The Effects Of The Great Recession On Corporate Working Capital Management Practices

Abstract

Working capital theory prescribes using the optimal amount of net working capital to maximize shareholder wealth. Evidence from multiple countries indicates a negative relationship between the cash conversion cycle or net working capital and firm profitability. However, severe economic conditions may force firms to change their inventory, accounts receivable, and/or accounts payable policies, causing the firms to use more/less net working capital. Taking a sample of non-financial S&P 500 firms, many of which are multinationals, this study finds significant changes in the cash conversion cycle in 2010 for some industries. Also, it appears firms in general held more net working capital in order to face new economic challenges.