The Moderating Role of Financial Constraints on the Relationship between Working Capital Investment and Firm Performance in Nigeria

Akinidele Jamiu, Adeniyi (2023) The Moderating Role of Financial Constraints on the Relationship between Working Capital Investment and Firm Performance in Nigeria. PhD thesis, Universiti Malaysia Sarawak.

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Abstract

This investigation aims to examine the relationship between working capital investment (WCI) and a firm’s performance inclusive of financial constraints impact in the context of literature. Working capital management has recently involved remarkable investigation with proper attention, and has become an issue since the financial crisis of 2008. The recent problems in the management of WCI of Nigerian companies could be associated with is the inability of management to identify the optimal level of investment in WC presents in financially constrained firms and inefficient management of investment in working capital components. Managers do not take proper consideration of the firm operating cycle consequently resulting in lengthier debtors’ collection periods and shorter creditors’ payment periods. This investigation will turn out to be notable because listed companies encounter a lot of problems in acquiring external resources to finance their day-to-day businesses in the developing economy. The study sample includes 902 non-financial firms-years listed on the Nigerian Stock Exchange. The analysis method uses dynamic panel data (GMM). Based on the results, cash flow moderates the relationship between investment in working capital and performance while the cost of external financing and interest coverage do not have any moderating effect on performance. Managers with specialized skills and competency can support the organization working capital strategy and mitigate the asymmetric information and agency cost to reduce the effect of financial constraints thereby increasing firms’ performance. The practical implication for firms is to consider the proficiency of their managers when they intend to formulate a working capital strategy as an investment resource. Keywords: Working capital; optimal investment; financial constraints; cash flows; performance; firm’s value.

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