Impact of Capital Investment on Working Capital Management

Transcription

1 Impact of Capal Investment on Working Capal Management Y. Vaicondam *a, M. A. Anuar b and S. Ramakrishnan c Department of Accounting and Finance, Faculty of Management, Universi Teknologi Malaysia, Skudai, Johor, Malaysia. *a [email protected], b [email protected], c [email protected] Abstract Working capal management is the mechanism to achieve balance between current assets and current liabilies for firm to meet the maturing obligations and fixed assets are properly serviced. This paper investigates the impact of capal investment on working capal management across Malaysian technology firms from 2007 to Proxies of working capal management are the net liquidy balance and working capal requirement, instead of the tradional financial ratios. Panel data analysis and robust regression techniques result of 115 observations shows capal investment impact net liquidy balance negatively. On the other hand, significant posive impact of capal investment on working capal requirement identified. This signifies that firms capal investment promote the working capal requirement to ascertain the firm s liquidy level and simultaneously creates value from liquid assets. Leverage is the strong substute for net liquidy balance capalization that increases the influence of financial expendure-net liquidy balance relationship. Hence, working capal management is dependent on capal investment in Malaysian technology firms, indicates that long-term investment decision does influence short-term financial management. Keywords: Capal Investment; Working Capal Management; Net Liquidy Balance; Working Capal Requirement. 1.0 INTRODUCTION Working capal management is the mechanism to achieve balance between firm s current assets and current liabilies to meet the maturing obligations and firm s fixed assets are properly serviced. Khan et al. [1] suggest that efficient working capal management is aimed by achieving optimal level of tradeoffs between liquidy and profabily of the firm. However, Ray [2] stated that achieving maximum profabily and liquidy simultaneously is complex. Financial officer faces difficulty to achieve both goals as long-term profabily comes wh a greater risk. The high level of capal investment reduces the firm s internal fund wh lower liquidy posion [3], which may eventually place the firm in unpredictable condion. Capal investment is the investment in fixed assets wh lengthy lifespans and measureable monetary value, which involves enormous firm s sources for longer term. In past two decades, working capal management areas have been studied extensively regardless of the financial constraint posion of firm and capal investment s decision. Past lerature assumed that cash flow and capal investment relation is fixed based on long-term financing policy of the firm, which determine the firm s future profabily [4] and financial structure [5]. The assumption offer ltle insight on working capal decision making process, where Liu [5]

2 recognized that working capal able to cover shortfalls in period between capal investment is made until the cash flow is generated from the investment. Capal investment is more widely seen as strategic investment decisions [6]. This study is motivated based on frequent and inefficient decision-making process on working capal components in anticipating shortfalls due to capal investment decision. This paper focused on the importance of capal investment on firm s growth, which is a magnude of small and growing economy like Asian countries [7]. Malaysian firms has tendency to maintain high liquidy for prof generation and take up longer period for the financial managers to monor the liquidy posion of the firm [8]. Thus, the inadequate cash flow management leads to financial distress as they unable to meet the short-term financial obligations [9]. Malaysia is generally considered as one of the most successful non-western nations. Moderately smooth economic transion from conventional to modern economic materialized in Malaysia [10]. Supported by Asian countries, which is increasingly begun to compete on knowledge and technology basis since 2005 [11]. Malaysia had shifted the investment focus more on high technology and capal-intensive industries on 2012 [12]. Therefor, knowledge on the impact and relation of capal investment and working capal management seems to be crucial for firms to achieve promising business growth whout fully depending on capal market. Study by Fazzari et al. [13] showed that financial aspects are affected by investment decision but varies according to the nature of firm. Appuhami [14] agreed wh Shulman and Cox [15] that the components of working capal depend on the nature of the business and industry. Liquidy of technology sector is crical since strongly relates to extensive capal investment in Malaysia s technology sector [16]. Even though technology firms are the major source of nation s innovation and development [17], firms do face financial constraint. Securing funds at lower cost especially the long-term fund is difficult and challenging for the technology sector to sustain continuous growth [18]. It is difficult to establish and forecast the monetary value of intellectual capal rather than the physical assets of the firm [17]. These weakening the opportuny to obtain funding wh collateral as technology firms have lower level of tangible asset. As the external financing is costly, technology firms strive for efficient working capal management to reduce their operating cost and this will release the fund tied up in working capal for further investment [19]. Failure to understand the components and factor influencing the working capal may direct the firm to financial distress. Few researches highlights the impact of capal investment on working capal management across industries in Thailand [14], Small Medium Enterprises (SMEs) in Tunisian [20], across industries in Iran [21], cement, sugar and energy industries in Pakistan [22], across firms in China [23], across manufacturing sector of Istanbul [4], and companies listed in China s stock market [5]. This study was undertaken to enhance the understanding of technology sector s capal investment in Malaysia as technology sector plays an important role in influencing economic development of a country [24]. Hence, the key contribution from findings may avoid inefficient capal investment that central issue for financially distress firm or overinvesting firms. Therefore, this paper draw closely to Malaysian technology sector and the focus is on the relationship and how capal investment impact the net liquidy balance and working capal requirement at firm level. The remaining of this paper is organized as follows. Section 2 reviews the relevant leratures; section 3 discusses the data and methodology; section 4 presents and discusses empirical results and section 5 concludes the findings. 2

