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Investigating the effect of working capital management on the performance of companies in the Tehran Stock Exchange

Number of pages: 130 File Format: word File Code: 30595
Year: 2013 University Degree: Master's degree Category: Management
Tags/Keywords: Claims collection period - Current debt payment period - Inventory turnover - Inventory turnover period - Liquidity cycle - operating cycle - profitability - Securities - stock exchange - Tehran Stock Exchange - Working capital - Working capital management
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  • Summary of Investigating the effect of working capital management on the performance of companies in the Tehran Stock Exchange

    Academic Thesis for Master's Degree in Business Administration, Financial Management Orientation

    Abstract

    Dissertation Title

    Investigating the Impact of Working Capital Management on the Performance of Companies in the Tehran Stock Exchange

         This research examines the relationship between working capital management and the performance of companies admitted to the Tehran Stock Exchange. For this purpose, there are 59 companies during the period of time. 1386-1390 was selected. In this research, we have studied the effect of various variables of working capital management, including receivables collection period, inventory circulation period, average debt payment period, liquidity cycle and operating cycle on company value and gross operating profit of companies. The size of the company and financial leverage have been used as control variables. The results of the current research, which examined the effect of working capital management on the performance of companies, show that due to the extremely weak significance between the liquidity cycle and its components, including the receivables collection period, the inventory turnover period, and the current debt payment period, there is a significant inverse relationship with the profitability of the companies, and company managers can increase their company's profitability by reducing the receivables collection period and the inventory turnover period.

    Key words: working capital management, profitability, receivables collection period, inventory turnover period, current debt payment period, liquidity cycle, operating cycle

    Introduction

          Capital is a vital and important element that plays a key role in establishing and creating economic activities as well as in their exploitation. If capital is not available, no economic activity can be established. After establishing the economic activities and preparing them for exploitation, if there is no necessary capital to circulate the operations, those initial investments will not have any results. Despite the important role of capital in the economy, the main point is the scarcity of capital. Another point is the continuous concern of capital providers (both those who give loans and those who accept ownership) about the principal of the capital and the income derived from it. Therefore, if a company wants to be responsible for the shortage of capital and also to be responsible for the capital suppliers. Must apply (proper capital management). That part of the capital that is used for establishment investments, after the initial decisions and the establishment of facilities and factories, the probability of their return is very low, or heavy costs must be accepted to change and transform the decisions. Therefore, it needs detailed measures and investigations and smart foresights. After providing basic and initial investments, another part of the capital should be used to support the company's operations (working capital). Any return on fixed capital is dependent on the operation of the established facilities, and this in turn is related to sufficient liquidity (working capital). For these reasons, the measures taken by companies to manage this part of capital, which is known as working capital management, has a special place in financial management (Talebi, 1377).

    Planning and control issues, especially in terms of liquidity, were gradually taken into account in financial management, and working capital management has become a specialized department of a business unit, and many managers spend all their energy and time on managing working capital. Any decision that is taken in this section by the managers of the business unit has significant effects on the operational efficiency of the business unit, which will change the value of the company and ultimately the wealth of the shareholders (Yaqub Nejad et al., 2009). The main goal of working capital management is to achieve the optimal balance between the working components of working capital management. 1-2 statement of the problem. Working capital is one of the necessities of the company's survival, in fact, the problem of liquidity is so important that if it is accompanied by weak management and a passive approach to the issue of liquidity, the company's financial life, i.e., the issue of survival and continuity of its activity, is seriously threatened (Mohammedzadeh and No Farsti, 2018). They consider the repayment of current debts.Therefore, the existence of a strong management in the field of working capital and controlling the amount of liquidity of the company seems very necessary (Nikomram et al., 1385:12).

    Working capital management, which is the management of current resources and expenses, is very important to maximize the wealth of shareholders as part of the duties of financial managers.

