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Effects of Working Capital Management on Corporate Performance moderated

by Financial Constraints

Conference Paper · May 2021

DOI: 10.29327/131787.1-1

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 Effects of Working Capital Management on Corporate Performance moderated by
Financial Constraints

Abstract

Financial constraints originate from an asymmetry of information, reduce the capacity of

investment in working capital and thus an organization’s rate of return. This study is designed
to analyze the effects of working capital management on corporate performance moderated by
financial constraints for Brazilian companies listed on [B]3 stock exchange from 2008 to 2017,
through quarterly data collection. First, this study observes the non-linear relationship between
working capital management represented by cash conversion cycle and corporate performance
measured by Tobin’s Q, EVA®, ROA and ROIC. Afterwards, it investigates the moderating
effects of financial constraints in the relationship between working capital management and
performance. Companies were classified as financially constrained and non-constrained by
their size and age associated with each economic sector. After classification and intersection
of the data, the final sample resulted in 184 companies and a total of 4,607 observations. We
used a data panel strategy of analysis utilizing the estimator GMM (Generalized Method of
Moments) in two stages (2SLS) due to issues of endogeneity present in the variables and the
heteroscedasticity of the residuals. Among our main results are the optimum balance between
performance and working capital management represented by a non-linear convex relationship
and the reduction of this ideal level under the moderation of financial constraints. In short, the
effects generated by the difficulties that financially constrained Brazilian companies listed at
[B]3 have in obtaining financing and investments decreases the company's cash conversion
cycle and, as a result, it reduces the organization’s performance as well.

Keywords: Financial Constraints, Working Capital Management; Corporate Performance;

Endogeneity; Generalized Method of Moments (GMM).
I. INTRODUCTION

The management of working capital is a fundamental component of corporate finance,

because it directly affects the organization’s liquidity and rate of return (Raheman and Nasr,

2007). Independently of the size or sector of operation, each organization has a demand for

working capital. Administering this with efficiency requires planning and a control of assets

and liabilities in such a way that, on one hand, the risk of not meeting short-term obligations is

eliminated, and on the other hand, excessive investments in these assets is avoided (Eljelly,

2004).

Liquidity or rate of return is a challenging decision that needs to be made when

conducting an organization’s daily operations. Liquidity is a prerequisite that ensures the

ability of companies to fulfill their short-term obligations, and the rate of return guarantees

their continual flow (Abuzayed, 2012). The relevance of cash flow as an indicator of financial

health demands that the business be conducted efficiently, generating results. When credit is

restricted, we observe a rapid reduction in the demand and volume of business in companies’

products and services, and an accentuated increase in capital linked to these actions. In this

context, organizations change their focus from growth to internal efficiency and management

of cashflow, provoking an incompatibility between assets and liabilities, which generates an

increase in a company’s short-term profitability, however as a consequence there also comes a

risk of insolvency. In contrast to this, the concentration of liquidity spent is the cost of a positive

rate of return. The manager thus, is faced with a trade-off between liquidity and rate of return

to maximize the company’s value (Padachi, 2006).

In this line of investigation, Deloof (2003) has demonstrated that a company increases

its value by investing in working capital that allows it to increase its sales and obtain anticipated

discounts from its suppliers. However, Kieschnick and Rotenberg (2016) state that to maintain
elevated investment in working capital, organizations face additional financial costs, which

generate probable risks of bankruptcy.

In this aspect, Fazzari and Petersen (1993), argue that, in comparison with the

investment in fixed assets, investing in working capital is more sensitive to financial

constraints. Fixed investment decisions are made by managers beforehand in order to maintain

stable cashflow, even though fluctuations in cash flow can occur, making it necessary to resort

to outside funding. Moreover, in situations where there is a rationing of credit, a company that

suffers financial constraints will not be capable of obtaining outside financial resources without

raising costs. As a result, in searching for less onerous solutions, working capital reveals itself

as one of the main alternatives for companies, given that it makes short-term liquidity possible.

In the same manner, Faulkender and Wang (2006) have found evidence of the influence

of financial constraints on liquidity evaluations and, thus, an investigation of the effects of

investing in working capital on the value of companies without taking into account financial

constraints may be inadequate.

In light of this discussion, Baños-Caballero, García-Teruel and Martínez-Solano

(2014), reiterate the non-linear relationship between the management of working capital and

corporate performance. In this conception, these researchers argue that the optimal investment

in working capital depends on internal sources of funding, the costs of external funding, and of

accessing the capital markets as well as the financial constraints of companies.

Given the mentioned studies and those available in the field literature, the research

question that guides this study is: What are the moderating effects of financial constraints on

the relationship between working capital management and corporate performance? The

overall objective of this study consists of investigating the moderating effects of financial

constraints on the relationship between working capital management and corporate

performance, looking at Brazilian companies whose stock was traded on the [B]3 stock
exchange during the period from 2008 to 2017 in order to identify and classify the companies

as financially constrained or not financially constrained, verify the relationship between

working capital management and corporate performance, and, analyze the influence of

financial constraints on the relationship between working capital management and corporate

performance.

A company’s responsibility is to generate profit, so that it may continue to operate for

an indefinite period of time and, thus fulfill its roles as an organization within society (Miglo,

2016). Within this context, this study contributes by investigating the levels of investment in

working capital that Brazil companies make, and also by developing a model for the strategic

management and the adoption of alternative investment policies and differentiated sources of

investment, given the economic climate in Brazil with its high interest rates, economic

recession and credit restrictions.

II. RELATED LITERATURE AND HYPOTHESES DEVELOPMENT

Credit Rationing

Joseph Stiglitz and Andrew Weiss (1981) examined credit rationing in a credit market

in equilibrium. They analyzed the adverse selection and incentive effects in the market for

loans and considered models based on two assumptions: those who take out loans have limited

liability (I); and creditors are not able to distinguish between projects of different levels of risk

(II). Both of these effects occur due to the asymmetry of information present in the loan market

after bank evaluations have been made. At this moment of negotiation, banks are worried about

risk and the interest rates that they will have to pay for the loans that they have taken out (Wette,

1983).

Stiglitz and Weiss (1981) point out that interest rates can act as a triage device:

individuals inclined to pay high rates of interest are, in general, the worst risks for creditors,
because they recognize that there is a reduced probability that these loans will be repaid. In the

same way, the behavior of a borrower will probably change, because with high interest rates,

the expectation that these projects will be repaid is diminished, leading companies to elaborate

projects with lower rates of success and larger profit margins. To sum up, given that it is

impossible for the bank to control the actions of the borrower due to an asymmetry of

information, the terms of the loan contract are elaborated in such a way as to attract low risk

borrowers, which is more in keeping with the bank’s interests.