3 2.0 LITERATURE REVIEWS Firm s decision on investment strategy is mainly to determine the future growth and profabily. Decisions made on long-term financing policy for capal investment may associate the short-term financial management decisions. On the other hand, capal investment may create a need for addional working capal e.g. increases in cash balance, trade cred and inventories [25]. However, the tradional financial ratios on measuring working capal management does not representing the firms ongoing concern [15]. Studies supported by Appuhumai [14], Bellouma [20], Raheman et al. [22] and Valipour et al. [21] showed that net liquidy balance and working capal requirement are the best indicators of working capal management efficiency. The inial investment outlay is expected to bring future benef from selection of investment process as per capal budgeting [26]. Capal expendure is the fund used by firm to upgrade or acquire the physical asset. Capal expendure expected to bring potential prof to the firm, to maintain or to increase the scope of business operation [5]. Generally, in cash flow statement, capal expendure is recorded as an investment [27] and most of the capal expendures involve a large cash outlay that affects the firm s future value [28]. The expanding fixed asset may influence the operating expendure [25] due to change in operation efficiency [29]. Appuhami [17] described that operating expendure has a posive significant impact on working capal management. The increases in operating expendure may lead to increases in the required capal and reduce the firm s liquidy level [30]. Similar to operating expendure, finance expendure is the cost associated wh capal expendure. Addional funding for capal expendure may incur addional financial cost to the firm [31]. An increase in financial expendure directly increases the working capal requirement as companies hold more current assets when they have commments to pay interest [14]. Hence, the capal investment conceptualization made largely based on capal expendure and related cost associated wh capal expendure i.e., operating expendure and financial expendure. The main objective of liquidy management is to stabilize firms solvency posion [32] and net liquidy balance is partly relevant to working capal management [20]. Net liquidy balance has relation wh cash that can be improved by managing the working capal management efficiently [22]. Likewise, a good collection of account receivables will lead to better net liquidy balance based on firms in cement, sugar and energy sectors [22]. Capal investment reduces the net liquidy balances and does reduce the level of liquid assets. Eventually, the firm s face internally generated fund insufficiency for long-term fixed investment. Moreover, Hill et al. [33] identified working capal requirement as the proxy of operating working capal in investigating the factors influencing net investment. They discovered that firms operation suation and financing capacy have significant affect on working capal requirement. The increase in operating expendure may lead to increase in required capal and reduction in liquidy level of the firm [30]. In addion, Biddle and Hilary [34] have seen capal investment as assets that may generate internal fund to the firm. Furthermore, the excess cash generated from capal investment is assumed would not all be returned to the investor but certain amount is retained in the firm as fund for future investment. Investment in long-term asset may affect the cost of funding where the external financing leads to better liquidy posion. As highlighted by Shin and Park [31] the opportuny to obtain external funding is high but expensive. Hence, to avoid 3