    In general, working capital is the company's investment in short-term assets such as cash, short-term securities, It refers to accounts receivable and merchandise inventories, and net working capital is current assets minus current liabilities (Mohammadi, 2008).

    The amount of current assets and liabilities should be constantly controlled to:

    ensure that the amount of items constituting working capital have reached the desired and desired levels.

    potential customers of the company are not lost. The company should not go bankrupt (Pi Novo, 2:24, 2018).

    The management of working capital is one of the most important issues of the management structure. The importance of this issue increases due to the following factors:

    Most Iranian companies prefer to convert cash into other assets due to the inflationary situation and the decrease in the purchasing power of money, and this causes the companies to suffer from a lack of liquidity when the debts are due and the credit of the organization is damaged. The main importance is working capital.

    Investors are looking for investments that have the highest return on shares, and in these cases, investors must be sure of the current situation, and this assurance is achieved with advice and planning to clarify the dark corners of the investment path (Hasanpour, 2018).

    Due to the lack of proper planning for the amount of working capital required, most companies have a surplus or deficit of working capital. For a company, the optimal amount of working capital that it must maintain in order to achieve the highest profitability is very important. If the working capital is kept in excess of the requirement; Then the company has invested too much in current assets and as a result there is a kind of lost opportunity cost. Also, if the company keeps less than the required amount of working capital, it may not be able to fulfill its obligations. Effective liquidity management includes planning and controlling current assets and liabilities in a way that eliminates the risk of not being able to meet short-term obligations and prevents additional investment in these assets (Ramachandran and Janakiraman, 2009). The result in the value of the company is of special importance. Because investing in working capital involves a trade-off between profitability and risk, and decisions that tend to increase profitability also lead to an increase in risk, and on the contrary, decisions that focus on reducing risk lead to a decrease in potential profitability (Fathi and Tawakoli, 2018).

    The investor determines his priority in investment according to the value of the company. Determining the value of the company is one of the important factors in the investment process.

    The question that we intend to answer in this research is whether there is a meaningful relationship between working capital management and the performance of companies listed on the Tehran Stock Exchange?

    1-3 The necessity of conducting research

    The increasing importance of working capital management has made this issue a specialized field of financial management. In very large companies, there are a number of expert executives who devote all their time and energy exclusively to managing the company's working capital. The reasons for the importance of this issue are as follows:

    Studies show that most of the financial management time is spent on the company's daily internal operations, operations that are simply included under the heading of working capital management. Because so much time is spent on working capital decisions, a thorough study of the subject during financial management courses seems appropriate.

  • Contents & References of Investigating the effect of working capital management on the performance of companies in the Tehran Stock Exchange

    Table of Contents

    Chapter One

    1-1 Introduction. 2

    1-2 statement of the problem. 3

    1-3 Necessity of doing research. 5

    1-4 research questions. 7

    1-5 research hypotheses. 7

    1-6 basic research objectives. 8

    1-7 research variables. 9

    1-7-1 dependent variable. 9

    1-7-2 independent variable. 10

    1-7-3 control variables. 12

    1-8 research territory. 12

    1-8-1 Subject area of ??research. 12

    1-8-2 spatial territory of research. 13

    1-8-3 Time domain of research. 13

    1-9 Definition of specialized words and terms. 13

    1-10 The general structure of the research. 16

     

     