In a similar manner, in order to eliminate excess demand, creditors can opt to not raise

interest rates and not require a guarantee, leading in this way to a rationing of credit. An

increase in the requirements of the guarantee and interest rates diminish proportionally the

expected return to the creditor on the loans offered due to the effects of adverse incentives and

selection. On the other hand, in debt contracts of limited responsibility and duration, the

expected profit for a borrower is a function that increases with the project’s risk. The

requirement of a greater guarantee diminishes the profit made on the loan (Wette, 1983;

Niinimäki, 2018).

As a result, this asymmetry of information in the credit market occurs due to the

uncertainty of the creditors as to whether they will receive the projected return on this loan.

The reaction of creditors to this uncertainty is the exercise of a credit rationing mechanism to

reduce the risk of default. Given this, the asymmetry of information between financial

institutions and the borrower in relation to the promised payments are the effects of uncertainty

of this risk project and, proportionally the degree of risk aversion that occurs in the rationing

of credit by these financial institutions. It is observed that in a rationing equilibrium, the level

of investment will be affected, not by the mechanism of interest rates, but rather by availability

of credit (Miglo, 2016).

 In light of the effects of this asymmetry of information, the function of financial

intermediaries is primarily the concession of loans as a way to finance investment projects,

because they produce information in an efficient manner through diversification, despite its

neutrality of risk (Williamson, 1987; Boyd and Prescott, 1986; Diamond, 1984).

Working Capital Management and Performance

The efficient management of working capital is a fundamental component of corporate

strategy to create shareholder value (Shin and Soenen, 1998). Its administration has a

significant impact on liquidity as well as the company’s rate of return. Nonetheless, according

to Smith (1980), managers face a trade-off between the objectives of working capital

management. The decisions that maximize rate of return normally do not maximize

opportunities for liquidity. On the other hand, concentrating almost entirely on liquidity

reduces the company’s potential rate of return. For Sagner (2014), the managing of working

capital is a vital part of corporate financial management and can be divided into three parts:

liquid working capital, operational working capital and financial working capital.

In fact, there is a significant cost in managing working capital, which can be calculated

using the cost of capital. The modern vision of working capital leads companies to focus on

the cost efficiencies of management and accounting of assets and liabilities through the

dynamics of business processes as well as the search for additional methods (Sagner, 2014).

There are three types of company concerns in managing the working capital cycle: risk,

efficiency and liquidity.

According to Deloof (2003), the measurement of working capital management

corresponds to the cash conversion cycle (CCC), or in other words, the interval of time between

cash outflows for buying raw materials and cash inflows based on the sales made. The more

prolonged this interval is, the greater will be the investment in working capital. A lasting cash
conversion cycle can increase the rate of return, and on the other hand, corporate performance

can diminish the cash conversion cycle, if the costs of greater investments in working capital

increase more quickly than the benefits, such as the maintaining of stock or the concession of

commercial credit to clients.

From this perspective Panda and Nanda (2018) consider the relevance of the working

capital to the operational leverage of companies, analyzing this relationship in terms of six

sectors of Indian manufacturing over a 17-year period (2000-2016). The findings reveal that

companies with high financial flexibility and considerable price/cost margins can increase their

profitability by using an aggressive strategy of working capital financing. Therefore, the

financing of a larger portion of working capital than is necessary through short-term loans and

the continuation of risky working capital financing can increase profitability.

The efficient management of liquidity involves the planning and control of short-term

assets and liabilities, in such a way that, on one hand, it will eliminate the risk of an inability

to fulfill short-term obligations, and on the other, avoid excessive investments in these assets.

However, instead of using working capital as a measurement of liquidity, many analysts

believe in using current quick indices, which have the advantage of making it possible to make

a temporal or transversal comparison. In sum, to measure the efficiency of the planning and

control of liquidity, they calculate the effect of these on profits and shareholder value (Singh,

Kumar, and Colombage, 2017).

Moderation of Financial Constraints on Working Capital Management and Performance

A relevant theoretical landmark in the discussion of the effects of financial constraints

on organizational investment policies was a study done by Fazzari, Hubbard and Petersen

(1988a). To these authors, investment can depend on financial factors, such as the availability

of internal financing, access to new debt or capital financing or the functioning of specific
credit markets. For companies that find themselves in situations characterized by financial

constraints, however, financial factors appear to be important in the sense that external capital

is not a perfect substitute for internal funds, particularly in the short term.

This is derived from the supposition that firms facing a source of expensive financing

will alter their current financial policies, increase their amount of cash in order to make future

investments with higher rates of return possible; supplying, at the same time, an empirical

implication that firms with financial constraints can be sensitive to a positive cash flow (cash

flow sensitivity) in contrast to those that do not display this behavior. Evidence found by

Almeida and Campello (2007) reveals that, even though tangible assets increase cash flow

sensitivity for financially constrained firms, these effects are not observed in firms without

constraints. Therefore, in accordance with these theoretical perspectives, tangibility influences

the status of a company’s credit, given that companies with more tangible assets are less likely

to have financial constraints.

To Baños-Caballero et al. (2014), the effects of the relationship between working

capital management and corporate performance are characterized by a non-linear relationship

and this signifies that investment in working capital and corporate performance have a positive

relationship with low levels of working capital and a negative relationship when there are

higher levels of working capital. Thus, the authors demonstrate by the results they obtained

that there is an inverted U relationship between working capital and corporate performance.

These results are found equally when companies are classified in accordance with their level

of financial constraints. However, the optimal level of working capital investment is lower for

companies with a greater probability of being financially constrained.

Confirming this concept, Bhatia and Srivastava (2016) affirm that the working capital

management is a function that requires a dynamic strategy, because the presence of an inverse

relationship between liquidity and rate of return involves a trade-off between these two
objectives. On one hand, the maximization of profit in order to guarantee the continuity of

operations and create value for the company, and on the other, sufficient liquidity to guarantee

the fulfilling of the company’s obligations and current operations (Lazaridis and Tryfonidis,

2006; Shin and Soenen, 1998). To Petersen and Rajan (1997), the concession of commercial

credit increases sales and Emery (1987) relates that clients are motivated to acquire low

demand products, which are also a short-term investment that is more profitable than negotiable

securities.

