Journal Pre-proof

Efficient working capital management, financial constraints and

firm value: A text-based analysis

Sandip Dhole, Sagarika Mishra, Ananda Mohan Pal

PII: S0927-538X(19)30290-2
DOI: [Link]
Reference: PACFIN 101212

To appear in: Pacific-Basin Finance Journal

Received date: 14 May 2019

Revised date: 19 August 2019
Accepted date: 24 September 2019

Please cite this article as: S. Dhole, S. Mishra and A.M. Pal, Efficient working capital
management, financial constraints and firm value: A text-based analysis, Pacific-Basin
Finance Journal(2018), [Link]

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© 2018 Published by Elsevier.

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Efficient Working Capital Management, Financial Constraints and Firm Value: A Text-Based
Analysis
Sandip Dhole [Link]@[Link], Sagarika Mishra2,∗ mishra@[Link], Ananda Mohan Pal3
1

ampbm@[Link]
1
Monash Business School Monash University
2
Department of Finance Deakin University
3
Department of Business Management University of Calcutta
∗
Corresponding author.

Abstract
In this paper we examine the association between efficient working capital management and
financial constraints for a sample of Australian firms. Using a text-based measure of financial
constraints, we show that efficient working capital management is associated with lower financial

of
constraints in firms in the next two to three years. Ours is the first study to use a text-based measure
of financial constraints for Australian firms. We also show that the negative association between

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financial constraints and future share price is significantly weakened for firms with efficient
working capital management, suggesting that such firms have higher market valuations despite

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being financially constrained. Finally, analysts seem take into account working capital
management of firms when setting the one year ahead target price.
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Keywords: Financial Constraints, Working Capital Management, Future Stock Price, Analyst Target
Price
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JEL Classification: G12, G32, M41

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1 Introduction

There is increasing scrutiny of financial performance that’s associated with managing

working capital. And, even though it does not appear on an income statement, working

capital can amount to significant revenue for a company.1

In this paper, we study the importance of working capital management in reducing the

likelihood of future financial constraints and signalling higher firm value. Working capital

management is important because it enables firms to free up cash and improve liquidity. Deloof

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(2003) shows that efficient management of the cash conversion cycle can improve corporate

ro
profitability significantly. Baños-Caballero et al. (2012) show that an optimal level of working

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capital is associated with higher profitability of Spanish SMEs. Aktas et al. (2015) also find that
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an optimal level of working capital improves operating performance. These studies highlight the

importance of good working capital management.

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The importance of working capital management is highlighted by the fact that firms often
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struggle to manage their working capital effectively, and thereby lose significant opportunities to

create value. Indeed, a recent survey by PriceWaterhouseCoopers revealed that 203 companies in
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Australia and New Zealand saw deteriorations in their working capital performance by more than 5
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percent in 2017.2 The survey further revealed that Australian and New Zealand firms could unlock

$90.60 billion by improving their working capital management practices. Given the importance of

working capital, we ask whether efficient working capital reduces the likelihood of firms being

financially constrained in the future and, whether financially constrained firms with more efficient

working capital management have higher future prices.

1
Cassio Calil, Managing Director of Corporate Client International Banking for J.P. Morgan Commercial Banking, `` Optimizing
Working Capital'' webinar, September 24, 2014; [Link]
webinar.
2
See [Link]
2
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There is anecdotal evidence of the benefits of efficient working management. In 1994, Dell,

Inc. turned to the management of its cash conversion cycle in order to reverse its recent losses.

That strategy contributed to Dell growing its return on invested capital to 167 percent, 10 times the

industry average, in the second quarter of 1997.3

Working capital management involves both choosing the amount to invest and managing the

cash conversion cycle (the time it takes to convert working capital into cash). It is not enough for

companies to invest in working capital. Deciding the amount to invest in working capital is

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important because over-investment in working capital may increase idle investment and therefore

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be value-reducing. This is consistent with the results of some prior research (Kieschnick et al.,

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2013; and de Almeida and Eid Jr, 2014) that incremental investment in working capital are could

be value reducing. To manage working capital effectively, it is also important for firms to manage
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the cash conversion cycle, because that creates liquidity. Given the importance of both level of
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working capital and the cash conversion cycle, we focus on both these aspects of working capital
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management in this study. This is an important feature of our study. Specifically, extant research

on working capital management usually focuses on only one aspect of working capital management
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(for example, Ding et al., 2013 define working capital management in terms of investment in
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working capital, whereas Baños-Caballero et al. (2014) define it in terms of the cash conversion

cycle). By focusing on both the level of investment and cash conversion cycle, we provide a more

comprehensive analysis of the importance of working capital.

