THE EFFECT OF WORKING CAPITAL PRACTICES ON RISK MANAGEMENT: EVIDENCE FROM JORDAN Faris Nasif ALShubiri, Amman Arab University for Graduate Studies

Transcription

1 GLOBAL JOURNAL OF BUSINESS RESEARCH VOLUME 5 NUMBER 0 THE EFFECT OF WORKING CAPITAL PRACTICES ON RISK MANAGEMENT: EVIDENCE FROM JORDAN Faris Nasif ALShubiri, Amman Arab Universy for Graduate Studies ABSTRACT Working capal does not receive a great deal of attention in financial decision making. Perhaps this is because involves investment and financing for the short term. Nevertheless, is an important component of firm financial management. This study investigates the relationship between aggressive/conservative working capal practices and profabily as well as risk. The sample includes 59 industrial firms and 4 banks listed on the Amman Stock Exchange for the period of -. The results indicate a negative relationship between profabily measures and working capal aggressiveness, investment and financing policy. Firms have negative returns if they follow an aggressive working capal policy. In general, there is no statistically significant relationship between the level of current assets and current liabilies on operating and financial risk in industrial firms. There is some statistically significant evidence to indicate a relationship between standard deviation of return on investments and working capal practices in banks. JEL: E44, G, G30, G3, G3 KEYWORDS: Banks, Degree of aggressiveness/conservativeness, Working Capal Practices, Profabily, Market Rate of Return, Tobin s q, Operating risk and Financial risk. INTRODUCTION C orporate finance basically deals wh three decisions: capal structure decisions, capal budgeting decisions, and working capal management decisions. Among these, working capal management is a very important component of corporate finance since affects the profabily and liquidy of a company. It deals wh current assets and current liabilies. Working capal management is recognized as an important concern of the financial manager for many reasons. For one thing, a typical manufacturing firm s current assets account for over half of s total assets. For a distribution company, they account for even more. The maintenance of excessive levels of current assets can easily result in a substandard return on a firm s investment. However, firms wh inadequate levels of current assets may incur shortages and have difficulties in smoothly maintaining day-to-day operations. Efficient working capal management involves planning and controlling current assets and current liabilies in a manner that eliminates the risk of inabily to meet short term obligations on one hand and avoids excessive investment in these assets on the other hand (Eljelly, ). The corporate finance lerature has tradionally focused on the study of long-term financial decisions, particularly investments, capal structure, dividends and company valuation decisions. However, shortterm assets and liabilies are important components of total assets and need to be carefully analyzed. Management of these short-term assets and liabilies warrants careful investigation since working capal management plays an important role for the firm s profabily, risk and value. The optimal level of working capal is determined to a large extent by the methods adopted for the management of current assets and liabilies. It requires continuous monoring to maintain proper level in various components of working capal. Working capal is current assets (cash, receivables, inventory, etc.) minus current liabilies (debt obligations due whin one year). Working capal may also be viewed as the amount of a business's 39

2 F. N. AlShubiri GJBR Vol. 5 No. 0 current assets provided (financed) by long-term debt and/or equy.net operating working capal relates to free cash flow and in turn market value of equy. A posive working capal requirement, or conservative working capal policy, indicates a need for addional capal which firms can finance internally, reducing free cash flow, or externally, generally via commercial paper or lines of cred. Thus, conservative working capal policy implies costs of eher lost opportunies or explic financing costs. A negative working capal gap means that the firm s net operating working capal provides financing for long-term assets, implying an aggressive strategy. The crucial part in managing working capal is maintaining liquidy in day-to-day operation to ensure s smooth running and meets s obligation (Eljelly, ). Yet, this is not a simple task since managers must make sure that the business operation is running in an efficient and profable manner. There is a possibily of a mismatch between current assets and current liabilies during this process. If this happens and firm s manager cannot manage properly then will affect firm s growth and profabily. This will further lead to financial distress and finally firms go bankrupt. Dilemma in working capal management is to achieve desired trade off between liquidy and profabily (Smh, 980; Raheman and Nasr, ). Referring to theory of risk and return, investment wh more risk will result to more return. Thus, firms wh high liquidy of working capal may have low risk then low profabily. Conversely, a firm that has low liquidy of working capal, facing high risk results to high profabily. The issue here is in managing working capal, firm must take into consideration all the ems in both accounts and try to balance the risk and return Shin and Soenen (998) and Deloof (003) show profabily and risk-adjusted returns are inversely related to the cash conversion cycle suggesting that aggressive working capal policy significantly improve firm performance. A firm may adopt an aggressive working capal management policy wh a low level of current assets as percentage of total assets or may also used for the financing decisions of the firm in the form of high level of current liabilies as percentage of total liabilies. Excessive levels of current assets may have a negative effect on the firm s profabily whereas a low level of current assets may lead to lower level of liquidy and stock outs resulting in difficulties in maintaining smooth operations (Van Horne and Wachowicz, ). This paper investigates the potential relationship of aggressive/conservative policies wh the accounting and market measures of profabily as well as the risk factor of 59 industrial companies and for 4 banks listed at Amman Stock Exchange for the period of -.The main objective of working capal management is to maintain an optimal balance between each of the working capal components. Business success heavily depends on the abily of financial executives to effectively manage receivables, inventory, and payables (Filbeck and Krueger, ). The purpose of this study is hopefully to contribute towards a crucial element in financial management which working capal management. It is almost untouched in Jordanian or very ltle research has been done in this area. Working capal management practices and s effects on risk management is focused in this study. Specific objectives are to examine the effect of working capal practices on risk management over a 5 years period, to establish a relationship between the two policies (investment and financing policy) of the industrial firms and banks. Firms can reduce their financing costs and/or increase the funds available for expansion projects by minimizing the amount of investment tied up in current assets. Most of the financial managers time and effort are allocated in bringing non-optimal levels of current assets and liabilies back toward optimal levels (Lamberson, 995). An optimal level of working capal would be the one in which a balance is achieved between risk and efficiency. The remainder of this paper is organized as follows. Section briefly discusses the relevant lerature.data selection, research methodology, and empirical models are described in Section 3.Section 4 provides analysis and interpretations of the empirical findings and section 5 concludes the paper. 40