On the other hand, there are potential adverse effects of investing in working capital,

that can have a negative effect on the company’s value at certain levels of working capital. Kim

and Chung (1990) point out the added costs of storage when the level of merchandise stored

increases. To maintain a higher level of working capital signifies that extra liquidity is

necessary, which will incur greater financing costs and opportunity costs as well as credit risk

(Deloof, 2003; Kieschnick, Laplante and Moussawi, 2013; Baños-Caballero et al. 2014).

Given the considerations presented, it is expected that exists an optimal level for a

company’s level of working capital to balance the costs and benefits and thus maximize its

value. The assumption is that corporate performance increases with the elevation of working

capital until it attains the optimal level and when it is surpassed, the relationship between

working capital and performance becomes negative. As a result, we observe a non-linear and

simultaneous relationship due to endogeneity between the working capital management and

performance according to the presented hypothesis:

H(1) = There is a non-linear convex relationship between working capital management

and corporate performance.

Once the assumption of the existence of an inverted U relationship between working

capital management and corporate performance is proven, it is to be expected that the optimal

level of investment in working capital will be different for companies that have financial
constraints and those that do not. Under the efficient-market hypothesis, Modigliani and Miller

(1958) demonstrates that companies can obtain external financing without depending on the

availability of internal capital. However, asymmetries of information and agency costs

converge on market imperfections, adding external capital costs associated with generating

funds internally, as well as generating a rationing of credit (Jensen and Meckling, 1976; Stiglitz

and Weiss, 1981; Myers and Majluf, 1984).

Along the same line of argument, Fazzari and Petersen (1993) demonstrate that

investments in working capital are more sensitive to financial constraints than investments in

fixed assets. Due to the need of investment for a positive level of working capital, it is supposed

that the optimal level of working capital is lower for companies with financial constraints.

Within this context, we present the following hypothesis:

H(2) = The ideal level (maximum point) in the non-linear relationship between working

capital management and corporate performance is lower when it is moderated

by financial constraints.

III. SAMPLE, DATA AND RESEARCH DESIGN

The study’s population represents Brazilian companies which were openly traded on

the [B]3 stock exchange on December 31, 2018, corresponding to a total of 494 companies. Of

this population of 494 companies, we have excluded 182 from the financial sector and another

70 associated with holding companies, bankruptcy proceedings and exchange traded funds

(ETFs) As a result (see Figure 1), our sample consists of 242 companies classified by the

economic sector indicated by the [B]3.

Figure 1: Sample distribution by economic sector of [B]3.

Cyclical Consumption 61

Public Utility 47

Industrial Goods 45

Basic Materials 30

Non-Cyclical Consumption 23

Health 15

Oil, Gas and Biofuels 10

Information Technology 7

Telecommunications 4

Figure 1. Sample distribution by economic sector of [B]3.

Source. Own preparation (2019).

By consulting the quarterly financial reports from the Eikon (Thomson Reuters®)

platform, we collected our initial sample data for these 242 Brazilian companies which were

openly traded on the [B]3 exchange from 2008 to 2017. There was a total of 9,680 initial

observations covering 40 quarters.

First it was necessary to classify each company as constrained or not-constrained

financially. The literature suggests many possibilities for this, including their sensitivity to cash

flow investment (Fazzari et al. 1988a), the Kaplan and Zingales restriction index (KZ index,

1997), the Whited and Wu restriction index (WW index, 2006) and the SA index, the restriction

index used by Hadlock and Pierce (2010). Almeida, Campello and Weisbach (2004) utilize

financial constraints and the division in deciles of the proxies: dividend payment indices, size,

bond ratings and commercial papers. They considered companies with the three lowest deciles

to be companies with financial constraints, and the companies with the three highest deciles to
be without financial constraints. Almeida et al. (2004) relate that this approach using the size

of the firm was also used by Gilchrist and Himmelberg (1995), given that smaller companies

are usually younger, not widely known and vulnerable to market imperfections.

Following this line of argument, Kirch, Procianoy and Terra (2014) first classify the

companies by sector and then their size1. The authors recommend that the classification, on

constrained or not-constrained financially, be realized in terms of economic sectors, given that

the same sector can present companies of a wide range of sizes. In the same manner, Devereux

and Schiantarelli (1990), Hovakimian and Titman (2003), Almeida and Campello (2007) state

that smaller companies have a greater probability of being financially constrained to the extent

that larger and more mature companies do not face financial constraints.

In light of these considerations, the present study proposes to adopt as an a priori

classification of these companies, the components of size and age for each economic sector

indicated by the [B]3 stock exchange. Using the criteria proposed by Hadlock and Pierce (2010)

the companies in the sample were classified by size (natural log of total revenues) and age

(length of time with [B]3 listing) and grouped by economic sector, in accordance with the

contributions of Kirch et al. (2014). This classification was realized for all quarterly periods

and every sector. Then, the companies were segregated by deciles, so that those within the 4

lowest deciles were considered financially constrained and those with the 4 highest deciles

were considered to be without financial constraints. The adoption of the decile classification

criteria for financial constraints is based on the consolidated methodology utilized in the studies

of Kirch et al. (2014) and Almeida et al. (2004). The utilization of the four lowest and highest

deciles instead of three is explained by the quantity of observations not considered. In this case,

the sample would be reduced 40% in relation to the initial sample, restricting in this manner

the statistical options used in this methodology.

1
Natural log of total assets
 Continuing toward the final classification of the observations by financial constraints,

we cross the group of observations classified by size with the observations classified by the

length of time of having a [B]3 listing. As a result, 5,536 observations were examined, of which

1,062 had financial constraints and 4,474 did not, referring to the 194 companies for each

quarter from 2008 to 2017. In addition to this reduction, due to the presence of companies with

negative net assets, we proceeded to exclude these observations, given that this information

would provoke a divergence in the calculation of the dependent performance variables. Thus,

the final sample consists of 184 companies, with a total of 4,607 quarterly observations over a

period of ten years.

Based on our review of the literature, the analysis of the relationship between working

capital management and corporate performance in this study will be developed using the

econometric models displayed in equations (1) and (2). Detailed variable definitions are

presented in Appendix A.

