Working capital financing and corporate profitability in the ASEAN region: The role of financial development

Abstract

Objective: The objective of the article is to empirically investigates the role played by financial development in determining the relationship between working capital financing and firms’ performance.

Research Design & Methods: Employing data of publicly listed manufacturing firms in five ASEAN countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand spanning from 2009-2018 resulted in 6,183 firm years observation. This study conducts an analysis using the two-steps generalized method of moments (GMM) estimator.

Findings: The inverted U-shape effect of working capital financing on firm profitability is confirmed, indicating a trade off in utilizing short-term debt to finance working capital requirements. Moreover, new evidence was shown that firms which operate in more financially developed regions have the opportunity to utilise a greater percentage of short-term debt without destroying their profitability.

Implications & Recommendations: Corporate managers should avoid using excessive short-term debt to finance their working capital requirement as the risk of refinancing and interest outweigh its benefit. Secondly, given the significant role played by financial development, policy makers should give priority to financial reforms and development to ensure firms have access to finance and, hence foster their growth for the benefit of economy.

Contribution & Value Added: This paper contributes to the existing literature in two ways. Firstly, this is the first study to analyse the role of financial development on working capital financing and performance relationship. Secondly, the study extends the insight of this research area of a large emerging region that has never been studied, the ASEAN region.