3 GLOBAL JOURNAL OF BUSINESS RESEARCH VOLUME 5 NUMBER 0 LITERATURE REVIEW There are basically two theories of working capal, which includes the conservative approach, the aggressive approach and the moderate approach (Nwankwo, ). These theories are examined below wh their implications. The Conservative Approach: In this approach permanent capal is being used to finance all permanent assets requirements and also to meet some or all of the seasonal demands. In view of conservative approach to working capal management, a company will keep a large quanty of current assets in relations to the total assets of the company. The implication of this approach is that yields a lower expected profabily resulting in a lower risk. This type of policy will also increase the company s net working capal suation but the firm will be short of funds to be used in other productive sectors. This option means that the company s finance is going to be relatively high cost (that is sacrificing low cost finance) but low risk; this will make the company s prof to be low but does not run the risk of being faced wh liquidy problem as a result of whdrawal of s source of finance. The conservative method is where a company predominantly finance all s permanent current assets and most of s fluctuation current assets using long-term source of finance and is only a small proportion of s fluctuating current assets that is financed using short-term source of finance The Aggressive Approach: In this approach, the company finances all of s fixed assets wh long term capal but part of s permanent current assets wh short-term cred (Van Horne, 980). Under this policy, the company holds relatively small portion of s total assets in form of current assets. The implication of the aggressive approach is that yields higher profabily resulting in a higher risk and lower working capal. A company that uses more short-term source of finance and less long-term source of finance will incur less cost but wh a corresponding high risk. This has the effect of increasing s profabily but wh a potential risk of facing liquidy problem should such short-term source of finance be whdrawn or renewed on unfavorable terms The need for maintaining an adequate working capal can hardly be questioned. Just as circulation of blood is very necessary in the human body to maintain life, the flow of funds is very necessary to maintain business. If becomes weak, the business can hardly prosper and survive. Working capal starvation is generally creded as a major cause if not the major cause of small business failure in many developed and developing countries (Rafuse, 996). The success of a firm depends ultimately, on s abily to generate cash receipts in excess of disbursements. The cash flow problems of many small businesses are exacerbated by poor financial management and in particular the lack of planning cash requirements (Jarvis et al, 996). While the performance levels of small businesses have tradionally been attributed to general managerial factors such as manufacturing, marketing and operations, working capal management may have a consequent impact on small business survival and growth (Kargar and Blumenthal, 994). The management of working capal is important to the financial health of businesses of all sizes. A firm can be very profable, but if this is not translated into cash from operations whin the same operating cycle, the firm would need to borrow to support s continued working capal needs. Thus, the two objectives of profabily and liquidy must be synchronized and one should not impinge on the other for long. Investments in current assets are inevable to ensure delivery of goods or services to the ultimate customers and a proper management of same should give the desired impact on eher profabily or liquidy. The separation was made in order to cover all the possible operational risks and to concentrate on the most significant causes of the severy of loss met day by day. Thus the operational risk can be interpreted as a vulnerabily of the financial instution that can be reduced or eliminated through an increased control. The important increase of the operational risk is due to organizational, 4