!"#$%#&'()"!,# = +% + +& !"#$%#&'()"!,#'& + +( ./0!,# + +) (./0)(!,# (1)

+ +* /%(3#%4!,# + 5# + 6! + 7!,#

!"#$%#&'()"!,# = +% + +& !"#$%#&'()"!,#'& + +( ./0!,# + +) (./0)(!,#

( (2)
+8& 9./0!,# × ;/!,# < + 8( 9./0!,# × ;/!,# < + ++ ;/!,#

++, =>!,#'& + +* /%(3#%4!,# + 5# + 6! + 7!,#

In which, Performancei,t, is represented by the variables Tobin’s Q, EVA®, ROA and

ROIC; WorkingCapitalManagementi,t, (WCM) is represented by the variable Cash Conversion

Cycle (CCC); Controli,t, is represented by the variables Size, Operational Cash Flow, Leverage,

Tangibility, Growth and EBITDA; Financial Constraints (FC) is a dummy variable; IVi,t-1,
Instrumental Variable; β0,β1,β2,β3,βn are the regression model coefficients; λt is a dummy time

variable to capture the influence of economic factors that affect performance; ηi is an

unobservable heterogeneity or unobserved individual effects of the company; and, εi,t is the

Company i Regression Error during Period t.

The assumption of exogeneity between the variables is fundamental to making

appropriate inferences about the causal relationship. However, within the context of corporate

finance, in addition to the difficulty of verification, this is an improbable issue, given that in

this area of knowledge secondary information from companies is used (Barros et al., 2010).

Due to the invalidity of the non-correlation assumption, it is found that one or more regressors

are endogenous, causing a bias in the erroneous estimators and inferences. These endogeneity

problems can arise for three reasons: omitted variables, errors in regressor measurement and/or

simultaneity (Ketokivi and McIntosh, 2017). Within this context, Antonakis et al. (2010)

performed a methodological review with a sample of 110 applied social science articles,

published in leading periodicals during the last 10 years. Their analysis reveals that researchers

failed in from 66% to 90% in their approach to the models and their estimation conditions,

invalidating their causal inferences.

According to the studies of Baños-Caballero et al. (2014) and Wintoki, Linck, and

Netter (2012), the proposal of this study is to examine the relationship between corporate

performance and working capital management using a dynamic panel estimator in the

Generalized Method of Moments (GMM), which eliminates the main sources of endogeneity

inherent in the estimation of the proposed relationship. Seminal studies about this estimator

have been elaborated by Blundell and Bond (1998), Arellano and Bover (1995) and Arellano

and Bond (1991), supplying econometric specifications to manage endogeneity issues that

probably are present in the relationship that we are investigating.

 Thus, as a way to verify possible sources of endogeneity, which can bias the parameters

obtained by the regression (Roodman, 2009; Arellano and Bond, 1991), the generalized

systemic method of moments in two stages (GMM-Sys 2SLS) is robust in terms of

heteroscedasticity and does not assume a normal variable distribution, even though it requires

non-auto-correlation as a second order assumption AR (2), and the validity of the utilized

instruments. To do this, they apply the Arellano/Bond tests for autocorrelation and Hansen tests

regarding overidentification, in addition to Hansen’s difference test for subgroups of

instruments. It should be emphasized that the sequence of estimation methods applied

displayed in Table 1 is due to the treatment of the presence of endogeneity in the variables.

TABLE 1
Analysis Protocol – Estimation Methods and Statistical Tests

Steps / Estimation Method Description

1. POLS (Pooled Ordinary Estimation for longitudinal models, considers the explanatory variables and
Least Squares) the error term !!,# to be endogenous. This controls for autocorrelation with
the terms and the error (Cameron and Trivedi, 2009).
1.1 T Test Evaluates the robustness of the coefficients.
1.2 Chow (F Test) Evaluates whether the most appropriate method is pooled or a panel.
2. Fixed Effects Estimation for longitudinal models which permits limited endogeneity for the
individual variations correlated with the explanatory variations. In the case
of heteroscedasticity of the idiosyncratic errors, considers the estimation of
fixed effects by robust standard errors with grouping of the individuals
(Fávero and Belfiore, 2017).
3. Random Effects Estimation for longitudinal models. Considers the variations simultaneously
within and between the data. In the case of error terms, auto-correlated over
time (within), the estimation for random effects by robust standard errors
with grouping of the individuals (Cameron and Trivedi, 2009; Fávero and
Belfiore, 2017).
3.1 Breusch-Pagan Test Analyzes the variance in the residuals (if zero, POLS; ≠ zero, random effects
3.2 Chow Test Analyzes the intercepts (if =, POLS; if ≠, fixed effects)
3.3 Hausman Test Verifies the appropriate estimator between Fixed and Random Effects
4. Generalized Systemic The Generalized Method of Moments makes use of the conditions of
Method of Moments orthogonality, making it possible to estimate the presence of
(GMM-Sys 2SLS) heteroscedasticity and endogeneity (Baum et al., 2007).
4.1 Arellano-Bond Test Tests for the presence of autocorrelation between estimated residuals.
4.1 Hansen J’ Test Verifies the validity of the instruments (overidentification test)
Source: Elaborated by the authors (2019).
 Given the sequence of steps in the analysis protocol, estimations of fixed and random

effects were realized to analyze the heterogeneity of the individual pieces of data in the sample.

Next the Chow, Breusch-Pagan and Hausman statistic tests were executed to verify the

appropriate estimator for the modeling of the panel data, namely POLS, fixed effects or random

effects. With instrument variables, in order to mitigate the issue of endogeneity, we considered

the past dependent variables. The results of each estimation are displayed in Table 2.

In analyzing the first equation with the Tobin’s Q dependent variable of performance,

we may note that there is a statistically significant and negative relationship between working

capital management and as well as those for fixed and random effects. We can see a 1% level

of significance of the past dependent variable, which confirms the use of the instrumental

variable for the endogeneity issue. The negative relationship and the 1% level of significance

also verifies the tangibility, leverage and growth variables. We can infer that the sensitivity of

tangibility occurs as a necessity of the liquidity becoming negative. The total of debt increases

in relation to the company assets and company growth decreases, making its opportunity to

grow slower. The tests indicate that the estimator for fixed effects is more appropriate for this

model.

In the second equation, working capital management indicates a 1% significant and

negative relationship with the performance variable EVA. However, the results of the Breusch-

Pagan, Chow and Hausman tests indicate that the estimator appropriate for this model is POLS,

or in other words, the model of pooled ordinary least squares for a longitudinal panel. In the

third equation, the performance variable ROA has a statistically significant positive

relationship with working capital management, and the execution of the tests indicate the

estimator for fixed effects. It can be noted the same indication in the result with R2 within.

Finally, in the fourth equation specified by performance variable ROIC, unlike the result found

in the POLS estimation, working capital management, even though it is not statistically
significant, has a negative relationship with the variable ROIC, presenting significance in its

relationship with the operational cash flow variables, ROA and leverage. In the same way, the

tests indicate that it is the appropriate estimator for fixed effects, as does the result of R2 within

of 0.797 being superior to the value between.

