IMPACT OF WORKING CAPITAL MANAGEMENT TO FIRM PROFITABILITY AND FIRM VALUE IN DIFFERENT BUSINESS CYCLE: AN EVIDENCE FROM INDONESIA

• Main Author: Mega Amelia, Theresia
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/40983
• Institution: Institut Teknologi Bandung

Business cycle is a natural phenomenon that occurs as long as the country’s economy is still growing. A huge shock in 2008 bring a significant decline on Indonesia economic growth. After making an expansion trend between 2010-2012, Indonesia facing a long recession in 2013-2016. During this business condition firm might have to change their corporate finance strategy. There are 3 main important areas relating to corporate finance which are working capital management, capital structure and payout policies to run the company’s business. During the recession, company might face financial constrain to the capital market thus change their external financing method to internal financing method which is working capital management. Working capital management efficiency can be measure from the cash conversion cycle. Cash conversion cycle includes inventory day, receivables day and payables day. Working capital management is aimed to increase firm’s profitability, however, there is always a trade-off between firm’s profitability and firm’s risks. Less working capital management can increase firm’s profitability, but also make the firm less liquid and the ultimate goal of the firm is increasing shareholders’ wealth, thus, this research is aimed to see the impact of working capital management to firm profitability and firm value in the different business cycle. Following the previous research, the proxy of firm’s profitability is ROA meanwhile firm’s value is measured by Tobin’s Q. Using panel regression from 2008 until 2018 with quarterly data of 146 manufacturing firms that listed in BEI, the result is obtained using fixed effect and Generalized Least Square method. The independent variables of working capital management are inventory days, receivable days, payable days, cash conversion cycle and cash reserves with dummy variable that included in this model is recession and expansion. By adding control variables on the model, the result is proceeded. During the expansion, working capital management have no significant effect to firm’s profitability, however during the recession, inventory days, receivables days, payable days, cash conversion cycle and cash reserves have negative significant effect. It can be concluded using aggressive working capital management increase firm profitability. In the other hand, working capital management have no significant effect to firm’s value, except cash reserves. Cash reserves during expansion have positive significant effect to firm value meaning that higher cash make the firms that have probability of high growth in the future, investor have willingness to invest. In contrary, during the recession, firm with higher value reduce inventory days and reduce cash reserves. On the recession firms reduce inventory and cash to reduce excess holding cash of having high inventory. This finding is aimed to help manager to make decision relating with working capital management in different business cycle, and enrich financial literature