Pedro J. García-Teruel

Effects of Working Capital Management on SME Profitability

Purpose - The object of the research presented in this paper is to provide empirical evidence on the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms. Design/methodology/approach - The authors have collected a panel of 8,872 small to medium-sized enterprises (SMEs) covering the period 1996-2002. The authors tested the effects of working capital management on SME profitability using the panel data methodology. Findings - The results, which are robust to the presence of endogeneity, demonstrate that managers can create value by reducing their inventories and the number of days for which their accounts are outstanding. Moreover, shortening the cash conversion cycle also improves the firms profitability. Originality/value - This work contributes to the literature in two ways. First, no previous such evidence exists for the case of SMEs. Second, unlike previous studies, in the current work robust test have been conducted for the possible presence of endogeneity problems. The aim is to ensure that the relationships found in the analysis carried out are due to the effects of the cash conversion cycle on corporate profitability and not vice versa.

Working capital management in SMEs

This paper analyses the determinants of Cash Conversion Cycle (CCC) for small- and medium-sized firms. It has been found that these firms have a target CCC length to which they attempt to converge, and that they try to adjust to their target quickly. The results also show that it is longer for older firms and companies with greater cash flows. In contrast, firms with more growth opportunities, and firms with higher leverage, investment in fixed assets and return on assets have a more aggressive working capital policy.

On the Determinants of SME Cash Holdings: Evidence from Spain

This work analyses the factors that might explain the level of cash holdings in a sample of 860 small and medium-sized firms from Spain during the period 1996-2001. The empirical results show that firms have a target cash level to which they attempt to converge. The level of this target is higher for firms with more growth opportunities and larger cash flows. In contrast, the target level for cash holdings falls when the use of bank debt and the presence of substitutes for cash increase. Moreover, when the interest rates in the economy increase firms reduce their cash holding. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Determinants of trade credit: A comparative study of European SMEs

This article presents the analysis of the determinants of the trade credit granted and received by a panel of 47,197 SMEs in Europe over the period 1996—2002. Our results show a strong homogeneity in the factors determining trade credit in European countries. On the one hand, firms with greater capacity to obtain resources from the capital markets, and more cheaply, grant more trade credit to their customers. Moreover, the results appear to support the price discrimination theory. We also found that firms react by increasing the credit they grant in an attempt to stem falling sales. On the other hand, larger firms, with greater growth opportunities and greater investment in current assets, receive more finance from their suppliers. Where firms have alternative sources of finance they are less likely to resort to vendor financing (substitution effect).

CORPORATE CASH HOLDING AND FIRM VALUE

This study contrasts the effect of cash holding on firm value for a sample of US industrial firms during 2001–2007. The study tests empirically for the existence of an optimal cash level that maximizes firm value. Second, the study analyses whether or not deviations from the optimum cash level reduce firm value. The results show a concave relation between cash holding and firm value, verifying the existence of an optimum level of cash holding. Additionally consistent with the initial analysis, deviations above and below optimal cash holding decreases the firm value.

A Dynamic Approach to Accounts Receivable: A Study of Spanish SMEs

The main objective of this paper is to extend the literature on the granting of trade credit. The focus is to test whether the accounts receivable decisions follow a model of partial adjustment. To do that, we use a sample of 2,922 Spanish SMEs. Using a dynamic panel data model and employing the GMM method of estimation we control for unobservable heterogeneity and for potential endogeneity problems. The results reveal that firms have a target level of accounts receivable and take decisions in order to achieve that level. In addition, we find that sales growth (if positive), the size of the firms, their capacity to generate internal funds and get short term financing, and economic growth are important in determining trade credit granted by firms.

Accruals Quality and Debt Maturity Structure

In this paper we use panel data and GMM estimation to examine the effect of accounting quality on debt maturity structure in a bank-based financial system and show that, even after controlling for unobservable heterogeneity, endogeneity, variables reflecting operating volatility and the cost of debt, firms with poor accounting quality face a shorter debt term than firms with higher accounting quality. This association between accounting quality and debt maturity is consistent with accounting quality as a means of reducing information asymmetry problems and improving the monitoring of managers.

Accruals Quality and Corporate Cash Holdings

This Work Uses Panel Data For Firms Listed In The Spanish Stock Exchange Over The Period From 1995 To 2001 To Analyse The Effect Of Accounting Quality On Cash Holdings. The Results Show That Firms With Good Accruals Quality Hold Lower Cash Levels Than Firms With Poor Accruals Quality. This Finding Suggests That The Quality Of Accounting Information May Reduce The Negative Effects Of Information Asymmetries And Adverse Selection Costs, Allowing Firms To Reduce Their Level Of Corporate Cash Holdings. The Results Also Show That Cash Holdings Decrease When Firms Increase Their Use Of Bank Debt And In The Presence Of Cash Substitutes. In Contrast With This, Firms With Higher Cash Flow Hold Higher Levels Of Cash.

The speed of adjustment in working capital requirement

This paper analyzes the determinants of working capital requirement (WCR) and examines the speed with which firms adjust toward their target WCR. The findings indicate that firms adjust relatively quickly, which supports the hypothesis that current balance sheet items are easier to manipulate and could be changed quite easily, even in the short run. Moreover, we find that the speed of adjustment is not equal across all firms and varies according to their external finance constraints and their bargaining power. Firms with better access to external capital markets and greater bargaining power adjust faster due to their lower costs of adjustment.

Trade credit policy and firm value

This manuscript studies the shape of the relation between firm value and trade credit for a sample of Spanish listed firms in the period 2001 to 2007. Considering the trade�?off between benefits and costs of investing in trade credit, we estimate a non�?linear relationship between accounts receivable and firm value. As expected, the results obtained show a positive relation between firm value and trade credit at low levels of receivables and a negative one at high levels. To give robustness to the results, we analyse whether deviation from target accounts receivable level reduces firm value. Consistent with the previous analysis, we find that deviations from this level of receivables decrease firm value.