Received 17 June 2012 Revised 3 October 2012, 16 October 2012 Accepted 1 November 2012
The impact of corporate governance on working capital management efﬁciency of American manufacturing ﬁrms Amarjit S. Gill
The University of British Columbia (Okanagan Campus), Kelowna, Canada, and
School of Business, Academic Center Carmel, Haifa, Israel
Purpose – The purpose of this study is to investigate the impact of corporate governance on working capital management efﬁciency. This study also seeks to extend the ﬁndings of Gill and Shah. Design/methodology/approach – This study applied a co-relational research design. A sample was selected of 180 American manufacturing ﬁrms listed on the New York Stock Exchange (NYSE) for a period of 3 years (from 2009-2011). Findings – The ﬁndings of this study indicate that corporate governance plays some role in improving the efﬁciency of working capital management. Research limitations/implications – This is a co-relational study that investigated the association between corporate governance and working capital management efﬁciency. There is not necessarily a causal relationship between the two, although the paper provides some conjectures to the ﬁndings. The ﬁndings of this study may only be generalized to ﬁrms similar to those that were included in this research. Originality/value – This study contributes to the literature on the factors that improve the efﬁciency of working capital management, and in particular on the association between several features of corporate governance and the efﬁciency of working capital management. The ﬁndings may be useful for ﬁnancial managers, investors, ﬁnancial management consultants, and other stakeholders. Keywords Corporate governance, Working capital management, Board size, CEO duality, CEO tenure, Audit committee, Manufacturing industries, United States of America Paper type Research paper
Managerial Finance Vol. 39 No. 2, 2013 pp. 116-132 q Emerald Group Publishing Limited 0307-4358 DOI 10.1108/03074351311293981
1. Introduction Efﬁcient management of working capital is essential for most ﬁrms. The management of working capital, in the context of this study, refers to the management of current assets and of current liabilities. Working capital components include receivables, inventory, payables, and using cash efﬁciently for day-to-day operations. The optimization of working capital balances helps minimize working capital requirements, which in turn, increase ﬁrms’ free cash ﬂow (Ganesan, 2007). Inefﬁcient working capital management policy, induced by poor corporate governance, has a negative impact on shareholders’ wealth. Effective corporate governance serves as a check on the management of the ﬁrm’s resources.
Although accounts receivable, inventory, and accounts payable are important parts of working capital management, cash is one of the most vulnerable to wanton behavior by management (Isshaq et al., 2009). Cash holding are funds readily available for investment in physical assets and for distribution to investors. In the spirit Keynesian postulations of the demand for money, ﬁrms hold cash for precautionary, speculative, and transactional motives. Transaction motive refers to cash which is held for everyday transactions to pay for goods or services. Precautionary motive refers to cash held for safety reasons to protect the ﬁrm from for unforeseen ﬂuctuations. The speculation motive reﬂects ﬁrms’ desire to hold cash balance in order to take advantages of any bargain purchases that may arise (Besley and Brigham, 2005; Gill and Shah, 2012, p. 70). Kim et al. (2011) describe that both precautionary and transaction motives play important roles in explaining the determinants of cash holdings. Excessive cash in corporate accounts is not necessarily in favor of the ﬁrm. Unnecessary cash may...