4 F. N. AlShubiri GJBR Vol. 5 No. 0 infrastructure, business environment or improvement changes. These changes were materialized in: the development of the technology. Molina and Preve () show that, compared to firms in competive industries, firms in concentrated industries tighten cred policy to a greater extent when facing financial distress. Distressed firms have limed financial slack and cash generating abily, and the strain of financial distress may cause firms to reduce investment in operating working capal by collecting on receivables, tightening cred terms, liquidating existing inventory, and by stretching cred terms granted by suppliers. Molina and Preve (), show that financially distressed firms have significantly reduced levels of trade cred relative to their non-distressed counterparts. We expect the working capal requirement to correlate inversely wh financial distress. Afza and Nazir () the study found significant differences among their working capal investment and financing policies across different industries. Moreover, rank order correlation confirmed that these significant differences were remarkably stable over the period of six years of study. Finally, ordinary least regression analysis found a negative relationship between the profabily measures of firms and degree of aggressiveness of working capal investment and financing policies. In the Pakistani context, Rehman () He concluded that there is a strong negative relationship between above working capal ratios and profabily of firms. Furthermore, managers can create a posive value for the shareholders by reducing the cash conversion cycle up to an optimal level. Filbeck and Krueger () highlighted the importance of efficient working capal management by analyzing the working capal management policies of 3 non-financial industries in USA. According to their findings significant differences exist between industries in working capal practices over time. Moreover, these working capal practices, themselves, change significantly whin industries over time. Teruel and Solano () suggested that managers can create value by reducing their firm s number of day's accounts receivable and inventories. Similarly, shortening the cash conversion cycle also improves the firm s profabily. The recent work of Howorth and Westhead (003), suggest that small companies tend to focus on some areas of working capal management where they can expect to improve marginal returns. Later on, Deloof (003) analyzed a sample of large Belgian firms during the period and the results confirmed that Belgian firms can improve their profabily by reducing the number of days accounts receivable are outstanding and reducing inventories.. Sathyamoorthi (00) he observed that more emphasis is given to investment in fixed assets both in management area and research. However, effective management working capal has been receiving ltle attention and yielding more significant results. Weinraub and Visscher (998).The authors have concluded that the industries had distinctive and significantly different working capal management policies. Moreover, the relative nature of the working capal management policies exhibed remarkable stabily over the ten-year study period. The study also showed a high and significant negative correlation between industry asset and liabily policies and found that when relatively aggressive working capal asset policies are followed they are balanced by relatively conservative working capal financial policies Shin and Soenen (998) concluded that reducing the level of current assets to a reasonable extent increases firms profabily Pandey and Parera (997) they found that most companies in Sri Lanka have informal working capal policy and company size has an influence on the overall working capal policy (formal or informal) and approach (conservative, moderate or aggressive). Moreover, company profabily has an influence on the methods of working capal planning and control. Jose, (996) examined the relationship between aggressive working capal management and profabily of US firms using Cash Conversion Cycle (CCC) as a measure of working capal management where a shorter CCC represents the aggressiveness of working capal management. The results indicated a significant negative relationship between the cash conversion cycle and 4

5 GLOBAL JOURNAL OF BUSINESS RESEARCH VOLUME 5 NUMBER 0 profabily indicating that more aggressive working capal management is associated wh higher profabily. However, Lamberson (995) who studied how small firms respond to changes in economic activies by changing their working capal posions and level of current assets and liabilies. Current ratio, current assets to total assets ratio and inventory to total assets ratio were used as measure of working capal while index of annual average coincident economic indicator was used as a measure of economic activy. Contrary to the expectations, the study found that there is very small relationship between charges in economic condions and changes in working capal. Soenen (993) investigated the relationship between the net trade cycle as a measure of working capal and return on investment in U.S firms. The results of chi-square test indicated a negative relationship between the length of net trade cycle and return on assets. Furthermore, this inverse relationship between net trade cycle and return on assets was found different across industries depending on the type of industry. A significance relationship for about half of industries studied indicated that results might vary from industry to industry.carpenter & Johnson (983) provided empirical evidence that there is no linear relationship between the level of current assets and revenue systematic risk of US firms; however, some indications of a possible non-linear relationship were found which were not highly statistically significant. DATA AND METHODOLOGY This study will show the impact of working capal practices on industrial firms and banks on risk management. Since the study is based on financial data, the main source of data was financial statements, such as income statements, balance sheets, of listed 59 firms and 4 banks listed in Amman Stock Exchange for the period from to. The reason for restricting the number of sample was that the latest data for the study was available for these years. The study was used aggressive investment policy and aggressive investment policy as measuring variables of working capal management. Aggressive Investment Policy (AIP) results in minimal level of investment in current assets versus fixed assets. In contrast, a conservative investment policy places a greater proportion of capal in liquid assets wh the opportuny cost of lesser profabily. In order to measure the degree of aggressiveness, following ratio will be used AIP = Total Current Assets (TCA)/ Total Assets (TA) Where: a lower ratio means a relatively aggressive policy Aggressive Financing Policy (AFP) utilizes higher levels of current liabilies and less long-term debt. In contrast, a conservative financing policy uses more long-term debt and capal. The degree of aggressiveness of a financing policy adopted by a firm will be measured by: AFP = Total Current Liabilies (TCL)/ Total Assets (TA) Where: a higher ratio means a relatively aggressive policy. The impact of working capal policies on the profabily will be analyzed through frequently used profabily measures i.e. Return on Assets (ROA) and Return on Equy (ROE) as well as market measure and Tobin s q by running cross-sectional regressions. The regression models and hypotheses to be estimated are: ROA ) + ε () 43

