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The current issue and full text archive of this journal is available at www.emeraldinsight.com/0307-4358.htm

MF 39,2

116
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

Nahum Biger
School of Business, Academic Center Carmel, Haifa, Israel
Abstract
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...
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