Effects of Working Capital Management on the Profitability of Portuguese Manufacturing Firms

Effects of working capital management on the profitability of Portuguese manufacturing firms

Sónia Silva* [e-mail] Florinda Silva** [e-mail] July 2012
Abstract
This study provides empirical evidence about the effects of working capital management on the profitability of Portuguese manufacturing firms. A database covering the period 1996-2006, collected from Portuguese Statistical Office, is analyzed under panel data methodology. In line with previous research, our empirical results show a negative linear relationship between profitability and net trade cycle. Moreover, a reduction in the average number of days of accounts receivable and in the average number of days of inventories leads to an increase in firms ' profitability. Also a decrease in the average number of days of accounts payable tends to increase profitability.
Additionally, this study contributes by testing a non-linear relation between profitability and working capital management in Portuguese firms. Our results suggest a non-linear relationship between these two variables, which indicates there is an optimum net trade cycle level that maximizes firms ' profitability.

Keywords Working capital management Profitability Net trade cycle Manufacturing
Firms
JEL Classifications

G30

G31

G32

G39

*Corresponding author
School of Economics and Management
University of Minho
Campus de Gualtar, 4710-057 Braga, Portugal
Tel: [phone]
Fax: + 351 253 601380
**NIPE - Economic Policies Research Unit
School of Economics and Management
University of Minho
Campus de Gualtar, 4710-057 Braga, Portugal
Tel: [phone]
Fax: + 351 253 601380

Effects of working capital management on the profitability of Portuguese manufacturing firms

Abstract
This study provides empirical evidence about the effects of working capital management on the profitability of Portuguese manufacturing firms. A database covering the period 1996-2006,

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