6 F. N. AlShubiri GJBR Vol. 5 No. 0 H0-: There is no statistical significant effect between working capal policies and return on assets of Jordanian industrial companies and commercial banks. ROE ) + ε () H0-: There is no statistical significant effect between working capal policies and return on equy of Jordanian industrial companies and commercial banks. Tobin s q ) + ε (3) H0-3: There is no statistical significant effect between working capal policies and Tobin s (Q) of Jordanian industrial companies and commercial banks ROI ) + ε (4) H0-4: There is no statistical significant effect between working capal policies and return on investment of Jordanian industrial companies and commercial banks ROC ) + ε (5) H0-5: There is no statistical significant effect between working capal policies and return on capal of Jordanian industrial companies and commercial banks. Where: ROA ROE ROC ROI Tobin s q i TCA/TA TCL/TA α ε = Return on Assets of Firm / bank i for time period t = Return on Equy of Firm / bank i for time period t = Return on Assets of Firm / bank i for time period t = Return on Assets of Firm / bank i for time period t = Value of q of Firm / bank i for time period t = Total current assets to total assets ratio of firm / bank i for time period t = Total current liabilies to total assets ratio of firm / bank i for time period t = Intercept = Error term of the model The impact of the working capal assets management and financing polices on the relative risk will be measured by applying regression models for the risk of the company and s working capal management policies over the period of -. The regression equations and hypothesis are: H0: There is no statistical significant effect between working capal practices and risk management of Jordanian industrial companies and commercial banks ) + ε Sales i i (6) ) + ε ROA i i (7) ) + ε ROE i i (8) ) + ε ROC i i (9) 44

7 GLOBAL JOURNAL OF BUSINESS RESEARCH VOLUME 5 NUMBER 0 ROI i i ) + ε (0) q i i ) + ε () Where: i EMPIRICAL RESULTS = Standard Deviation representing risk of Firm i First I provide information about the regression analysis of working capal policies (aggressive and conservative policy) and ROA, ROE, Tobin s Q, ROI, ROC as dependent variables of industrial companies listed in Amman Stock Exchange. Metrics are reported over five periods from to (see Table ). This table indicates β - Coefficient, (R^), t-test values, F-values and significance of each policy. This table shows the regression estimates of the all previous equations discussions form -5. The results of regression model : ROA ) + ε have been reported in table, where the dependent variable return on assets having the same independent variable of working capal investment policy and working capal financing policy. TCA/TA and TCL/TA ratios have been regressed against ROA values and the six regression models indicating the impact of working capal policies on the profabily of industrial firms in Jordan. The model t-test, F-values and the SPSS statistics indicates overall best f of the model. The t-statistics of both TCA/TA and TCL/TA are statistically significant 3.7***,.433**,.860* and.700* indicate on investment policy and -.093** and -.9* on financing policy and F-values are 4.55***,5.553*** on significance at the, 5, and 0 percent levels respectively except for the year and. The posive coefficient of TCA/TA shows a negative relationship between the degree of investment policy aggressiveness and return on assets. As the TCA/TA increases, degree of aggressiveness decreases, and return on assets goes up. Therefore, there is negative relationship between the relative degree of aggressiveness of working capal investment policies and return on assets. The negative value of β coefficient for TCL/TA also points out the same negative relationship between the aggressiveness of working capal financing policy and return on assets. Higher the TCL/TA ratio, more aggressive the financing policy, that yields negative return on assets. The results of regression model : ROE ) + ε have been reported in Table, where the dependant variable is return on equy having the same independent variable of working capal investment policy and working capal financing policy. As the degree of aggressiveness of working capal policy tends to increase, the returns are likely to decrease. Though, the results are statistically highly impressive which is apparent from the high level of significance of b coefficients and t-values, however, they predict a negative relationship between the degree of aggressiveness of working capal policy and accounting measures of returns. The second part of table in each cell is the t- statistic of both TCA/TA and TCL/TA are statistically significant 3.6***,.99**,.078**,.590** and.09** indicate on investment policy and -.656** on financing policy and F-values are 6.55***, 5.463*** and 4.37** on significance at the, 5, and 0 percent levels respectively except for the year. To further validate the above-mentioned results, the impact of working capal investment and working capal financing policy has also been examined on the market returns. Tobin s q has been used as a measure of market returns and, for each year from to. A q value of greater than indicated the greater perceived value given by investor to the firm. 45

8 F. N. AlShubiri GJBR Vol. 5 No. 0 The results of equation 3: Tobin s q ) + ε have been presented in cell three of Table, which the highlighting that the market returns on Tobin s q are decreasing as the firms are following the aggressive investment policy by keeping low level of current assets in the firm. This similary in market and accounting returns confirms the notion that investors do not believe in the aggressive approach of working capal management, hence, they don t give any addional value to the firms in Amman Stock Exchange.However, there are some dissimilaries are found in the relationship of financing policy and Tobin s q. In the year, and the relationship between working capal financing policy and Tobin s q is posive, indicating that the higher the degree of aggressiveness of working capal financing policy, the greater the investor s value given to the firm. The cell three of table in each cell is the t- statistic.50* and.76 indicate on investment policy and F-values are 3.040**, on significance at the 5, and 0 percent levels respectively except for the years. and. The results of regression model 4 : ROI ) + ε have been reported in Table, where the dependant variable is return on investment having the same independent variable of working capal investment policy and working capal financing policy. As the degree of aggressiveness of working capal policy tends to increase, the returns are likely to decrease. Though, the results are statistically highly impressive which is apparent from the high level of significance of b coefficients and t-values, however, they predict a negative relationship between the degree of aggressiveness of working capal policy and accounting measures of returns. The cell fourth of table in fourth cell is the t- statistic.46**,.705*and.69*, indicate on investment policy and **,-3.334**,-.04* and -.50* on financing policy and F-values are ***, *,-.49**and -.54* on significance at the, 5, and 0 percent levels respectively. Finally, The results of regression model 5: ROC ) + ε have been reported in Table, where the dependant variable is return on capal having the same independent variable of working capal investment policy and working capal financing policy. As the degree of aggressiveness of working capal policy tends to increase, the returns are likely to decrease. The cell fifth of table in each cell is the t- statistic -3.4**,.67**, and -.58*, indicate on investment policy and -3.89**,--.4* and -.4* on financing policy and F-values are -.4***, ***and -4.05** on significance at the, 5, and 0 percent levels respectively except the year and. Second, Table provide information about the regression analysis of working capal policies ( aggressive and conservative policy ) and ROA, ROE, Tobin s Q, ROI, ROC as dependent variables of commercial banks listed in Amman Stock Exchange. Metrics are reported over five periods from to.this table indicates β - Coefficient, (R^), t-test values and F-values and significance of each policy. This table shows the regression estimates of the all previous equations discussions form -5. The results of regression model. TCA/TA and TCL/TA ratios have been regressed against ROA values and the six regression models indicating the impact of working capal policies on the profabily of commercial banks in Jordan. The model t-test and F-values and the SPSS statistics indicates overall best f of the model. The t-statistics of both TCA/TA and TCL/TA are statistically significant **, indicate on investment policy and -9.30***,-3.437*** and *** on financing policy and F-values are.888***,-40.9***and 5.863** on significance at the, 5, percent levels respectively except the year. 46

