 0.189 (0.83) 0 (.) 0.006 (0.12) 0.093 (3.60) 0 (.) 0.018 (0.97)
Property and construction industry 1.287 (4.27) 0 (.) 0.602 (3.92) 0.683 (21.59) 0 (.) 0.203 (4.77)
 
Services industry 0.219 (0.88) 0.401 (1.76) 0.001 (0.02) 0.187 (6.05) 0.069 (2.66) 0.042 (1.62)
Constant 0.040 (0.08) 6.005 (1.96) 0.241 (0.52) 2.297 (18.62) 0.530 (0.66) 0.664 (3.83)
Observations 3,190 3,190 3,190 3,190 3,190 3,189
Groups 319 319 319 319 319 319
F statistic test 9.53 4.05  12.15 57.13 8.91 101.90
Adjusted R2 0.25 0.21 0.34 0.07
Hausman test 118.74  70.11 
Number of instruments 44 54
AR(2) [p-value] 0.79 [0.43] 0.72 [0.47]
Hansen test [p-value] 19.11 [0.32] 31.40 [0.21]

VOL. 22 NO. 6 2022

DHT for GMM instruments:
(a) Hansen test excluding group [p-value] 16.24 [0.37] 29.62 [0.16]
Diff (null H = exogenous) [p-value] 2.87 [0.24] 1.78 [0.62]
(b) IV Hansen test excluding group [p-value] 3.00 [0.39]
Diff (null H = exogenous) [p-value] 28.39 [0.20]

Notes: This table shows the two-step system GMM estimators. The dependent variables are NWC to sales (NWCS) in Panel A and the net trade cycle (NTC) in Panel B. L.1NWCS is
one lagged value of NWCS. L.1NTC and L.2NTC are one and two lagged values of NTC, respectively. Some year and industry effects were not reported because of statistically
insignificant results. AR(2) is a second-order serial correlation test under the null hypothesis of no serial correlation. The Hansen test is a test of over-identifying restrictions distributed
asymptotically under the null hypothesis of validity of instruments. DHT for GMM instruments is a different-in-Hansen test of two parts: (a) the instruments in brackets of GMM and (b)
the instruments in brackets of IV, under the null hypothesis of the instrumental variables are exogenous.  ,  and  indicate significance at 1, 5 and 10%, respectively

j CORPORATE GOVERNANCE j PAGE 1187

 as the independent variable is correlated with the residual. Therefore, if the regression
model contains one endogenous variable, the OLS estimators are inconsistent (Schultz
et al., 2010; Wintoki et al., 2012). Moreover, our model may have a simultaneous issue
between board composition and WCM, and a traditional fixed effect and random effect
panel data static models may provide inconsistent and biased estimators (Wooldridge,
2012). Hence, the two-step system GMM method is appropriate for addressing this issue
and provides consistent estimators. Moreover, the AR(2), Hansen and DHT tests indicate
that our models are correctly identified after including the instruments.
The GMM results in Model 3 show that board size is related significantly and negatively to
NWCS and NTC at the 5% and 1% levels, respectively. This suggests that firms with larger
boards have lower NWC levels and reduce the net trade cycle. Moreover, sales growth and
profitability are negatively associated with NWCS and NTC at least at the 10% significance
level. By contrast, the size of firms, consumer products and property and construction
industries are positively related to NWCS and NTC, at least at the 10% significance level.

4.2 The effect of board composition on an aggressive working capital management

policy
Table 5 shows the results from equation (2) using the probit regression method. Panel A
reports the raw coefficient estimators, while Panel B presents the marginal effects. Based
on Panel A, the values of Wald Chi2 in both models are statistically significant at the 1%
level. This indicates that at least one of the coefficients in our models is not equal to zero.
Moreover, the values of McFadden’s pseudo R2 and McKelvey and Zavoina’s pseudo R2,
are quite low at 6% and 13% in Model 1 and 2% and 4% in Model 2, respectively. However,
the pseudo R2 in the probit regression is not equivalent to the R2 in the OLS regression
(Dhrymes, 1986). Moreover, the pseudo R2 for limited dependent variable models
has not been extensively accepted by several researchers (Veall and Zimmermann, 1994).

