WORKING CAPITAL MANAGEMENT AND ITS IMPACT ON FIRM VALUE AND PERFORMANCE : EVIDENCE FROM PUBLIC LISTED INFRASTRUCTURE RELATED COMPANY IN INDONESIA

• Main Author: Fajri, Salman
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/53358
• Institution: Institut Teknologi Bandung

Indonesian's economic growth has shown positive growth since the last decade, making Indonesian's company experience a relatively same magnitude of growth. The strong and steady economic growth is also supported by foreign and domestic direct investment in the infrastructure-related project. Those projects require substantial financing support from the firm's internal financial capability and other significant portions from an external resource. Short-term financial planning positively affects the market value, which does not mean that working capital management does not have consequences. Higher working capital makes a firm face additional financing expenses, increasing their probability of default (failed to repay the obligation). The level of working capital influences a firm's profitability and value; it is determined by the inventory level, the value of accounts receivable, and accounts payable .In that state, the firm has brought more focus to the investment that the firm makes in the short- term asset, namely working capital. The focus of working capital is to ensure the firm has buffer resources in all phases of the cash conversion cycle. Note that the firm's primary purpose is to maximize the firm's profit or maximize shareholder wealth. Given this situation, the firm needs to ensure the working management is appropriately conducted. The purpose of this study is to explore the relationship between working capital management and its impact on firm market valuation and performance. The working capital management measure by the cash conversion cycle (CCC) and its three main components: days accounts receivable (DAR), days of inventory (DI), and days of account payables (DAP). The firm market value is measured by the firm Tobin Q. While the firm's performance is measured by return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC). The study employs the multiple regression method with fixed effect to analyze the panel data. Other than that, to test the regression result's robustness, the Generalize Method of Moment (GMM) is employed in the data panel regression. The regression result on the sample firm shows that the firm's market value is positively correlated with the cash conversion cycle length in the multiple regression model. Meanwhile, the firm's performance shows no significant correlation with the working capital in all multiple regression models. Different results show when the data panel is estimated using the GMM estimator. Under GMM estimation, the evidence shows that working capital significantly correlates with the firm's market valuation. Other than that, working capital has a significant positive correlation with the ROA and ROE. The significant positive correlation indicates that a firm with a more considerable market value is to pay less attention to working capital management. The result also suggests that the positive correlation between working capital and return on assets means that the firm can significantly increase the return on assets by prolonging its cash conversion cycle. The prolonged cash conversion cycle can also significantly increase the firm's return on equity. The research find different situation in between infrastructure, utilities and transportation subsector. In infrastructure firms, DAP and CCC significantly affect the market valuation of infrastructure firm market value. Other than that, only ROIC can be significantly affected by the CCC. The utilities firm can improve its ROA and ROE by simultaneously managing DI, DAP, and CCC. In the transportation sector only DAR that relatively affecting firm value and performance. The different results generated between the multiple regression results and the GMM estimator indicated that the working capital variable is highly endogenous, meaning that the current value is related to the preceding year's value. The best fit estimation method should take into account when studying financial data. The research conclude the there is a relationship between working capital and firm value and also firm profitability. Working capital management significantly affect the firm market valuation and firm performance. So, it is essential for the firm to manage the working capital to improves the market valuation and firm performance. The implications of the results of this study in terms of the correlation between working capital and firm value and performance have strengthened the existing risk and return theory. Also, in practical implication, related stakeholder can get suggestion on maintain the growth in infrastructure related sector that supposed to support national economic growth. The limitation of this study is only using secondary data form 68 firms in the infrastructure, utilities, and transportation sector listed in the Indonesian Stock Exchange for the 2010 – 2019 period. Since every firm do not have the same financial data publicly provided, the data panel become unbalance data panel. The result is not supposed to describe how the company maintain its short term financial stability during Covid-19 pandemic since the financial data that influenced by pandemic is on 2020 fiscal year and when this study being written is not publicly accessible. The current research in working capital management and it relation with firm market value and firm performance in infrastructure, utilities, and transportation sector open possibility to go forward on future research in this topic, such as, the research can also use other variable control and independent variable as a proxy to working capital. Also use others estimation method that more suitable in financial research .Further research can also conduct the research in working capital and bankruptcy risk in infrastructure-related sector. Other than that, the comparative study about optimal working capital management in the selected company can also be conducted in future research.