    Chapter Two

    2-1 Introduction. 18

    2-2 Operational Definitions. 19

    2-3 working capital. 19

    2-3-1 working capital management. 20

    2-3-2 liquidity management. 21

    2-3-2-1 cash conversion cycle. 21

    2-4 Investment. 23

    2-4-1 Nature of investment. 23

    2-4-2 Investment opportunities (IOS). 23

    2-4-3 The nature of investment opportunities. 25

    2-4-4 Identification of investment opportunities. 25

    2-4-5 Measurement of investment opportunities. 26

    2-4-6 external factors affecting investment opportunities. 26

    2-4-6-1 uncertainty. 26

    2-4-6-2 global investment arena. 27

    2-4-6-3 investment portfolio formation strategy. 27

    2-4-6-4 Relationship of investment opportunities with leverage effect. 28

    2-4-6-5 investment opportunities and their impact on cost and profit. 29

    2-4-6-6 Executive process and use of investment opportunities. 30

    2-4-6-7 The process of creating investment opportunities (IOS). 30

    2-4-6-8 Evaluating cash flows and investment opportunities. 30

    2-4-6-9 Evaluation of investment opportunities. 31

    2-4-6-10 Approval of the implementation of accepted investment opportunities 32

    2-4-6-11 Monitoring and control of investment opportunities. 32

    2-5 concepts of performance and value. 33

    2-5-1 Definition of value. 33

    2-5-2 Company value. 33

    2-5-3 Different concepts of value. 34

    2-5-3-1 nominal value. 34

    2-5-3-2 book value. 34

    2-5-3-3 market value (day). 35

    2-5-3-4 value assuming the continuation of activity. 35

    2-5-3-5 value assuming liquidation of the company. 35

    2-5-3-6 intrinsic value (present value). 35

    2-5-4 performance measurement criteria. 35

    2-5-4-1 Accounting standards. 36

    2-5-4-1-1 criteria based on accounting information. 36

    2-5-4-1-1-1 accounting profit. 37

    2-5-4-1-1-2 Earnings per share (EPS). 37

    2-5-4-1-1-3 dividends. 37

    2-5-4-1-1-4 free cash flows (FCF). 38

    2-5-4-1-1-5 return on equity (ROE). 38

    2-5-4-1-1-6 return on assets (ROA). 38

    2-5-4-1-2 criteria based on accounting information and market information. 39

    2-5-4-1-2-1 price-earnings ratio (P/E). 39

    2-5-4-1-2-2 ratio of market value to book value of shares (MTB). 39

    2-5-4-1-2-3 Stock Return (RT). 40

    2-5-4-1-2-4 Tobin's Q ratio. 41

    2-5-4-2 Economic criteria. 42

    2-5-4-2-1 Economic value added (EVA). 42

    2-5-4-2-2 Market Value Added (MVA). 42

    2-5-4-2-3 Adjusted Economic Added Value (REVA). 44

    6-2 interest; Concepts, differences, theories. 44

    2-6-1 The concept of profit and its applications. 45

    2-6-1-1 The concept of profit from a structural point of view: 45

    2-6-1-2 The concept of profit from an interpretive point of view: 45

    2-6-1-3 The concept of profit from a behavioral point of view. 46

    2-6-2 Accounting profit and how to calculate it. 46

    2-6-3 Economic profit and how to calculate it. 47

    2-6-4 Comparison of economic profit and accounting profit. 49

    2-6-5-1 Profit concepts at different levels of theory. 53

    2-6-5-1-1 Concepts of profit at the level of structural theory. 53

    2-6-5-1-2 profit at the level of interpretive theory. 53

    2-6-5-1-3 Profit concepts at the level of behavioral theory (reflection). 54

    2-7 research background. 55

    2-7-1 Research conducted inside the country. 55

    Chapter Three

    3-1 Introduction. 62

    3-2 Statistical population. 62

    3-3 statistical sample. 63

    3-4 research area. 63

    3-4-1 Subject area of ??research. 63

    3-4-2 spatial territory of research.63

    3-4-3 temporal domain of research. 64

    3-5 type of research. 64

    3-5-1 type of research based on the objective. 64

    3-5-2 type of research based on method. 64

    3-6 Data collection and classification. 65

    3-7 research methods. 65

    3-8 research variables. 66

    3-8-1 independent variable. 66

    3-8-2 dependent variable. 67

    3-8-3 control variables. 68

    3-9 research hypotheses. 69

    3-10 issues to consider in model estimation. 70