9 GLOBAL JOURNAL OF BUSINESS RESEARCH VOLUME 5 NUMBER 0 Table : Regression Analysis of Working Capal Policies and (ROA, ROE, Tobin s Q, ROI, ROC of Industrial Companies Listed in ASE) ROA ROE T-Q ROI ROC Year Investment Policy Financing Policy Investment Policy+ Financing Policy B- Coefficient ( R^) t- value( sig) B- Coefficient t- value( sig) B- Coefficient t- value( sig).307(.094).39(.34).98(.004).95(.0).0 (.048).85 (.043).69(.07).34(.34).65(.).80(.30).87 (.085).87(.035).069(.).095(.00) -.074(.009) -.4(.00).7 (.05).006 (.000).056 (.33).044 (.00).044 (.00).083(.007).0 (.049).068 (.5).07 (.000).034 (.) -.68 (.08) -.85 (.34 ).089 (.38) -.07 (.0).433**.860* * 3.7***.09**.590**.078**.99** ***. 50* *.0.46* *.69* * **.67** -.837* ( R^) -.67(.7) -.05(.005).6(.30).039(.007).060 (.004) (.4) -.33(.0) -.090(.00).06(.0).077(.00).099 (.00).009 (.000) -.04(.00).66(.003).64(.03) -.05(.00).006(.000).-.07 (.000) (.46).57 (.5).004(.000) (.00).044(.) (.000) (.003) -.06 (.).08 (.0) (.009 ) -.05 (.3) -.04 (.4) -.093** * -.656** ** -.04* ** -.50* * ** -.4* ( R^) (.336) (.067) (.048) (.040) (.049) (.037) (.369) (.35) (.07) (.080) (.036) (.036) (.009) (.03) (.036) ( ( (.000).3.46 (.09) (.3) (.00) (.0) (.550) (.5) (.003) (.3) (.045) (.068) (.8) (.3) 4.5*** *** 6.357*** 4.37**, *** ** * -.99** *** -.765** ** *** ***, ** and * indicate Significant at the, 5, 0 percent level respectively The result of regression model.the second cell of table is the t- statistic.79*, indicate on financing policy on significance at the 0 percent level the year, and no significant in other years of two policies. Tobin s q has been used as a measure of market returns and, for each year from to. A q value of greater than indicated the greater perceived value given by investor to the firm. The results of model 3 have been presented in cell three of Table, which the highlighting that the market returns on Tobin s q are decreasing as the firms are following the aggressive investment policy by keeping low level of current assets in the firm. This similary in market and accounting returns confirms the notion that investors do not believe in the aggressive approach of working capal management, hence, they don t give any addional value to the firms in Amman Stock Exchange However, the cell three of table in each cell is the t- statistic significant ***, indicate on investment policy and -5.0*** on financing policy and F-values are 6.56***and 5.488** on significance at the 5, 0 percent levels respectively except the year, and. The results of regression model 4 have been reported in Table, as the degree of aggressiveness of working capal policy tends to increase, the returns are likely to decrease. Though, the results are statistically highly impressive which is apparent from the high level of significance of β coefficients and t-values, however, they predict a negative relationship between the degree of aggressiveness of working capal policy and accounting measures of returns. The cell fourth of table is the t- statistic significant ***, -.43*** and -5.30*** indicate on investment policy and -6.67***,.34***and -.5 on financing policy and F-values are 7.86***, 8.036***, 8.300*** and 3.987*** on significance at 47