 TABLE 2 - Results of the Estimations of the (1) Econometric Models
Performance Q de Tobin EVA® ROA ROIC
184 firms Coef. p-value Coef. p-value Coef. p-value Coef. p-value Coef. p-value Coef. p-value Coef. p-value Coef. p-value
L.Performance 0,408 0,000 0,442 0,000 0,701 0,000 0,749 0,000 0,019 0,073 0,018 0,164 -0,002 0,913 0,028 0,573
-6 -6 -8 -8 -7
CCC -2,5.10 0,315 -3,4.10 0,244 -0,005 0,040 -0,008 0,007 2,7.10 0,783 8,2.10 0,355 -1,6.10 0,987 -4,5.10-6 0,578
2 -11 -11 -8 -8 -12 -12 -11
CCC -3,5.10 0,012 -3,8.10 0,026 -4,9.10 0,005 -7,3.10 0,001 1,0.10 0,029 1,0.10 0,005 -5.10 0,240 -6,2.10-11 0,110
SIZE -0,053 0,096 -0,021 0,332 -66,19 0,456 -58,26 0,118 0,003 0,162 0,002 0,078 -0,206 0,401 -0,086 0,388
-12 -12 -7 -7 -13 -13 -11
OCF -1,4.10 0,412 -1,3.10 0,436 -2,2.10 0,143 -3,3.10 0,000 -2,1.10 0,001 -1,9.10 0,006 2,1.10 0,003 1,6.10-11 0,015
4 4
ROA 1,094 0,292 0,894 0,321 1,2.10 0,055 1,1.10 0,020 ----- ----- ----- ----- 120,22 0,000 121,51 0,000
TANG -0,516 0,017 -0,489 0,005 -563,02 0,173 -53,54 0,795 -0,013 0,109 -0,002 0,760 0,123 0,883 -0,820 0,463
LEV -0,769 0,001 -0,653 0,000 -841,79 0,114 88,92 0,727 -0,007 0,316 -0,015 0,080 -2,013 0,045 0,026 0,983
GROWTH -0,001 0,039 -0,002 0,009 -4,757 0,202 -5,624 0,090 2,9.10-4 0,010 3,3.10-4 0,008 -0,002 0,833 -0,004 0,741
ROIC -0,003 0,678 -0,001 0,897 -41,92 0,126 -24,42 0,140 0,006 0,000 0,006 0,000 ----- ----- ----- -----
3 3
_const 2,451 0,000 1,666 0,000 1,89.10 0,309 1,03.10 0,117 -0,047 0,255 -0,021 0,224 5,009 0,298 1,914 0,315
n° observations 4.607 4.607 4.607 4.607 4.607 4.607 4.607 4.607
Prob > F 0,000 0,000 0,000 0,000 0,000 0,000 0,000 0,000
R² within 0,272 0,270 0,554 0,552 0,800 0,799 0,797 0,794
R² between 0,472 0,569 0,984 0,987 0,708 0,733 0,632 0,710
R² overall 0,495 0,578 0,773 0,775 0,735 0,751 0,720 0,748
sigma_u 0,552 0,373 969 0 0,015 0,008 2,372 1,074
sigma_e 0,412 0,412 4.039 4.039 0,017 0,017 2,271 2,271
Rho 0,641 0,450 0,054 0 0,449 0,180 0,522 0,183
Estimation Fixed effects Random Effects Fixed effects Random Effects Fixed effects Random Effects Fixed effects Random Effects
Breusch-Pagan / Chi2: 905,45 0,000 3636 4394
Prob > Chi2: 0,000 1,000 0,000 0,000
Chow Test / Chi2: 12,18 0,84 15825 13,49 17,68
Prob > F 0,00 0,00 0,95 0,000 0,000 0,000
Hausman Test / Chi2: 163,41 3,09 310,81 437,86
Prob > Chi2: 0,000 0,797 0,000 0,000
Sargan-Hansen / Chi2: 165,64 334,17 486,47
Prob > Chi2: 0,000 0,000 0,000
Source: Research data.
Notes L.Performance (Lagged variables: L.TOBINQ, L.EVA, L.ROA and L.ROIC); CCC (Cash Conversion Cycle); CCC2 (Square of Cash Conversion Cycle); Size (Natural Log of Sales);
OCF (Operating Cash Flow); ROA (Return on Assets); TANG (Tangibility); LEV (Leverage); GROWTH; ROIC (Return on Invested Capital).
 However, taking into account that the dependent variables Tobin’s Q, EVA, ROA and

ROIC are variables that present continuity over time, or in other words, past values explain

present and future values, it is indispensable to find a method that solves the issue of

endogeneity. For this reason, we have adopted the specification of a model with the dependent

variables Tobin’s Q, EVA, ROA and ROIC, the past variables and a dynamic specification. In

this way, the generalize method of moments becomes an uncontested alternative for the

consistent estimation of the parameters.

The efficient proposal to solve, or at least reduce, the problems of endogeneity is to use

the estimator known as GMM. According to Baum et al. (2007) and Roodman (2009), this

method is the most appropriate to produce inferences about the relationships between variables

of interest when used in a data panel. It is mainly utilized in cases in which a short panel is

used, or in other words, a sample with many individual records in relation to the period

analyzed in this study, and dynamic dependent variables, fixed effects, endogeneity and

heteroscedasticity in the individual units.

Table 3 displays the results of these GMM estimations for the performance variables:

Tobin’s Q, ROA and ROIC – while for the EVA variable, according to the indications of the

statistical tests, we maintained the POLS estimation method.