    3-10-1 Normality. 70

    3-10-2 Variance heterogeneity. 71

    3-10-3 Autocorrelation. 72

    3-10-4 parallel. 72

    3-10-5 Mana of variables. 73

    3-11 methods of data analysis. 74

    3-12 Advantages of using panel data. 75

    3-13 Regression model estimation with panel data. 76

    3-13-1 How the AR sentence works. 77

    3-13-2 Choosing the right model in consolidated data. 78

    3-14 chapter summary. 81

    Chapter Four

    4-1 Introduction. 83

    4-2 Descriptive statistics. 83

    4-3 Test of normality of dependent variable and error sentence. 86

    4-4 The results of tests and estimates. 88

    4-4-1 Chow test or test of structural changes related to hypotheses. 90

    4-3-2 Hausman test related to the research hypothesis in case A. 92

    4-5 Maney test of research variables. 102

    4-6 chapter summary. 104

    Chapter Five

    5-1 Introduction. 106

    5-2 Assumptions and results of models review. 106

    5-3 research limitations. 109

    5-4 practical suggestions. 110

    5-5 Future Offers. 110

    List of Persian sources. 113

    List of English sources. 114

      

    List of Farsi sources

    Ismailpour, Hassan, (1381) International Marketing Management. Negah Danesh.

    Flatoni, Abbas, Nikbakht, Laili, (2008), Application of Econometrics in Accounting Research, Financial Accounting and Economic Sciences, Terme Publications. Financial Management, Semt Publishing. Bank accounting, preparation of financial statements. Central Bank of the Islamic Republic of Iran, Monetary and Banking Research Institute.

    Tehrani, Reza, Tabatabai, Seyed Jalal, (2006) "Investigation of the stability of the systematic risk index of companies listed on the Tehran Stock Exchange", Financial Research, Volume 9, Number 23.

    Jahankhani, Ali and Abdo Tabrizi, Hossein. (1373) "Efficient Capital Market Theory" Journal of Financial Research Number 1, University of Tehran. 

    Junior Charles. P. (2008). investment management; translation; Reza Tehrani, Noor Bakhsh Asgar.  Negah Danesh Publications, 5th edition.

    Hass Yeganeh, Yahya and Moradi, Mohammad, (2007). Examining the relationship between institutional investors and company value, Accounting and Auditing Reviews, 52, pp. 107 to 122.

    Delavar, Ali (2011). Research in psychology and educational sciences. Ed. Publications.

    Raee, Reza and Telangi, Ahmed (1387). Advanced investment management. Organization of studying and compiling humanities books of universities (Samt).

    Rood Pashti Guide, Fereydoun, Kiaei, Ali, (2007). Investigating the explanation of working capital management strategies in companies admitted to the Tehran Stock Exchange. Accounting Knowledge and Research Quarterly, No. 13.

    Rezazadeh, Javad, Heydarian, Jafar (2011). The effect of working capital management on the profitability of Iranian companies. Journal of Accounting Research.

    Saroukhani, Baqer, (2008), Research Methods in Social Sciences: Principles and Foundations, Research Institute of Humanities and Cultural Studies.

    Shabahang Reza(2008), Financial Management, Audit Organization Publications, Volumes 1 and 2.

    Fathi, Saeed, Tawakli, Seyed Yasin (2008). Investigating the relationship between working capital management and financial performance of economic enterprises, Journal of Business Studies, No. 36.

    Fadainejad, Mohammad Ismail (1383). Principles of capital budgeting, review of investment projects. Organization for the study and compilation of humanities books of universities (Samt).

    Fali, Maryam (2007), examining the relationship between corporate governance and company value, Master's thesis, Faculty of Management, University of Tehran.

    Namazi, Mohammad and Kermani Ehsan, (2007), the effect of ownership structure on the performance of companies listed on the Tehran Stock Exchange, Accounting and Auditing Reviews, 42, pp. 97-124.

Investigating the effect of working capital management on the performance of companies in the Tehran Stock Exchange
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