Working Capital Management and Economic Policy Uncertainty

In the aftermath of the financial crisis, Ernst and Young (2009) working capital report note that the leading 2,000 corporations in the US and Europe can extract an up to US$1 trillion if they manage their working capital efficiently. While the existing literature documents the effects of working capital management on firm performance, there is a dearth of research between economic uncertainty and working capital management. We attempt to fill this gap by examining the effect of the economic policy uncertainty on firms’ ability to manage their working capital. For this study, with over 80,000 US firm-year observation over the period 1996 through 2016, we document the following. A consistent negative association between economic uncertainty and working capital management. Economically, we interpret the result that, economic uncertainty leads firms to pursue aggressive working capital management, leading to a fourteen days improvement in working capital

Working Capital Management and Economics Policy Uncertainty

In the aftermath of the financial crisis, Ernst and Young (2009) working capital report note that the leading 2,000 corporations in the US and Europe can extract an up to US$1 trillion if they manage their working capital efficiently. While the existing literature documents the effects of working capital management on firm performance, there is a dearth of research between economic uncertainty and working capital management. We attempt to fill this gap by examining the effect of the economic policy uncertainty on firms’ ability to manage their working capital. For this study, with over 80,000 US firm-year observation over the period 1996 through 2016, we document the following. A consistent negative association between economic uncertainty and working capital management. Economically, we interpret the result that, economic uncertainty leads firms to pursue aggressive working capital management, leading to a fourteen days improvement in working capital