Research On Determinants Of Working Capital And Its Impact On Valuation

Working capital management is one of the three key issues in corporate finance, and previous researches had focused mainly on the other two areas, which are long-term investment decisions and capital structure. The current global economic environment has underlined the increasing importance of short term capital management, which to some extent, equals to working capital management.This paper has done an in-depth research on the determinants of working capital management and at the same time, its impact on the corporate structure, with the intention to better explain why working capital is so critical in assessing a company's quality.In the theoretical analysis part, the paper will dig deep the essence and components of working capital, and present two brand new measures of working capital:Net Liquid Balance (NLB) and Working Capital Requirement (WCR), then try to figure out why these two measures are better compared to the original ones.As far as the empirical researches are concerned, the paper will use both NLB and WCR to study which factors have the greatest influence on Chinese companies' working capital management. Then, a valuation model will be built to exam how sensitive the a company's valuation respond to the working capital policy.The last part of the paper will analyze concretely and clearly the role that industrial factor plays in the working capital determinants. We will see some typical industrial chains and figure out how different the working capital policies are when you are in the different position of an industrial chain.Finally, conclusions concerning the working capital management will be given.