10 F. N. AlShubiri GJBR Vol. 5 No. 0 the, 5 percent levels respectively except the year. Finally, the results of regression model 5. The cell fifth of table is the t- statistic only at.804* at 0 percent level for year Table : Regression Analysis of Working Capal Policies (ROA, ROE, ROI, ROC of Commercial Banks Listed in ASE) ROA ROE T-Q ROI ROC Year Investment Policy Financing Policy Investment Policy+ Financing Policy B- Coefficient (R^).403(.6) -.7(.04).063(.004) -.090(.008) -.656(.430) -.06(.000).397(58).06(.00).0(.0) -.3(.07).65(.070).4(.03) -.09(.008).390(.5) -.705(.497).47(.74).5(.03).00(.000) -.7(.09).0(.000) -.905(.89) -.040(.00) -.957(.96) -.54(.9).44(.0).39(.53).365(.33).0(.04).89(.036).087(.007) t- value( sig) B- Coefficient ( R^) ** *** *** *** -5.30*** (.046) -.87(.683) -.40(.058) -.937(.878).704(.496) -.06(.004).459(.) -.089(.008).63(.069) -.49(.06).3(.03) -.037(.00) -.83(.678).43(.70).0(.04).85(.08).047(.00).006(.000) -.539(.90) -.55(.303).0(.00) -.875(.766) -.963(.97) -.095(.009).46(.3).35(.099) -.04(.000) -.07(.005).68(.08).6(.06) t- value( sig) *** *** *** * *** ** *** -.34*** * B- Coefficient ( R^) (.65) (684) (.5) (.88) (.56) (.004) (.63) (00) (.058) (.077) (.34) (.08) (.75) (.77) (.499) (.47) (.70) (.000) (.93) (.36) (.83) (.766) (.937) (.95) (.6) (.36) (.38) (047) (.039).058. (.09) t- value( sig) *** *** 5.863** *** ** *** 8.038*** 8.300*** 3.987*** ***, ** and * indicate Significant at the, 5, 0 percent level respectively Third, table 3 provide information about the regression analysis of working capal policies and risk (,,,,,,) of industrial companies listed in Amman Stock Exchange. Sales ROA ROE q ROI ROC Metrics are reported over five periods from to.this table indicates β - Coefficient, (R^), t-test values and F-values and significance of each policy. This table shows the regression estimates of the all previous equations discussions form 6-. The theory of Van-Horne and Wachowicz (), impact of working capal policies on risk of the firms have been investigated by the ordinary least square regressions for equations 6-. The risk is measured by the standard deviation of sales and different return measures as operating and financial risk respectively. The standard deviation has been estimated over the five years from to and then six regressions have been run for working capal investment and working capal financing policy and result are reported in Table 3. The posive β coefficients of,,, and Sales ROA, ROE ROI ROC indicate negative relationship between the risk measurements and the working capal Tobin s q investment policy. On the other hand, similar relationship has been found for the working capal financing policy. The increased variation in sales and profabily is attributed to increasing the level of current assets and decreasing the level of current liabilies in the firm. 48

11 GLOBAL JOURNAL OF BUSINESS RESEARCH VOLUME 5 NUMBER 0 The results of regression model 6 : Sales' i i ) + ε have been reported in Table 3, where the dependant variable is standard deviation of sales having the same independent variable of working capal investment policy and working capal financing policy and the results indicate no significant effect. The results of regression model 7 : ) + ε have been reported in ROA i i cell two at table 3, where the dependant variable is standard deviation of return on assets having the same independent variable of working capal investment policy and working capal financing policy and the results indicate t- statistic significant indicate on investment policy and 4.46*** on financing policy and F-values are 4.63**, and 3.9* on significance at the, 5,0 percent levels respectively except the year and. The results of regression model 8: ) + ε have been reported in ROE i i third cell at table 3, and the results indicate t- statistic significant *** indicate on investment policy and 3.65*** and.50** on financing policy and F-values are 6.88**, and 5.86*** on significance at the, 5 percent levels respectively except the year and and. The results of regression model 9 : ) + ε have been reported in q i i fourth cell at table 3, and the results indicate t- statistic significant -.99** indicate on financing policy and F-values are.948*, on significance at the 5,0 percent levels respectively only on total years.the results of regression model (0) : ) + ε have been reported in ROI i i fifth cell at table 3, and the results indicate t- statistic significant *** indicate on investment policy and F-values are 5.906***, on significance at the percent levels only on the year. The results of regression model (): ) + ε has been reported in sixth cell at ROC i i table 3, and the results indicate no significant effect. In general, there is no statistically significant relationship between the level of current assets and current liabilies and operating and financial risk of Amman industrial firms. Fourth, table 4 provide information about the regression analysis of working capal policies and risk (,,,,,,) of commercial banks listed in Amman Stock Exchange. Sales ROA ROE q ROI ROC Metrics are reported over five periods from to.this table indicates β - Coefficient, (R^), t-test values and F-values and significance of each policy. This table shows the regression estimates of the all previous equations discussions form 6-. The standard deviation has been estimated over the five years from to and then six regressions have been run for working capal investment and working capal financing policy and result are reported in Table 4. The posive β coefficients of,,, and indicate negative Sales ROA, ROE ROI ROC Tobin s q relationship between the risk measurements and the working capal investment policy. On the other hand, similar relationship has been found for the working capal financing policy. The increased variation in sales and profabily is attributed to increasing the level of current assets and decreasing the level of current liabilies in the firm. The results of regression model (6): Sales' i ) + ε has been reported in Table 4, and the results indicate no significant effect. The results of i regression model 7 : ) + ε have been reported in cell two at ROA i i table 4, where the dependant variable is standard deviation of return on assets having the same independent variable of working capal investment policy and working capal financing policy and the 49