We focus on whether efficient working capital management affects the likelihood of future

financial constraints. Campello et al. (2010) and Almeida and Campello (2007) argue that financial

constraints negatively affect future performance. Financially constrained firms often pass up po-

tentially profitable investment opportunities, and the ability of firms to avail external financing.

3
See [Link]
3
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Given the adverse consequences of financial constraints, prior research has identified factors that

reduce the likelihood of financial constraints. For instance, Erel et al. (2015) show that financially

constrained target firms experience financial relief after being acquired. Ratti et al. (2008) show

that bank concentration could reduce financial constraints, and Love (2003) shows that financial

liberalisation could reduce financial constraints. These studies thus show that some external factors

could reduce financial constraints. Internal capital markets could also reduce the likelihood of

financial constraints, as Shin and Park (1999) and Desai et al. (2007) argue. Using a sample of

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Australian firms and a text-based measure of financial constraints developed by Bodnaruk et al.

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(2015), we show that efficient working capital management reduces the likelihood of the firm

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facing financial constraints up to three years into the future.
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We next examine the valuation implications of working capital, by studying whether the

negative effect of financial constraints on future share prices is less for firms with more efficient
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working capital management. Our research is based on findings in prior research (Denis and
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Sibilkov, 2009) that cash holdings enable financially constrained firms to make (value increasing)

investments. We find that, while there is a negative association between financial constraints and
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one-year ahead share price, this negative association becomes weaker for firms with more efficient
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working capital management. In important additional analysis, we show that analysts seem to

recognise the importance of working capital management for financially constrained firms, as

evidenced by higher target prices for such firms.

We focus on Australian firms for the following reasons. First, Australia has a developed capital

market with strong investor protection laws (Leuz et al., 2003). Since firms operating in capital

markets with strong investor protection laws tend to manage earnings less (Leuz et al., 2003) and

have more informative earnings announcements (DeFond et al., 2007), financial statements of

Australian firms are of high quality and useful for analysis. Second, despite the fact that Australia

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has a developed capital market, it has a significant number of small firms, which are more likely

to be affected by financial constraints (Belghitar and Khan, 2013). Indeed, the mean total assets

for our sample of firms is AUD 45.90 million. This contrasts with USD 7,270 million for US firms

(Glendening et al., 2019). The fact that a significant number of small firms is listed on the

Australian Stock Exchange (ASX) and the fact that Australia has a developed capital market makes

it an interesting institutional setting to study financial constraints.

Further, (poor) working capital management is an issue of relevance for Australian companies.

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Indeed, as discussed above, the 2018 working capital survey of Pricewaterhouse Coopers finds

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that about 50% of the surveyed Australian and New Zealand companies saw their working capital

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performance deteriorate by more than 5 per cent between 2017 and 2018, and that these companies

could unlock $90.6 billion in value by managing their working capital more effectively. These
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survey results make our research setting of particular relevance.
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Our study relates to Ding et al. (2013) and Baños-Caballero et al. (2014). However, in our
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opinion, our study differs significantly from these studies. Ding et al. (2013) is more closely related

to our study, because they analyse the association between financial constraints and working
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capital investment. They argue that high investment in working capital allows firms to invest more
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during periods of financial constraint. Ding et al. (2013) focus only on the investment in working

capital; they do not study the importance of the efficiency of working capital management. In

contrast, we consider both the level of working capital (through measures like cash to asset ratio,

and current ratio) and also the efficiency of working capital management (cash conversion cycle).

Investment in working capital, by itself, does not measure the efficiency of working capital

management. Indeed, high level of working capital could suggest that the firm has idle investment

or poor cash conversion issues, as it is not able to generate enough cash from its working capital.

