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The economic impact of working capital management on corporate profitability evidence for Ho Chi Minh stock exchange

By Tran Thuy Duong (VNP 23)

Supervisor: Dr. Nguyen Trong Hoai

Abstract:

The thesis focuses on investigate the impact of working capital management to corporate profitability in Vietnam context. A comprehensive panel data including 192 HOSE-listed corporates within 2011 - 2017 are collected to serve the research objectives. The thesis employs three panel data analysis approaches: pooled ordinary least squared, fixed effect and random effect model to investigate the relationship between cash conversion cycle, days of sales outstanding, days of inventories outstanding, days of payables outstanding, which represent working capital management quality, and return on total assets, which represents corporate profitability. The paper also extends the examination to the connection between company size, revenue growth, financial leverage and GDP growth to profitability. The sector dummy variables are incorporated to model specifications to detect the performance of the inspected relationship across distinct sectors. Model testing results identify the random effect model as the most appropriate model to conclude the relationship between working capital management indicators and business performance because there is an absence of statistically significant correlation between individual specific effect and the regressors. Model regression results recognize statistically significantly negative connection between working capital management indicators (cash conversion cycle, days of sales outstanding, days of inventory outstanding and days of payables outstanding) and corporate profitability in the examined dataset. By scrutinizing possibly unobserved sector-specific characteristics, the study detects potential vulnerabilities of various sectors to the internal and external shocks. Industrials, Information Technology and Energy are evaluated as the most vulnerable industries to negative market shocks because of its relatively thin profit buffer; in other words, lower base return on total asset contrasted with other sectors make these sectors more sensitive to undesired impact sourced from either internal factors or external factors.

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