4 the higher financing cost, the firm may increase the fund availabily for capal investment by derogates the amount tied up in current asset [35]. Generally, the small firms in technology sector use a combination of personal equy and debt that often secured by the personal assets of the entrepreneur, which the large firms obtains external funding from the financial market. The growth opportuny of technology sector firms encourages more external sources of capal. As described by Coleman and Robb [17], securing funds for technology sector is challenging. Firms in technology sector involved wh great level of intangible asset where, funding constraints is much wider. Thus, internal fund is the most favorable as easily obtained and incur lower cost to the firm. However, the internally sourced capal investment impacts the working capal management. Working capal is intensively reversible liquidy compared to capal investment [36], and changing the level of investment is costly rather maintaining the stable level of investment path whin the same working capal. The authors have put forward that capal investment has a significant negative relationship wh net liquidy balance and working capal requirement e.g. [15] [20] [22]. Study carried out by Appuhami [14] on listed companies in Thailand stock exchange across sectors found significant relationship of operating cash flow wh working capal management. Listed firms in Thailand are modifying their working capal management policy based on many factors such as capal expendure, operating cash flow and sales growth. Nonetheless, the inefficient working capal management may direct to lower profabily. Investment reduces the level of working capal required as a dual impact of investment [14]. Capal investment play a role in working capal as prevailed over the liquidy dilemma of export SMEs in Tunisia by Bellouma [20]. He indicated that capal investment is the liquidy generator of future compared to expenses that lower the liquidy posion at present. In contrast, Valipour et al. [21] concluded that capal investment has no significant relationship wh growth opportunies e.g. working capal requirement and net liquidy balance. Interestingly, shows liquidy in Tehran stock exchange s firms is not determined by the capal investment. There are financing mismatch between short-term fund and lives of capal expendure, whereby this might be due to Iran s inflation condion that directs financial managers to concern on short-term profabily in isolation. 3.0 DATA AND METHODOLOGY This study considers Shulman and Cox [15] working capal management efficiency measurement by using net liquidy balance and working capal requirement as proxy of dependent variable. The study employed capal expendure, operating expendure and finance expendure as dimensions of capal investment as independent variable, which were used to test the hypothesis. The investigation is based on the secondary data for the period of 5 years from 2007 until 2011, comprise of technology firms listed in the Main Board of Bursa Malaysia. The data iniated from , comprises 9 th Malaysia Plan duration that emphasized on technology sector. Under 9 th Malaysia Plan the government provided funding allocation of RM5.3 billion for science, technology and innovation iniatives whereby 68% of the funding allocations are for R&D, technology acquision and commercialization of research. Besides, RM200 million was provided to industrial training instutes and advanced technology-training centre [37]. 4

5 Table 1: Model Specification Model I II III IV NLB NLB WCR WCR Equation = α 0 + β 1 CI + β GRW + β LVR + β OCAF + ε = α 0 + β 1 CPEX + β 2 OPEX + β 3 FIEX + β GRW + β LVR + β OCAF + ε = α 0 + β CI + β GRW + β LVR + β OCAF + ε = α 0 + β 1 CPEX + β 2 OPEX + β 3 FIEX + β GRW + β LVR + β OCAF + ε NLB : Net liquidy balance WCR : Working capal requirement CI : Capal investment CPEX : Capal expendure OPEX : Operating expendure FIEX : Finance expendure GRW : Growth LVR : Leverage OCAF : Operating Cash Flow α 0 : Intercept of equation β i : Coefficients of independent and control variables t : Time of 1, 2, 3, 4, 5 years. i : Number of 1, 2,, 23 firms ε : Error term The model specifications based on Table 1 are the four regressions generated for analysis based on the liquidy-profabily tradeoff theory [38]. The theory urges that profabily maximization will lead to minimum level of liquidy and vice versa. The first set of study is to identify the impact of independent variables on net liquidy balance, which is explained by model I and II. Bellouma [20] indicates capal investment does affect the net liquidy balance significantly. In contrast, Valipour et al. [21] found capal investment has no significant impact on net liquidy balance and working capal requirement. Considering the previous lerature, the following four hypotheses has been developed: H 1 : H 2 : H 3 : H 4 : Capal investment has significant negative impact on net liquidy balance. Capal expendure has significant negative impact on net liquidy balance. Operating expendure has significant negative impact on net liquidy balance. Finance expendure has significant negative impact on net liquidy balance. Second set of study is to identify the impact of independent variables on working capal requirement, which is explained by model III and IV. Capal investment affects working capal requirement negatively as per findings of Bellouma [20] and Raheman et al. [22]. Ding et al. [23] added that, the efficient working capal management might relieve the firm s 5