Table 5 Effect of board composition on an aggressive policy of WC

Panel A: Raw coefficients Panel B: Marginal effects
(1) (2) (1) (2)
Variables AIP AFP AIP AFP

BS 0.002 (0.20) 0.005 (0.44) 0.001 (0.20) 0.002 (0.44)

BI 0.002 (0.01) 0.461 (1.86) 0.001 (0.01) 0.177 (1.86)
WB 0.219 (1.35) 0.238 (1.49) 0.082 (1.35) 0.091 (1.49)
CD 0.219 (3.37) 0.185 (2.87) 0.081 (3.39) 0.071 (2.88)
SG 0.018 (0.69) 0.019 (0.70) 0.007 (0.69) 0.007 (0.70)
FS 0.563 (13.03) 0.084 (2.06) 0.209 (14.21) 0.032 (2.06)
Profit 0.078 (2.10) 0.112 (2.08) 0.029 (2.11) 0.043 (2.08)
Age 0.086 (0.58) 0.514 (3.51) 0.032 (0.58) 0.197 (3.53)
Consumer products industry 0.276 (2.54) 0.015 (0.14) 0.101 (2.57) 0.006 (0.14)
Property and construction industry 0.237 (2.65) 0.120 (1.37) 0.088 (2.66) 0.047 (1.37)
Resources industry 0.053 (0.45) 0.348 (3.00) 0.020 (0.45) 0.131 (3.06)
Technology industry 0.406 (3.91) 0.045 (0.44) 0.148 (3.99) 0.018 (0.44)
Constant 3.80 (10.83) 1.39 (4.20)
Observations 3,190 3,190 3,190 3,190
Wald Chi2 241.70 81.57
McFadden’s Pseudo R2 0.06 0.02
McKelvey and Zavoina’s Pseudo R2 0.13 0.04
Cragg and Uhler’s Pseudo R2 0.11 0.04
Efron’s Pseudo R2 0.08 0.03
Notes: This table reports the probit regression estimators in Panel A and their marginal effects in Panel B. The dependent variables are
the aggressive investing policy (AIP) in Model 1 and the aggressive financing policy (AFP) in Model 2. Robust heteroskedasticity-
consistent standard errors are presented in parentheses. Some year and industry effects were not reported because of statistically
insignificant results.  ,  and  indicate significance at 1, 5 and 10%, respectively

PAGE 1188 j CORPORATE GOVERNANCE j VOL. 22 NO. 6 2022

The appropriate ranges of R2 for the goodness of fit in the OLS regression vary depending
on the type of sample (Veall and Zimmermann, 1996). Similarly, there is no consensus on
the benchmark value of the pseudo R2. For instance, McFadden (1979) suggested that
pseudo R2 at 0.4 is an excellent fit. In addition, Hagle and Mitchell (1992) also
recommended that probit and logit models should not only rely on pseudo R2. Further, Veall
and Zimmermann (1994) claimed that McKelvey and Zavoina’s pseudo R2 is the best based
on their criterion. Therefore, our values of McKelvey and Zavoina’s pseudo R2, which are
13% in Model 1 and 4% in Model 2, are acceptable.
The results show that the coefficient signs for CEO duality are significantly negative for AIP
at the 1% level. This indicates that CEO duality mitigates the use of an aggressive policy for
WC investment. In contrast, CEO duality is positively associated with AFP at the 1%
significance level. This suggests that firms with CEO duality tend to adopt aggressive
policies for financing for current liabilities. Conversely, the coefficient signs for board
independence are significantly negative for AFP at the 10% level. This indicates that firms
with high board independence tend to avoid aggressive policies in their WC financing.
Furthermore, firm size and consumer product industry are positively associated with AIP, at
least at the 5% level, while profitability, property and construction and technology industries
are negatively related to AIP, at least at the 5% level. In addition, firm size, profitability, firm
age and the resource industry are negatively related to AFP, at least at the 5% level.

