Working capital management, related party transactions and firm performance: evidence from india
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Ahmedabad University
Abstract
Corporate scams, related party transactions, and working capital management issues are all interrelated when it comes to firm performance. Keeping this context in the background, the purpose of the research study is to uncover the relationship between working capital management (WCM), related party transactions (RPTs) and their impact on firm performance (FP). Academia has extensively explored the topics in a silo, but to our knowledge, a connection between WCM, RPTs and their impact on FP has been an unexplored area. Large RPTs related to sales and purchase of raw materials pertain to the WCM of a company, and we believe that they should have a joint impact on FP. We gathered data of 306 non-financial Indian firms. The firms are part of the S&P BSE 500 list, and the study period is 10 years, from 2013 to 2022. We have used return on assets (ROA) representing the firm as our dependent variables. The independent variables used for empirical analysis are the cash conversion cycle (CCC), individual components of the CCC, various core and non-core RPTs like sales, purchases, assets and investments purchased and sold, guarantees given and taken, borrowings received and repaid, share capital issued, etc. We first regress the CCC cycle components individually
then, we observe a joint impact and then a moderating impact of any of the RPTs on the relationship between WCM and FP. An additional robustness check is also performed to determine which particular related party transactions have what impact on FP to build on the literature of efficient transaction theory or conflict of interest in the Indian context. The empirical results of the study show that inventory days and receivable days have a negative impact on FP, while payable days have a positive impact on FP. Together, the CCC has a negative relationship with FP. This implies that shortening the cycle will lead to better corporate profitability. There is a moderating impact of RPTs related to the core operations on WCM and FP but it is not strong. Additionally, the results of all RPTs prove that transactions related to sales, borrowings receivable and investment purchased have a positive and significant impact on FP, suggesting firms can continue to take benefits of such efficient transactions. At the same time, it needs to be vigilant for RPTs related to the amount received for selling assets, as they have a negative and significant impact on FP. Also, RPTs such as guarantee given, guarantee taken, 6 receivables, loans given, borrowings payable, and bad debts have a negative impact, demanding more scrutiny for such transactions while assets and raw material purchased, loans received, and investments sold to related parties have a positive and insignificant impact on FP. The study contributes to the literature by studying WCM, RPTs and FP in India.
then, we observe a joint impact and then a moderating impact of any of the RPTs on the relationship between WCM and FP. An additional robustness check is also performed to determine which particular related party transactions have what impact on FP to build on the literature of efficient transaction theory or conflict of interest in the Indian context. The empirical results of the study show that inventory days and receivable days have a negative impact on FP, while payable days have a positive impact on FP. Together, the CCC has a negative relationship with FP. This implies that shortening the cycle will lead to better corporate profitability. There is a moderating impact of RPTs related to the core operations on WCM and FP but it is not strong. Additionally, the results of all RPTs prove that transactions related to sales, borrowings receivable and investment purchased have a positive and significant impact on FP, suggesting firms can continue to take benefits of such efficient transactions. At the same time, it needs to be vigilant for RPTs related to the amount received for selling assets, as they have a negative and significant impact on FP. Also, RPTs such as guarantee given, guarantee taken, 6 receivables, loans given, borrowings payable, and bad debts have a negative impact, demanding more scrutiny for such transactions while assets and raw material purchased, loans received, and investments sold to related parties have a positive and insignificant impact on FP. The study contributes to the literature by studying WCM, RPTs and FP in India.