6 financial constraint for fixed investment, thus the hypothesis will test whether the working capal requirement is increased to facilate the capal investment. Considering the previous lerature, the following four hypotheses has been developed: H 5 : H 6 : H 7 : H 8 : Capal investment has significant posive impact on working capal requirement. Capal expendure has significant posive impact on working capal requirement. Operating expendure has significant posive impact on working capal requirement. Finance expendure has significant posive impact on working capal requirement. Prior to regression analysis, the diagnostic test was conducted on raw data set based on the Ordinary Least Square (OLS) assumptions i.e., lineary, normaly, multicollineary and homoscedasticy. The lineary test performed shows that all the points are not randomly dispersed. The plots suggest a pattern in the data analyzed which, indicating that variables have a linear relationship. The degree of unevenness for distribution and kurtosis of independent variables and control variables indicates abnormal distribution. Thus, the data are transformed to normal distribution by operating square root and natural log function. The plots presented as per Figure 1, 2, 3 and 4 in appendix referring to the lineary and normal distribution of variables. Based on multicollineary test, the entire models fulfilled the basic assumptions of multicollineary wh mean variance inflation factor of less than 10. Subsequently, the homoscedasticy test for models I, II and III rejects the H 0 hypothesis wh variance of the residuals is irregular as per Breusch-Pagan s test. 4.0 FINDING AND DISCUSSION 4.1 Descriptive and Correlation Analysis Table 2 illustrates the 5 years observations, wh highest mean score of for capal investment. The variation of capal investment from the mean of shows the large variation that was mainly due to the difference across the size of firms in technology sector. The variation from the mean of capal expendure, operating expendure and finance expendure were , and Capal expendure and finance expendure was highly dispersed and this is probably due to different firm size across technology sector in Malaysia. It appeared that, the working capal management carries average mean score of and standard deviation Net liquidy balance has lower mean score of compared to the working capal requirement wh the mean score of This highlights that technology firms maintained lower cash or near cash ems compared to all other current assets. 6

7 VARIABLE N MEAN MEDIAN Table 2: Descriptive Analysis STANDARD DEVIATION MINIMUM MAXIMUM WCM NLB WCR CI CPEX OPEX FIEX GRW LVR OCAF WCM= Working capal management, NLB =Net liquidy balance, WCR=Working capal requirement, CI=Capal investment, CPEX=Capal expendure, OPEX=Operating expendure, FIEX=Financial expendure, GRW=Growth, LVR=Leverage and OCAF=Operating cash flow. To achieve the first objective of this paper, Table 3 demonstrates the relationship between variables. The correlation analysis indicates that all the variables have linear relationship. Capal investment and capal expendure has moderate negative significant relationship wh working capal management at 5% significance level. Capal investment has significant relationship wh all the variables except growth, which indicates that capal investment is not a determinant of firms growth. Correlation analysis suggest that capal investment is significantly and negatively related to net liquidy balance and significant posive relation wh working capal requirement. Table 3: Correlation Matrix VARIABLE CI WCM NLB WCR CPEX OPEX FIEX GRW LVR OCAF CI WCM ** NLB *** *** WCR *** *** CPEX *** ** *** *** OPEX *** *** * *** FIEX *** *** * *** GRW *** LVR *** * *** * *** *** OCAF *** *** *** *** *** * ***is significant at p<0.01 **is significant at p<0.05 and *is significant at p<0.10. Number of observation (N) =115, WCM= Working capal management, NLB=Net liquidy balance, WCR=Working capal requirement, CI=Capal investment, CPEX=Capal expendure, OPEX=Operating expendure, FIEX=Financial expendure, GRW=Growth, LVR=Leverage and OCAF=Operating cash flow. 7