 TABLE 3
Results of the Estimation using the Generalized Method of Moments
Dependent Tobin’s Q ROA ROIC
184 firms Coef. p-value Coef. p-value Coef. p-value
L.TOBINQ 0.633 0.000***
L.ROA 0.047 0.001***
L.ROIC 0.114 0.167
CCC 6.8.10-5 0.042** 1.5.10-7 0.239 0.001 0.000 ***
2 -10
CCC -2.9.10 0.135 3.1.10-12 0.015** 2.5.10-8 0.043 **
SIZE 0.215 0.000*** 0.001 0.063* -1.24 0.019 **
-11
OCF -2.8.10 0.073* 2.1.10-12 0.121 1.1.10-10 0.000 ***
ROA -2.82 0.524 ------ ------ 107.1 0.000 ***
TANG 1.16 0.080* 0.020 0.057* 3.8 0.324
LEV -2.56 0.000*** -0.067 0.069* -1.48 0.666
GROWTH -0.098 0.217 0.001 0.323 -0.18 0.444
EBITDA -0.005 0.175 0.001 0.000*** 0.007 0.805
ROIC 0.055 0.050** 0.004 0.000*** ------ ------
_const -3.10 0.000*** -0.037 0.125 22.2 0.026 **
n° Observations 4,605 4,605 4,605
n° Groups 184 184 184
Prob > F 0.000 0.000 0.000
R² / Wald 316.06 262.56 152.93
Arellano-Bond
Hθ: in AutoOr1Prob> |z| 0.0478 0.0001 0.2828
Hθ: in Auto Or2Prob>|z| 0.9719 0.1371 0.3423
Hansen’s J-test / Chi2: 57.6489 78.6625 73.2155
Prob > chi2: 0.8103 0.1996 0.3415
Source: Research Data
Notes: Dependent variables – Tobin’s Q, ROA (Return on Assets) and ROIC (Return on Invested Capital); L.TobinQ (Past
Tobin’s Q dependent variable); L.Roa (Past Return on assets dependent variable); L.Roic (Past Return on invested capital
dependent variable); Ccc (Cash conversion cycle); Ccc*Ccc (Square of the Cash conversion cycle); Size (Size, Natural
logarithm of sales); Ocf (Operating cash flow); Roa (Return on assets); Tang (tangibility); Lev (Leverage); Growth; Ebitda
(Ebitda margin).

In the model (2.1) where performance is represented by Tobin’s Q, the past dependent

variable (L.tobinq) presented an appropriate result, with a statistical significance at a level of

1%. The working capital management coefficient (CCC) is positive and its square (CCC2)

negative, indicating a negative relationship with Tobin’s Q in the form of a convex parabola.

We found a significance to a level of 5% for CCC. This result is consistent with the findings

of Baños-Caballero et al. (2014), Altaf and Shah (2017). In terms of size and tangibility, the

relationships were positive with Tobin’s Q and were significant at respective levels of 1% and

10%, and this evidence was also found in the studies of Kirch et al. (2014) and Almeida and

Campello (2007). Equally for ROIC, we found a positive relationship with a statistical
significance at a level of 5%. We found that operational cash flow and leverage indicate a

negative relationship with performance, Tobin’s Q. OCF points to a 5% level of significance

in this case, assuming the sensitivity of cash in relation to Tobin’s Q, in accordance with the

studies of Kirch et al. (2014), Almeida and Campello (2004) and Fazzari and Petersen (1993).

Leverage demonstrated statistical significance at a level of 1%. This result ratifies that there is

an ideal level of corporate indebtedness so that companies don’t diminish their value.

(Modigliani and Miller, 1958). The other variables, growth, EBITDA margin and ROA did not

present significance in this model.

Using the same model (2.1), where performance is represented by ROA, presented a

significance at a level of 1% for Lroa (the past dependent variable). In this model, the working

capital management coefficient (CCC) and its square (CCC2) are positive, indicating a positive

relationship with ROA in the form of a concave parabola with CCC2 having significance at a

level of 5%. In this case, after the reduction of performance ROA at a certain level of working

capital management, performance returns to growth with an increase in working capital. Size

and tangibility indicate a positive relationship with ROA with both at a level of significance of

10%. The EBITDA margin and the ROIC also present a positive relationship with ROA with

both having significance at a level of 1%. Leverage, on the other hand, demonstrated a negative

relationship with performance and was significant at a level of 10%. Operational cash flow and

growth did not present statistical significance in this model.

Finally, this model (2.1) with ROIC as performance did not present significance with

the past dependent variable. The working capital management coefficient (CCC) and its square

(CCC2) indicate a positive relationship with ROIC in the form of a concave parabola with

significance at a level of 1% for CCC and 5% for its square. Size, operational cash flow and

ROA demonstrated a positive relationship with performance when it is represented by ROIC

and the significance was at levels of 5%, 1% and 1% respectively. The other variables

tangibility, EBITDA margin, leverage and growth did not present significance in this model.

Once the applied econometric models were validated and tested, we proceeded with the

execution of moderating financial constraints in these models by using the GMM estimator in

two stages. In this mode, the variable of financial constraints classified by size and length of

time registered on the [B]3 stock exchange, represented by the dummy variable, interact with

the cash conversion cycle variable and its square. The analysis of the results indicated in Table

4 are displayed below.

TABLE 4
Results of the Estimations Moderated by Financial Constraints (GMM-Sys 2SLS estimation)
Dependent Tobin’s Q ROA ROIC
184 firms Coef. p-value Coef. p-value Coef. p-value
L.TOBINQ 0.70 0.000***
L.ROA -0.018 0.001***
L.ROIC 0.076 0.417
CCC -4.10-5 0.010** 0.0015 0.000 ***
0.0002 0.107
2 -11
CCC 3.10 0.554 2.10-8 0.000*** -7.2.10-9 0.250
CCC*FC 2.10-5 0.093* 0.0015 0.027** -0.0002 0.207
2 -10
CCC *FC -2.10 0.091* 1.9-8 0.000*** -5.6.10-9 0.420
SIZE 0.0031 0.918 -3.35 0.000*** -1.41 0.021 **
OCF -3.10-11 0.009** 9.10-11 0.020** 3.8.10-11 0.252
ROA -2.2 0.517 ------- ------- 108.1 0.000 ***
TANG 0.41 0.107 15.32 0.000*** 2.17 0.575
LEV -1.01 0.023** -17.13 0.002** -63 0.157
GROWTH -0.005 0.983 0.06 0.575 0.2 0.244
EBITDA -0.0002 0.043** 0.54 0.000*** 0.0054 0.424
ROIC 0.055 0.021** -0.2 0.023** ------- -------
FC -0.49 0.029** -12 0.000*** -4.75 0.028 **
_Const -0.73 0.295 73.34 0.000*** 32.23 0.009 **
n° observations 4,605 4,605 4,605
n° groups 184 184 184
Prob > F 0.000 0.000 0.000
R² / Wald 1331.80 5935.56 269.49
Arellano-Bond
Hθ: in Auto Or1 Prob>|z| 0.0000 0.2889 0.0014
Hθ: in Auto Or2 Prob>|z| 0.2789 0.2713 0.3942
Hansen’s J-test – Chi2: 150.60 151.16 156.18
Prob > chi2: 0.2945 0.2838 0.2303
Source: Research data
Notes: Dependent variables – Tobin’s Q, ROA (Return on Assets) and ROIC (Return on Invested Capital); Ltobinq (past
dependent variable of Tobin’s Q); Lroa (past dependent variable of the return on assets); Lroic (past dependent variable of
return on invested capital); Ccc (Cash conversion cycle); Ccc_sq (square of the cash conversion cycle); Size (size, natural
logarithm of sales); Ocf (operational cash flow); Roa (return on assets); Tang (tangibility); Lev (leverage); Growth; Ebitda
(ebitda margin)
 In the model (2.2) moderated by financial constraints with Tobin’s Q as performance,

