Working capital management and firm performance in China

Ting REN, Nan LIU, Hongyan YANG, Youzhi XIAO, Yijun HU

Research output: Journal PublicationsJournal Article (refereed)peer-review

31 Citations (Scopus)


The purpose of this paper is to examine the relationship between working capital management (WCM) and firm performance in the context of the Chinese economy. Specifically, it investigates the effects of ownership structures as an internal factor and of institutional environments (IE) as an external factor shaping this relationship.

The study applies two-way fixed effect regression models to a sample of Chinese listed manufacturing firms for the period of 2010 to 2017. WCM is measured by cash conversion cycles (CCC); profitability is measured by core profit ratios; ownership structures are classified based on state-owned enterprises (SOEs) and non-SOEs; and IEs are measured from dimensions of factor markets (FM) and legal systems (LS).

First, the results show a negative relationship between CCC and firm performance. Second, the negative relationship between CCC and profitability is significant for non-SOEs but not for SOEs. Third, both the FM and LS strengthen the negative association between CCC and profitability. Fourth, the moderating effect of FMs and LSs is evident for non-SOEs only. The results hold when using alternative measures of WCM and profitability and while controlling for additional variables.

The current study shows that while WCM has a significant effect on the profitability of Chinese firms, such an effect greatly depends on the ownership structures and IE involved. The results thus offer important implications in helping the Chinese government create better IEs and in allowing manufacturing firms to improve upon their WCM practices.
Original languageEnglish
Pages (from-to)546-562
Number of pages17
JournalAsian Review of Accounting
Issue number4
Early online dateNov 2019
Publication statusPublished - 2 Dec 2019


  • Cash conversion cycle
  • Institutional environment
  • Ownership
  • Profitability
  • Working capital management


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