8 4.2 Regression Model I and Model III Table 4 demonstrates the impact of capal investment on working capal measurement, which was tested by hypothesis H 1 and H 5. The findings show diverse results across pooled OLS, firm-fixed impact and time-fixed effect. Based on pooled OLS and firm fixed effect, the findings highlight a significant negative impact of capal investment on net liquidy balance and therefore the H 1 hypothesis is not rejected. This finding supports previous research by Shulman and Cox [15], Bellouma [20] and Raheman et al. [22], which demonstrates negative impact of capal investment on net liquidy balance. Technology firms in Malaysia tend to manage net liquidy balance efficiently when they tend to invest in capal investment as whole. However, dissimilary noted Appuhami [14] as capal investment impact net liquidy balance posively. Nevertheless in time (year) fixed analysis, the capal investment affects net liquidy balance posively on year three and year four i.e., on year 2009 and year 2010 respectively. This is partially due to capal-intensive projects approval [39] and encouragement through capal investment tax incentive for technology firms on year 2009 and The tax incentive may contribute to greater cash balance in firms, compared to other years of study. The study performed on SMEs in Tunisia wh significant posive impact of capal investment on net liquidy balance is consistent wh result derived by time fixed effect in Malaysia. This indicates, technology firms regard capal investment as liquidy generator rather than high cash outflow activy since firms may avoid costly capal investment that will lead to financial constraint to firms. Demonstrated by Minton and Schrand [40], if the firm facing liquidy shortage the firm rather permanently forgoes that particular capal investment. Based on the regression model III (refer Table 4), the findings highlight the impact of capal investment on working capal requirement. According to pooled OLS, the capal investment is posively affects the working capal requirement at 5% significance level and thus fails to reject H 5. This finding is reinforced the findings of Ding et al. [23] where the increase in capal investment increases the working capal requirement whin the firm. The growth is also illustrating the significant impact on working capal requirement at significant level of 10%. However, the firm-fixed effect and time-fixed effect shows insignificant results. This study confirms that technology firms that listed on Bursa Malaysia dependent on stable working capal and is consistent wh Zainudin [41] who argues that large firms in Malaysia have high liquidy level to satisfy the working capal requirement. However, this result is contradictory wh Fazzari and Petersen [42] and Bellouma [20] who found that increased in fixed investment reduces working capal requirement. 8

9 Table 4: Regression Model I and III WCM Net Liquidy Balance Working Capal Requirement Variable OLS OLS-Fixed effect across firm OLS-Fixed effect across time Ordinary Least OLS-Fixed effect Square across firm OLS-Fixed effect across time P -VALUE (Coefficient) CI 0.042**(-0.729) 0.001**(-3.572) 0.012**(3.485) 0.000**(0.803) (0.021) (-0.284) GRW (0.029) (-0.090) (-0.135) 0.095* (-0.299) (-0.169) (-0.135) LVR (-0.177) (-0.534) (-0.556) (0.226) (0.260) (0.325) OCAF (-0.148) (0.0517) (0.013) (0.041) (0.039) (0.034) YEAR (0.644) (-0.157) YEAR **(0.601) (-0.131) YEAR **(0.832) (0.135) YEAR (0.416) (0.035) MODEL I MODEL III Number of observation (N) =115, CI=Capal Investment GRW=Growth, LVR=Leverage, OCAF=Operating cash flow, WCM=Working capal management. **are significant at p<0.05 and *are significant at p< Regression Model II and Model IV Result presented in Table 5 highlights that capal expendure and operating expendure is statistically insignificant on net liquidy balance equally rejecting the H 2 and H 3. Thus, the unintended cost to acquire capal investment does not influence the net liquidy balance of technology firm in Malaysia. The posive impact of financial expendure estimated to influence the net liquidy balance level which to migate the risk of inabily to meet shortterm obligations [33]. The time-fixed effect across time also support the existing findings and shows significant impact of expendures on net liquidy balance. Despe, significant posive impact of finance expendure and negative impact of leverage on net liquidy balance constructed based on all three sets of regression. This denoting that leverage provide alternative for net liquidy balance capalization that evidenced by financial expendure. Based on Table 5, the pooled OLS analysis shows that the capal expendure established a posive significant impact on working capal requirement. Thus, the study does not reject the H 6 hypothesis and this result is contradicting wh Celik and Boyagioglu [4]. This indicates technology firms in Malaysia likely to increase the ROI and simultaneously creates value from other current asset ems. This practices probably to generate ROI whout posioning the firm in difficult condion in running day-to-day operation. In addion, different results were observed across firm-fixed effect and time-fixed effect. Leverage has significant posive impact on working capal requirement demonstrated by firm-fixed effect and time-fixed effect. This result is consistent wh Booth et al. [43] who found firms in developing countries have the tendency to obtain short-term debt compared to long-term debt to achieve the working capal requirement. However, Hill et al. [33] discovered the oppose result. Their study shows firms operation activy and financing activy have significant impact on working capal requirement. Inspection of Valipour et al. [21] in Iran partially supporting findings of Hill et al. [33] indicated posive significant impact of finance expendure on working capal requirement across firms Iran. 9

