Working capital management efficiency : evidence from OIC countries and non-OIC countries

Abstract

The study broadly aimed to examine the factors that affect the working capital management efficiency of firms belonging to OIC and Non-OIC countries. The study also examined whether a difference exists in the working capital management (WCM) efficiency of the firms belonging to OIC and Non-OIC countries. Also, the study examined the impact of various firm-level and macroeconomic variables of WCM efficiency in OIC and Non-OIC countries. Lastly, the study examined the differential impact of firm-level and macroeconomic determinants on the WCM efficiency in OIC and Non-OIC countries in recession and boom states of the economy. To achieve these objectives, the study adopted an exploratory and descriptive research design. The firm-level data for the study has been collected from the COMPUSTAT database and the data on macroeconomic variables has been collected from the World Bank development indicator database. For sampling a purposive sampling technique was adopted wherein the researcher would select the sample firms from the COMPUSTAT database belonging to OIC and Non-OIC countries. The final sample consists of firms belong to 18 OIC countries and 35 Non-OIC countries. The data for the study was collected for a period of 22 years (2000-2021). The study estimated the models by using econometric panel data methodology. The study made an investigative check for heteroscedasticity, autocorrelation, multicollinearity, and the presence of outliers and accordingly produced robust estimates. The study runs analysis on full-sample, OIC sample and Non-OIC sample to make best comparison. They found that WCM efficiency differs significantly between firms in OIC and Non-OIC countries, with OIC firms generally exhibiting lower efficiency. Firm-level factors such as profitability, firm size, tangibility, leverage, cash flow, sales growth and firm age, have significant impacts on working capital management (WCM) efficiency in both OIC and Non-OIC countries, but the magnitude and direction of these impacts often differ between the two groups. Macroeconomic factors, including money supply, stock market development, inflation, GDP growth and interest rates, also influence WCM efficiency, with their effects varying between OIC and Non-OIC countries. The impact of both firm-level and macroeconomic determinants on WCM efficiency differs during recession and boom periods, with these differences being more pronounced in OIC countries. It shows that Islamic financial principles in OIC countries appear to influence working capital management practices, often leading to more conservative approaches compared to Non-OIC countries. The study highlights key implications for financial managers, policymakers, and researchers. Financial managers in OIC countries need to align working capital strategies for better efficiency. Policymakers should consider these unique challenges when designing economic policies. For researchers, this opens new avenues to explore the intersection of cultural, religious, and economic factors in financial management.