Does the efficiency of working capital management affect a firm’s financial distress? Evidence from UAE

Abstract

Purpose This study aims to explore the relative efficiency of the working capital management (WCM) for Emirati firms before and during the coronavirus crisis. Next, this study explores the potential impact of WCM on the likelihood of financial distress. Design/methodology/approach A data envelopment analysis (DEA) was applied to assess the relative efficiency of the WCM. This study uses the emerging market Z-score model to predict the likelihood of financial distress. The logistic regression was applied to investigate the impact of the efficiency of WCM on firms’ financial distress. Findings The results of this study model showed a negative and significant influence of the efficiency of WCM on firms’ financial distress likelihood. Practical implications The findings have important implications for many stakeholders, including decision makers, WC managers, financiers, investors, financial consultants, researchers and others, in increasing their awareness of firms’ WCM performance before and during the crisis. Further, the results could have implications for trading strategies as investors seek attractive economic gains from their investment in firms that care about WCM. Social implications The implications of WCM performance on social interests would cause firms’ decision makers to operate efficiently and achieve the best practices to minimise the probability of firms' financial distress. Originality/value This study advances a novel contribution to the literature by introducing a novel model to assess WCM based on DEA technology.