Firm, Industry and Economic Determinants of Working Capital at Risk

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Purpose – The objective of this study is to examine the relative contribution of firm-level, industry-level and country level variables to working capital at risk. Working capital at risk is treated as the Value at Risk for a portfolio of firm’s current assets. As far as short-term liquidity is concerned, working capital at risk, being the maximum amount that a firm may lose at a certain confidence interval, must be the most important part that a firm’s management must focus on.

Design/methodology/approach – This study empirically examines the possible associations between wide range of variables and working capital at risk. The sample firms include 143 non-financial firms listed in Egypt stock Exchange. The data cover the years 2000-2014. The statistical tests include the fixed and random effects, testing for linearity versus non-linearity. The Least Squares Dummy Variables and discriminant analysis are utilized. The working capital at risk is classified into three levels: low, medium and high.

Findings – The general findings of the study show that cash conversion cycle and the leverage are the most significant determinants of working capital at risk. Both determinants have significant influence on the level of volatility of working capital throughout the three categories of working capital at risk.

Originality/value – This study offers a new approach that deals with working capital as a portfolio, rather than single ratios, that firm’s management must decrease its volatility (Value at Risk), therefore, short-term liquidity can be improved significantly. This approach can be considered a financial engineering in terms of monitoring and managing short-term liquidity exposure.