5. Discussion
5.1 The influence of board composition on the level and efficiency of net working
capital
The results show that board size is negatively associated with NWC levels and efficiency,
measured based on the NTC. This is consistent with Gill and Biger (2013), who found that
board size is negatively related to CCC and current ratios. This implies that larger boards
support firms in reducing NWC holdings to increase their efficiency within shorter NTCs. As
excessive NWC levels increase opportunity cost and incremental interest expense, larger
boards encourage firms to maintain the optimal NWC level (Gill and Shah, 2012; Baños-
Caballero et al., 2014). This is consistent with Berger et al. (1997), who found that larger
boards mitigate the domination of managers and prevents them from selecting inappropriate
policies to benefit themselves. In addition, diversified boards with more board members
minimize information asymmetry (Yang et al., 2004). Therefore, a larger board has more
independence when making decisions, and it has enhanced board efficiency and monitoring,
based on agency theory (Jensen and Meckling, 1976; Fama and Jensen, 1983). Hence, firms
with larger boards tend to gain high WCM efficiency with shorter net trade cycles.
However, no relationship was found among board independence, women on the board,
CEO duality and the level and efficiency of NWC. This is inconsistent with Fiador (2016) and
Gill and Shah (2012), who found that board independence and CEO duality are related to
NWC level and efficiency. However, Fiador (2016)’s study was conducted in Ghana and Gill
and Shah (2012)’s in Canada; our study was conducted in Thailand. Therefore, country-
based differences may have caused the board of directors to behave differently. Moreover,
the insignificant association of women on the board can be explained by Ferna ndez-
Temprano and Tejerina-Gaite (2020), who stated that a board’s gender diversification is not
related to corporate performance. Thus, this does not support agency theory or the
resource independence theory.

5.2 The effect of board composition on an aggressive policy of working capital

management
The results show that board independence is negatively related to the likelihood of using
aggressive policies in WC financing. This indicates that more independent directors on the

VOL. 22 NO. 6 2022 j CORPORATE GOVERNANCE j PAGE 1189

 board dissuade firms from using aggressive policies for short-term financing. Although this
policy entails more returns, it is associated with higher risks (Baños-Caballero et al., 2012).
This is consistent with Fiador (2016), who found that board independence is negatively
associated with CCC and AR periods. They examined WC efficiency, whereas we
investigated an aggressive policy for short-term financing, and offer novel evidence that
when boards of directors are more independent in their decisions, they dissuade firms from
risky policies in WC financing. This implies that more independent directors lead to more
efficient monitoring of the board and more alignment of interests between managers and
shareholders (Byrd and Hickman, 1992). Thus, firms with more independent directors
independently and potentially decide to prevent risky policies, including the aggressive WC
financing policy, based on the agency theory of Jensen and Meckling (1976).
Conversely, CEO duality is positively associated with the propensity to adopt aggressive
policies in WC financing, which supports the findings by Gill and Shah (2012). Moreover,
our findings are corroborated by Finkelstein and D’aveni (1994) and Tang (2017) that the
efficiency of a firm’s monitoring declines with CEO duality, as the board of directors is
dominated by an insider shareholder. Consequently, firms with CEO duality tend to adopt
risky policies, including aggressive policies, in their WC financing. This supports the agency
theory by Jensen and Meckling (1976) that managers, who are agents, attempt to pursue
their own interests rather than shareholders’ interests. Therefore, they persuade the board
to choose policies that maximize their own wealth. Hence, firms with CEO duality implement
aggressive policies to earn high returns from short-term financing sources, enhancing
managers’ performance. However, they ignore the high risks from rolling over financing
short-term debts with higher interest rates to invest continually in long-term assets based on
this policy.
In contrast, firms with CEO duality tend to avoid using aggressive policies in WC
investments. This is consistent with Gill and Biger (2013) that CEO duality supports
increased WCM efficiency, and it supports the stewardship theory by Donaldson and
Davis (1991), which offers an alternative explanation. This theory perceives managers as
“stewards” rather than as agents; therefore, they have non-financial motives such as
respecting their authority and work ethics. Hence, they tend to accomplish firm objectives
by using high levels of discretion, such as in-depth knowledge and technical expertise, to
implement the policy and thus maximize shareholders’ wealth. Consequently, managers in
firms with CEO duality are good stewards for firm assets; thus, they avoid using aggressive
policies for their WC investment. The reason is because this policy holds the minimum WC
level, leading to higher risks of running short of WC in firms’ day-to-day operations and
lacking firm liquidity. Moreover, this may reduce sales because of creditability loss in the
long-term.
Our findings are also consistent with Elsayed (2007), who found that both agency and
stewardship theories account for the effect of CEO duality and firm performance.
Additionally, our study supports the claim by Nicholson and Kiel (2004) that firms should not
use only a single CG theory to improve their performance. Using a single theory only will not
explain the sophisticated board leadership structure of specific firms, as CEO duality
benefits some firms and causes drawbacks in others (Boyd, 1995; Brickley et al., 1997). In
addition, our findings are consistent with Weinraub and Visscher (1998) that a negative
relationship exists between WC policy for investment and financing. This implies that if firms
adopt an aggressive policy in their WC financing, they attempt to balance their risks and
returns by using a conservative policy for their WC investment.
Finally, no relationship exists between board size and women on a board with an
aggressive policy in short-term financing. Moreover, board size, board independence and
women on a board are not associated with adopting an aggressive policy in WC
investment. However, no study has investigated this issue. We provide new evidence that
these factors have no bearing on the adoption of an aggressive policy in WCM.