12 F. N. AlShubiri GJBR Vol. 5 No. 0 results indicate t- statistic significant *** indicate on investment policy and -4.9*** on financing policy and F-values are 8.439***, on significance at the percent level only on year. Table 3: Regression Analysis of Working Capal Policies and Risk ( Sales, ROA, ROE, q, ROI, ROC,) of Industrial Companies Listed in ASE Sales ROA ROE q ROI ROC Year Investment Policy Financing Policy Investment Policy+ Financing Policy B- Coefficient ((R^) t- value( sig) B- Coefficient (R^) t- value( sig) B- Coefficient (R^) t- value( sig) -.043(.003).07(.004) -.09(.000) -.007(.000).040 (.00) -.06(.004) -.7(.00) -.47(.0) -.0(.0) -.047(.036) (.008) -.55(.04) -.54(.0) -.090(.003) -.65(.005) -.50(.003) -.60 (.06) -.76(.03) -.058(.0) -.044(.003).9(.078).07(.009).4(.046) -.085(.007).005(.000) -.07(.005) -.03 (.04).09(.008) -.45 (.7) -.093(.009).053(.003).06(.004) -.0(.044).076 (.006).040 (.00 ) -.003(.000) *** *** *** (.0) -.0(.03).05(.004) -.38(.00) -.08(.007) -.084(.007).509(.34) -.09(.098).006(.006).045(.0) -.9 (.04) -.3(.03).433(.336).74(.43).60(.).058(.3) -.5 (.03).-.093(.009) -.007(.00).055(.005) -.5(.056).034(.00).003 (.000) -.7(.06) (.006).-40(.00).096(.009) -.09(.008) -.8 (.04) -.005(.000).039(.00).078 (.006).057(.003).8 (.06) -.06(.004) -.048(.00) ***, ** and * indicate Significant at the, 5, 0 percent level respectively ** ***.50** ** (.007) (.06) (.00) (.0) (.0) (.009) (.098) (.0) (.05) (.007) (.06) (.03 ) (.376) (.0) (.060) (.039) (.036) (.034) (.004) (.006) (.068) (.005) (.053) (.00) (.0) (.0) (.056) (.08) (.74) (.009) (.003) (.008) (.05) (..07) (.008) (.00) (* ** 6.88*** *** * *** The results of regression model 8: ) + ε has been reported in ROE i i third cell at table 4, and the results indicate t- statistic significant.890* indicate on financing policy and F-values are 6.634**, on significance at the 5, 0 percent levels respectively only on years and.the results of regression model 9 : ) + ε have been q i i reported. in fourth cell at table 4, and the results indicate t- statistic significant -5.59*** indicate on financing policy and F-values are 4.66***and 5.768***, on significance at the percent level only on years and The results of regression model 0 : ) + ε ROI i i have been reported in fifth cell at table 4. 50

13 GLOBAL JOURNAL OF BUSINESS RESEARCH VOLUME 5 NUMBER 0 Table 4: Regression Analysis of Working Capal Policies and Risk (Standard Deviation of Sales ( Sales, ROA, ROE, q, ROI, ROC,) of Commercial Banks Listed in ASE Sales ROA ROE q ROI ROC Year Investment Policy Financing Policy Investment Policy+ Financing Policy B- Coefficient (R^)..33(.098).(.049).97(.039).3(.050).48(.0).9(.07).65(.070) -.(.05).07(.000) -.064(.004) -.75(.5) -.030(.00).7(.09) -.06(.955).039(.000) -.04(.0).54(.065).090(.008) -.0(.040).304(.09) -.709(.503).444(.98).06(.004) -.03(.00) -.36(.056).04(.000) -.903(.86) -.07(.000) -.966(.933) -.54(.93).057(.003).37(.38).35(.3).40(.057).70(.09).08(.007) t- value( sig) *** *** *** -5.33*** B- Coefficient (R^).55(.065).44(.059).9(.04).089(.008).38(.09).4(.00).56(.04) -.778(.605) -.45(.060) -.875(.765) -.67(.45) -.079(.006).479(.9).07(.000) -.35(.4) -.4(.050).44(.80) -.06(.00) -.835(.697).466(.7).076(.006).340(.6).049(.00).04(.000) -.56(.35) -.53(.74).03(.0) -.83(.693) -.948(.899) -.097(.009).49(.84).355(.) -0.40(.00) -.046(.00).87(.035).3(.07) t- value( sig) B- Coefficient ( R^) *** * *** ** -.7* *** -0.39*** (.7).86.3 (.093) (.067).0.08 (.056) (.0).00.5 (.09) (.073) (.605) (.06) (.767) (.56) (.006) (.63) (.00) (.9) (.059) (.547) (.08) (.7) (.70) (.5) (.303) (.006) (.00) (.93) (.36) (.88) (.693) (.936) (.95) (.6).36.8 (.6) (.5) (.060) (.037).05.8 (.00) t- value( sig) *** *** 5.683** ** *** ** ***.4*** *** 0.039*** ***, ** and * indicate Significant at the, 5, 0 percent level respectively The results indicate t- statistic significant -7.89***, -.937*** and -5.33*** indicate on investment policy and -5.05***and -0.39*** on financing policy. F-values are 6.53***,.4***, 80734*** and 0.039*** on significance at the percent levels only on the year. The results of regression model : ) + ε has been reported in sixth cell at table 4, and ROC i i the results indicate no significant effect. In general, there is some statistically significant relationship between the level of current assets and current liabilies and operating and financial risk of Jordanian commercial banks especially between standard deviation of return on investment as dependent variable and working capal policies CONCLUSION Working capal management is the management of the net of current assets and current liabilies wh the objective of reaching the right balance between profabily and liquidy. To discuss the different approaches to financing working capal, is important to identify that ordinarily, company may use 5