we may observe that the relationship between the cash conversion cycle under moderation of

financial constraints and performance display a negative relationship for both working capital

management variables. In comparison with the previous model without the moderation of

financial constraints, we may observe an equal inverted U relationship in the form of a concave

parabola, but without the relevance of observing that its vertex, that is the maximum point of

this parabola (the optimal point for working capital management) is lower relative to model

(2.1) in which its vertex has a maximum point higher than in this model in which there is

interaction with the financial constraints. We found statistical significance at a level of 5% for

CCC and 10% for CCC*RF and CCC2*RF. This result is supported by the study of Baños-

Caballero et al. (2014).

In the model (2.2) moderated by financial constraints with performance given as ROA,

the relationship between the cash conversion cycle variables under moderation of the financial

constraints and performance was found to be positive for both working capital management

variables. In comparison with the previous model (2.1) without moderation of the financial

constraints, we find, in model (2.2), a U relationship as before with a concave parabola,

however, it is fundamental to note that its vertex, that is the minimum point of this parabola

(the lowest point of Y – ROA) is lower in comparison with the model (2.1) in which its vertex

has a minimum point higher than the one in this model (2.2) with the interaction with financial

constraints. It had significance at a level of 5% for CCC.

Finally, in the model with moderation of financial constraints (2.2) which uses ROIC

for performance, the relationship between the cash conversion cycle variables moderated by

financial constraints and performance proves to be negative for both working capital

management variables. Unlike the previous model (2.1) without moderation of financial

constraints, in this model (2.2) we may note a U relationship that forms a convex parabola,
which indicates with its vertex the maximum point of the parabola (high point of the expression

Y – ROIC) and the optimal point for working capital management. Even though evidence can

be found for this in the literature, these variables were not statistically significant in this model,

as they were in the previous model.

IV. MAIN RESULTS

In this section we will present the main results in a summarized form, comparing them

with the inferences of this study. Thus, considering the results encountered jointly by

hypothesis(1) (the relationship between performance and working capital management) and

hypothesis(2) (featuring moderation of the financial constraints in relation to performance and

working capital management), and seeking to understand the effects of working capital

management on corporate performance in Brazilian companies when there is moderation of

financial constraints, the findings are observed based on the following hypotheses introduced

in this study:

H(1) = There is a non-linear convex relationship between working capital management

and corporate performance.

Due to the adoption of working capital management policies, a company’s rate of return

can increase or decrease. Accompanying the positive and negative effects of working capital

management indicate that working capital management involves a trade-off. On one hand, it is

understood that it is relevant to maintain positive working capital and on the other, adverse

effects can provoke a negative impact on the value of the company at given levels of working

capital. Given these considerations, it is to be expected that companies have an optimal level

of working capital to balance costs and benefits while at the same time corporate performance

increases until it reaches this optimal level. Once it surpasses this optimal point (the vertex of

the parabola – its maximum point), the relationship between working capital and performance
becomes negative. In Figure 2, we can observe the result of the estimation for the equation

model (2.1):

Figure 2
Tobin’s Q Estimation (Y) and Working Capital Management (X) Graph

60
40
20
0
(15,0) (10,0) (5,0) -20 - 5,0 10,0 15,0 20,0 25,0 30,0
-40
-60
-80
-100
-120
Q Tobin

We can see from the graph in Figure 2 that the findings of this study in relation to the

first hypothesis point to a non-linear convex relationship when Tobin’s Q is considered to

represent performance. This signifies that this model presents a maximum point at which up to

a given point in the business cycle, a company can reveal its best performance. After this ideal

level of cash conversion cycle term, that is, by increasing this term, corporate performance

begins to decrease as a result. In analyzing this model with the performance variables ROA

and ROIC, it has been confirmed that the relationship is non-linear, however it takes on a

concave form and not convex as is the case with the first hypothesis. In Figures 3 and 4 we

indicate the relationships between CCC (abscissa X) and ROA and ROIC (ordered Y). In this

case, it is understood that corporate performance diminishes as time goes on in the cash

conversion cycle, but once it arrives at the minimum point, performance begins to increase

again. Therefore, the non-linear convex relationship between working capital management and

performance measured by Tobin’s Q and EVA does not reject the hypothesis, however the

performance represented by ROA and ROIC does reject the hypothesis.

 Figure 3 – ROA (Y) and Working Capital Management (X)

50,0

40,0

30,0

20,0

10,0

0,0
(15,0) (10,0) (5,0) - 5,0 10,0 15,0
-10,0

ROA

Figure 4 – ROIC (Y) and Working Capital Management (X)

25,0

24,5

24,0

23,5

23,0

22,5

22,0
(15,0) (10,0) (5,0) - 5,0 10,0 15,0

ROIC

In light of the evidence of the existence of an inverted U relationship between working

capital management and corporate performance, it is expected that the optimal level of

investment in working capital will be different for companies that are constrained financially

as compared to companies that are not. In this manner, we present the second hypothesis:

H(2) = The ideal level (maximum point) in the non-linear relationship between working

capital management and corporate performance is less when companies are moderated by

financial constraints.

Modigliani and Miller (1958), using the perfect markets hypothesis, demonstrated that

companies can obtain external financing without depending on the availability of internal

capital. However, asymmetries of information and agency costs converge in market

imperfections, adding external capital costs in relation to funds generated internally, as well as

generating a rationing of credit. Due to the need for investment for a positive level of working

capital, it is assumed that the optimal level of working capital will be inferior in companies

with financial constraints.

As in hypothesis(1), the results obtained in hypothesis(2) demonstrate a non-linear

convex relationship for the model where performance is represented by Tobin’s Q and working

capital management is under the moderation of financial constraints, with the optimal point

being lower than in hypothesis(1) as demonstrated in Figure 5. As a consequence, we can

perceive that in decreasing the maximum point, the cash conversion cycle and performance

decrease simultaneously. These findings are consistent with the expected result, therefore a

company under financial constraints will face a scarcity of liquidity due to its difficulty in

obtaining financing, which may be due to high costs or due to issues related to asymmetry of

information. In this manner, it does not reject the second hypothesis.