PAGE 1190 j CORPORATE GOVERNANCE j VOL. 22 NO. 6 2022

6. Conclusions
This study aims to investigate the influence of board composition on the level and efficiency
of NWC and the probability of using an aggressive policy for the investment and financing
of WC. We used 3,190 firm-year observations with 319 listed firms in Thailand, from 2010 to
2019, to analyze this issue, using the two-step system GMM method to address the
endogeneity issue and the probit regression method to address discrete data.
The analysis reveals that a larger board size aligns the interests of managers and those of
shareholders and mitigates asymmetrical information between them. This leads to a more
efficient decision to pursue the maximization of shareholders’ wealth. Therefore, firms with
larger boards tend to reduce excessive NWC levels because of higher opportunity costs
and incremental interest expenses and to enhance their WC efficiency.
Moreover, this study is the first to report that CEO duality has a negative effect on
aggressive policies in WC investment. Board independence also negatively influences
aggressive policies in WC financing. This implies that firms with strict internal governance
avoid risky policies in their WCM. Conversely, CEO duality positively influences aggressive
policies in WC financing. This indicates that firms attempt to balance their risks and returns
by implementing a WC policy that is between investment and financing. Moreover, our
findings support both agency and stewardship theories. Therefore, a single theory only
cannot explain the complicated behaviors of Thai managers, implying that the effect of
board composition on WCM should not be considered as static; it should be considered as
a dynamic effect, as it may differ among firm industries and countries.
This study has both academic and practical implications. Academically, this is the first
study on the influence of board composition on aggressive policies in WCM. Practically, our
findings can guide managers and investors to understand that the internal governance of
firms influences WCM. Moreover, they should consider both agency and stewardship
theories to enhance the efficiency of their WCM, as only applying one theory may not
address the sophisticated structure of individual firms. Additionally, this study can serve as
a reference for policymakers and regulators in formulating appropriate strategies to improve
the internal governance of large firms with independent directors on the board.

7. Limitations
Our study has some limitations. First, as we focus on industrial listed firms, our findings may
differ when implemented in financial or unlisted firms. Second, Thailand has unique
institutions, CG systems and cultures; thus, our study may not be applicable to other
countries. Third, there are several measurements for CG, including CG scores, ownership
structure and executive compensation; however, we concentrate only on-board
composition. Finally, most of the data used in our study were collected from financial
statements, and the numbers may have been manipulated by managers, based on
historical data, because of the accounting standards of each country. Thus, researchers
and practitioners should recognize this limitation to ensure the reliability of our results.
Therefore, we suggest further studies that attempt to address our limitations for future
research.

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Corresponding author
Nongnit Chancharat can be contacted at: mnongn@kku.ac.th

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