14 F. N. AlShubiri GJBR Vol. 5 No. 0 short-term sources of finance to finance s short-term activies, such as working capal activies and long-term source of finance for s capal investments in non-current assets The choice of which source of finance a company uses to finance s working capal and other activies depend on several factors such as: availabily of fund, the length of time such funds may be required for, the purpose for which the funds is required, the size of the company, the rate of interest but for the discussion of the financing of the working capal, the two main factors that needs to be considered are the risk of the finance used and the cost of finance; eher by financing working capal using short or long-term source of finance. The risk and cost factors are inversely related, in that if a company goes for a low risk source of finance, is related to a high cost source of finance and vice versa. Based on risk, short-term source of finance is assumed to be more risky than a long-term source of finance. In general, current assets are considered as one of the important component of total assets of a firm. A firm may be able to reduce the investment in fixed assets by renting or leasing plant and machinery, whereas, the same policy cannot be followed for the components of working capal. The high level of current assets may reduce the risk of liquidy associated wh the opportuny cost of funds that may have been invested in long-term assets. Efficient working capal is really a prerequise to growth and existence of corporate enterprises because dictates the level of production, inventory and sales This study investigated the relative relationship between the aggressive/conservative working capal policies for 59 industrial companies and 4 banks listed at Amman Stock Exchange for a period of -. The impact of aggressive/conservative working capal investment and financing policies has been examined through cross-sectional regression models between working capal policies and profabily as well as risk of the firms and banks. The result indicates a negative relationship between the profabily measures of firms and banks and degree of aggressiveness of working capal investment and financing policies. The firms yield negative returns if they follow an aggressive working capal policy. The results moreover, also confirmed the findings of Carpenter and Johnson (983) that there is no significant relationship between the aggressiveness\conservativeness of working capal policies of firms and their operating and financial risk, but there are some statistically significant relationship between the level of current assets and current liabilies and operating and financial risk of Jordanian commercial banks especially between standard deviation of return on investment as dependent variable and working capal policies. Moreover, theoretical discussion on risk and working capal management has also been tested on empirical basis in an emerging market of Jordan. Although the results of current study are in contradiction to some earlier studies on the issue, yet, this phenomenon may be attributed to the inconsistent and volatile economic condions of Jordan. When any company manages s working capal well, has every leverage opportuny to continue in business indefinely both in profabily and in liquidy. Based on this research work, the researcher has proffered the following recommendations: The financial manager should have knowledge of the sources of working capal funds as well as investment opportunies where idle funds may be temporarily invested. The current assets at all times should be sufficiently in excess of current liabilies to constute buffer for maturing obligations whin the ordinary operating cycle of a business. The management decisions concerning working capal should not be left to the financial manager alone. Other departmental heads should partake for optimaly to be attained easily. The decision on how to optimize and finance current assets should be highly considered wh care. Finally, the owners and investors should to be careful to analysis of accounting data of financial statements to gain access to the financial status of firms to try to make a proper assessment and improve the overall performance as well as risk of the firms 5

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16 F. N. AlShubiri GJBR Vol. 5 No. 0 Shin HH and L Soenen (998). "Efficiency of Working Capal and Corporate Profabily". Financial Practice and Education 8: Smh K (980). Profabily versus Liquidy Tradeoffs in Working Capal Management, in Readings on the Management of Working Capal. New York: St. Paul, West Publishing Company Soenen LA (993). Cash Conversion Cycle & Corporate Profabily. Journal of Cash Management 3(4): Sathamoorthi CR (00). The Management of Working Capal in Selected Co-operatives in Botswana. Finance India Dehli 6(3): Teruel PJG and PM Solan (). Effects of Working Capal Management on SME Profabily. Working Papers Series. Dept. Organización de Empresas y Finanzas, Facultad de Economía y Empresa, Universidad de Murcia, Campus Espinardo, Spain Van-Horne JC and JM Wachowicz (). "Fundamentals of Financial Management" ( th Edion). New York: Prentice Hall Publishers Van Hone (980). Financial Management (8th ed.) (p. 737). New York: Dryden Press Weinraub HJ and S Visscher (996). "Industry Practice Relating To Aggressive Conservative Working Capal Policies." Journal of Financial and Strategic Decision (): -8. ACKNOWLEDGMENT The author wish to thank the anonymous reviewers for their excellent comments, resulting in a significant improvement in the qualy of this paper. BIOGRAPHY Dr. Faris Nasif AL-Shubiri is an Assistant Professor of Finance at Amman Arab Universy for Graduate Studies, He can be contacted at: College of Business, Department of Finance and Banking, Amman- Jordan, P.O. box : Code : 3, fa_shub@yahoo.com, Tel NO: