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Net Operating Working Capital Behavior: A First Look

Authors

  • Matthew D. Hill,

    1. Matthew D. Hill, CTP, is an Assistant Professor of Finance at the University of Mississippi in Oxford, Mississippi, USA.
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  • G. Wayne Kelly,

    1. G. Wayne Kelly is an Associate Professor of Finance at Mississippi State University in Starkville, Mississippi, USA.
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  • Michael J. Highfield

    1. Michael J. Highfield, CFA, is an Assistant Professor of Finance and Interim Robert W. Warren Chair of Real Estate at Mississippi State University in Starkville, Mississippi, USA.
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  • We appreciate the helpful comments from the editor (Bill Christie), two anonymous referees, Dan Bradley, Ken Cyree, Corie Hulen-Hill, Julia Ingram, Bonnie Van Ness, Robert Van Ness, Jim Washam, and John Zietlow as well as session participants at the 2007 Southern Finance Association Annual Meeting and the 2008 Financial Management Association Annual Meeting. Financial support and research assistance for this project was provided by the College of Business and Industry and the Warren Chair of Real Estate at Mississippi State University. A previous version of this paper was titled “Determinants of Operating Working Capital Policy: A First Look.” All errors remain the sole property of the authors.

Abstract

Net operating working capital captures multiple dimensions of firms’ adjustments to operating and financial conditions. Sales growth, uncertainty of sales, costly external financing, and financial distress encourage firms to pursue more aggressive working capital strategies. Firms with greater internal financing capacity and superior capital market access employ more conservative working capital policies. Results are robust to unobserved heterogeneity and industry effects. The evidence suggests that operating and financing conditions should be considered when evaluating working capital behavior, not just industry averages. Additionally, industry concentration magnifies the effect of sales growth.

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