Figure 5 – Tobin’s Q (Y) and Working Capital Management (X)

10,0

-
(15,0) (10,0) (5,0) - 5,0 10,0 15,0
(10,0)

(20,0)

(30,0)

(40,0)

(50,0)

(60,0)

(70,0)

(80,0)

Q de Tobin (Restrições Financeiras)

Figure 6 – ROA (Y) and Working Capital Management (X)

45,0
40,0
35,0
30,0
25,0
20,0
15,0
10,0
5,0
-
(15,0) (10,0) (5,0) (5,0) - 5,0 10,0 15,0
(10,0)

ROA (Restrições Financeiras)

The graph indicated in Figure 6 refers to the result of the estimation between the

performance variable ROA and working capital management moderated by the interaction with

financial constraints. In terms of the model with moderation due to constraints compared with

the performance variable ROA indicated in Figure 6, despite the evidence that it is a non-linear

relationship, the function is concave and not convex as indicated by the second hypothesis. In

relation to the model with moderation from these financial constraints using the ROIC variable

to represent performance, there was no rejection of the absence of autocorrelation according to

the indications of the Hausman test. Thus, the second hypothesis was rejected for the model

with the performance variables ROA and ROIC.

V. CONCLUSIONS

This study seeks to answer the question of the effects of working capital management

on corporate performance when there is moderation due to financial constraints. To accomplish

this, this paper has realized two studies, with the purpose of (i) investigating the non-linear

relationship between working capital management and corporate performance and (ii)
verifying the effects of moderation of financial constraints in relation to working capital

management and corporate performance.

The growing demand for knowledge integrated with external contexts, besides the

techniques developed by accounting instruments inherent in financial administration, offer the

manager the opportunity to become aware of other values and a strategic corporate vision. The

purpose of researches on working capital management is to obtain additional perspectives on

the importance of the financial aspect of decision making. In this manner, it is understood that

the managerial quality of having liquidity available stands out in relation to quantity, being

fundamental to the continuity of operations.

To sum up, the evidence presented in this study enables us to conclude that financial

constraints significantly influence a company’s performance and working capital management.

In addition, we may observe that the moderation exercised by financial constraints acts in a

variety of ways in different economic sectors, and we must keep in mind the peculiarities of

each activity and the factors related to the obtaining of liquidity to leverage a company. Issues

of fundamental importance to the continuity of corporate operations, in addition to thorough

analysis of the business cycle, are the implementation of strategic plans to avoid a lack of

resources and actions to mitigate the problems associated with asymmetry of information.
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 APPENDIX A
Variable Definition
Variables Description
Performance Variables
Tobin’s Q Market value of equity plus the book value of total liabilities divided by the book
value of total assets (Altaf and Shah, 2017; Bhatia and Srivastava, 2016). Source:
Eikon
EVA® Net operating profit after taxes (NOPAT) less invested capital multiplied by weighted
average cost of capital (WACC) (Assaf Neto, 2015). Source Eikon
ROA Ratio earnings before interest and taxes over operating assets (Bhatia and Srivastava,
2016). Source: Eikon
ROIC Net operating profit after taxes (NOPAT) scaled by invested capital (Lyngstadaas and
Berg, 2016). Source: Eikon
Instrumental Variables
L.TOBINQ Lagged Tobin’s Q variable (Altaf and Shah, 2017; Bhatia and Srivastava, 2016).
Source: Eikon
L.EVA® Lagged EVA® variable (Assaf Neto, 2015). Source: Eikon
L.ROA Lagged ROA variable (Bhatia and Srivastava, 2016). Source: Eikon
L.ROIC Lagged ROIC variable (Lyngstadaas and Berg, 2016). Source: Eikon.
Independent Variables
CCC Account receivables divided by sales total multiplied by 365 days plus inventory
divided by sales total multiplied by 365 days less account payables divided by sales
total multiplied by 365 days (Altaf and Shah, 2017; Bhatia and Srivastava, 2016;
Baños-Caballero et al., 2014). Source: Eikon
CCC 2 Cash conversion cycle squared (Altaf and Shah, 2017; Baños-Caballero et al., 2014).
Source: Eikon
Control Variables
SIZE Natural logarithm of sales (Bhatia and Srivastava, 2016; Baños-Caballero et al., 2014;
Deloof, 2003). Source: Eikon
LEV Total liabilities scaled by total assets (Altaf and Shah, 2017; Bhatia and Srivastava,
2016; Baños-Caballero et al., 2014; Deloof, 2003). Source: Eikon
GROWTH Current sales less prior period’s sales scaled by the prior period’s sales (Altaf and
Shah, 2017; Bhatia and Srivastava, 2016; Baños-Caballero et al., 2014; Deloof,
2003). Source: Eikon
TANG Subtraction of total liabilities, intangible assets and goodwill from total assets scaled
by total assets (Kirch et al., 2014). Source: Eikon
OCF Net income plus depreciation/amortization expenses plus changes in working capital
(Kirch et al., 2014; Almeida and Campello, 2007). Source: Eikon
ROA Ratio earnings before interest and taxes over operating assets (Bhatia and Srivastava,
2016; Baños-Caballero et al., 2014). Source: Eikon
ROIC Net operating profit after taxes (NOPAT) scaled by invested capital (Lyngstadaas e
Berg, 2016). Source: Eikon
EBITDA Ratio earnings before interest, taxes, depreciation and amortization over gross
revenues (Deloof, 2003). Source: Eikon
FC (0) not-financially constrained; (1) financially constrained (Kirch et al., 2014; Baños-
dummy Caballero et al., 2014; Hadlock and Pierce, 2010). Source: Eikon
Notes. Tobin’s Q, EVA (economic value added), ROA (return on assets) and ROIC (return on invested capital) are
dependent variables which represents performance; L.TOBINQ, L.EVA, L.ROA and L.ROIC are instrumental
variables represented by its lagged; CCC (cash conversion cycle) variable represents working capital management;
CCC2 (cash conversion cycle squared) variable represents working capital management; SIZE, LEV (leverage),
GROWTH, TANG (tangibility), OCF (operating cash flow), ROA (return on assets), ROIC (return on invested
capital), EBITDA (earnings before interest taxes, depreciation and amortization) are controls variables; FC
(financial constraints) = dummy. Source: own preparation from the database (2019).

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