Financial constraints and speed of working capital adjustment

Abstract

PurposeThe study examines the existence of target level of working capital and the speed of adjustment toward the target for eight manufacturing sectors of Indian economy. In addition, this study examines the impact of financial constraints on the speed of adjustment.Design/methodology/approachThis study is based on secondary financial data of 1936 Indian manufacturing companies from eight sectors for a period of 18 years (2000–2018). This study employs two-step GMM techniques to arrive at results.FindingsResults of the study confirm that firms do have target working capital, but the speed of adjustment from the current level of working capital to the target working capital is slow, and the speed of adjustment varies across sub-sectors. Moreover, we found that firms that are likely to be less constrained adjust their working capital quickly compared to firms facing high financial constraints.Originality/valueThis study contributes to working capital management literature by examining the speed with which the firms move toward their target and also the impact of financial constraints on the speed of adjustment across eight manufacturing sectors of Indian economy. Further, the study examines the impact of financial constraints on the speed of adjustment.