10 Table 5: Regression Model II and IV WCM Net Liquidy Balance Working Capal Requirement Variable OLS OLS-Fixed effect OLS-Fixed effect across firm across time OLS OLS-Fixed effect across firm OLS-Fixed effect across time P -VALUE (Coefficient) CPEX (-0.042) (0.328) (0.929) 0.003** (0.843) (-0.422) (-0.284) OPEX (0.305) (1.358) (1.133) (-0.102) (0.661) (0.489) FIEX 0.016** (1.173) 0.016**(1.433) 0.006** (1.496) (-0.306) (-0.452) (-0.505) GRW (-0.123) (0.167) (0.095) (-0.206) (-0.181) (-0.153) LVR 0.042** (-0.963) 0.011**(-1.179) 0.000**(-1.463) (0.411) 0.079* (0.602) 0.024** (0.816) OCAF (-0.134) (-0.009) (-0.060) (0.037) (0.053) (0.057) YEAR * (0.706) (-0.149) YEAR ** (0.570) (-0.125) YEAR ** (0.884) (0.093) YEAR (0.142) (0.277) MODEL II MODEL IV Number of observation (N) =115, CI=Capal investment, CPEX=Capal expendure, OPEX=Operating expendure, FIEX= Finance expendure, GRW=Growth, LVR =Leverage, OCAF=Operating cash flow, WCM=Working capal management. **are significant at p<0.05*are significant at p< CONCLUSION This study contributes to the lerature of working capal management wh mixed findings and empirical evidence of the emerging economy, i.e. Malaysia. Essentially, study extends the paper of Bellouma [20] that highlights the impact of capal investment on working capal management. It adds new aspects to the existing research of capal investment decision during financial constraint. This study urged that capal investment could be financed by adjustments in management of working capal requirement. Furthermore, study also fills the gap of empirical evidence in technology firms in Malaysia and may facilate the improvement of the policy implementation in developing country. Thus, may accelerate firms to experience R&D activy and lead to mass production that eventually contributes to economy growth. In addion, this study enlightens the financial officer s burden; the sound liquidy management may avoid corporate insolvency. The net liquidy balance and working capal requirement shows different reaction towards capal investment implementation in the technology firms. Capal investment has significant negative impact on net liquidy balance and posive impact on working capal requirement. The financially constraint firms may dependent on the less liquid resources to employ capal investment and may lead to higher net liquidy balance in the firm. Thus, the presented findings demonstrated how each cost associated wh capal expendure, influence the net liquidy balance and working capal requirement. Limed data reported in this study, as only 68% (23 firms) technology firm have balanced dataset from year Future studies may focus on conducting the same study in sectorial basis to provide understanding for practioners to recognize specific behavior of each sector in operating their working capal. 10

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14 Appendix Figure 1: Normaly and Lineary of Regression Model I Figure 2: Normaly and Lineary of Regression Model II Figure 3: Normaly and Lineary of Regression Model III Figure 4: Normaly and Lineary of Regression Model IV 14