The Empirical Research On Financial Constraints, Working Capital Management, And Corporate Performance

Liquidity management is the core of financial management, working capitalmanagement is the main content of liquidity management, researchers generally holdthe idea that working capital management affect corporate performance, but therehave no a recahed conclusion of there relationship, while the domestic research hasnot yet discussed the working capital investment from the perspective of the source offunding, which provides us a space for expansion and possible the research.According to the existing findings, this paper proposes a non-linear relationshipbetween working capital and corporate performance, and also analysis how thefinancing constraints affect the relationship. It propose recommendations in thepractice of working capital management in the end. Firstly, this paper introduces theresearch background, significance and content etc.. Secondly, it explains the conceptof financing constraints, working capital and corporate performance as well as theirrelationships. Listing the the current research status and comments. Thirdly, it designsthe research program including select sample, propose hypotheses and model basedon the theory. Finally, this paper conducts regression analysis and gets the conclusion,and proposes future research directions.The fndings in this paper is different from before, it provide strong support foran inverted U-shaped relation between investment in working capital and frmperformance, which implies the existence of an optimal level of investment inworking capital that balances costs and benefts and maximizes a frm’s value. It isbased on a sample of non-fnancial Chinese companies. Conclusions have specificreference to the practical business activities. If the working capital investment is lessthan optimal level, companies should develop a relaxed working capital managementpolicies, relax the credit terms appropriately, increase the accounts receivable andinventory to avoid the negative impact on corporate performance due to lossing sales or discounts resulting. If the working capital investment is higher than the optimallevel, companies should reduce the working capital investment, strict working capitalmanagement policies, tighten credit terms, reduce accounts receivable and inventoryto avoid the negative impact on corporate performance due to high financial costs.This paper also discusses the impact of financing constraints on the relationshipof capital and corporate performance. The ability of obtaining funds will impact theinvestment decisions of working capital. And the effect of financing constraints ismore obvious on working capital investment because of working capital has strongliquidity, requiring companies to financing fund in a very short period of time toguarantee the basic production operations and maintain a certain liquidity reserve.Financing constraints is prevalent in the capital market. It blocks the ability to obtainfunding avenues, this will directly affect the working capital which is very sensitivewith financing constraints. Different financing constraints may affect the relationshipbetween working capital and corporate performance. The paper analyzes whether theoptimal working capital level is sensitive to alternative measures of fnancialconstraints. The fndings show that this optimum is lower for frms more likely to befnancially constrained.