Second, Ding et al. (2013) study how investment in working capital allows financially constrained

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firms to make investments in the current period. This research question is fundamentally different

from ours, since we study whether current working capital management is associated with future

financial constraints, and whether more efficient working capital management allows financially

constrained firms to enjoy relatively higher valuations. Ding et al. (2013) do not study the valuation

implications of working capital management. Finally, unlike Ding et al. (2013), who measure

financial constraints by the ratio of current cash flow to capital stock, we use a novel text-based

measure of financial constraints that detects financial constraints more accurately than other

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measures (Bodnaruk et al., 2015).

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Our study also differs from Baños-Caballero et al. (2014). Baños-Caballero et al. (2014)

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primarily analyse the association between net trading cycle (working capital efficiency) and firm

performance. They find a U-shaped relation, which suggests that there is a certain level of working
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capital efficiency that improves firm performance. They also find that financial constraints make
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the inflection point lower, i.e., a shorter trade cycle is associated with superior firm performance.
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In other words, financial constraints is a moderating variable in Baños-Caballero et al. (2014). In

contrast, it is one of the main variables of analysis in our paper – we focus explicitly on the
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association between working capital management and financial constraints. Thus our research
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objective is different from Baños-Caballero et al. (2014). Second, while net trade cycle is an

important measure of working capital management, it does not describe the level of investment in

working capital. A more complete description of working capital management considers both the

efficiency and level of working capital. Our paper considers both aspects. Third, unlike Baños-

Caballero et al. (2014), whose financial constraint measure is based on financial statement

variables, we use a more recent text-based measure, as described above.

We make the following contributions to extant literature. First, we provide a more complete

analysis of the effect of working capital management on future financial constraints. Most extant

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literature (for example, Ding et al., 2013; Baños-Caballero et al., 2014) focus on either working

capital investment or the trade cycle. By studying both the cash ratio and the cash conversion cycle,

we present comprehensive evidence on the importance of working capital management in reducing

the likelihood of financial constraints and improving firm value. This analysis is important as in-

creasing working capital investment (or reducing trade cycle) by itself is not always optimal (as

the results of Kieschnick et al., 2013 show).

Ours is also the first study to use a text-based measure of financial constraints for Australian

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firms. As Bodnaruk et al. (2015) note, this measure has several advantages over other commonly

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used measures, as it captures financial constraint more accurately by focusing specifically on the

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language used by financially constrained firms in their annual reports.

We also contribute to the literature by demonstrating that financially constrained firms with
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efficient working capital management have higher market valuations than those with less efficient
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working capital management. While prior studies (for ex- ample, Denis and Sibilkov, 2009) allude
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to the importance of cash holdings to finance investment, ours is the first study, to our knowledge,

to demonstrate the valuation benefits of efficient working capital management for financially
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constrained firms.
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The paper is organised as follows. We discuss prior literature, build our hypotheses and de-

scribe our research methodology in Section 2; we describe the data in Section 3, and present the

results of our empirical estimation in Section 4. We describe our robustness tests in Section 5, and

conclude the paper in Section 6.

2 Literature, Hypotheses and Research Methodology

2.1 Working Capital Management

Working capital management significantly impacts firm performance and valuation. Indeed, net

working capital accounts for a significant proportion of a firm’s capital employed. Firms maintain

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their investment in working capital for many reasons. Holding a certain inventory balance at all

times enables firms to reduce supply costs and protect against price fluctuations (Blinder and

Maccini, 1991). Schiff and Lieber (1974) argue that holding inventory allows firms to service

customers better and avoid high production costs that arise from fluctuations in production.

Similarly, allowing trade credit is an important policy to enhance sales and profits. In fact, Emery

(1984) argues that trade credit is a more profitable short-term investment than marketable securi-

ties. Investment in working capital can provide firms with liquidity, insuring it against the adverse

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effects of a shortfall of cash (Fazzari and Petersen, 1993). However, too much of investment in

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working capital could also create problems for firms in terms of profitability (Deloof, 2003), as

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idle investment reduces return and increases cost of financing. Therefore, an optimal investment

in working capital is desirable.

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While investment in working capital is an important part of working capital management, it is
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also important for firms to convert working capital accounts to cash. This is because the inability
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to convert working capital to cash could create liquidity problems for firms. Therefore, efficient

working capital management also involves managing the cash conversion cycle. Prior research
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identifies the importance of the management of the cash conversion cycle for small businesses,
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which could be cash constrained (Belghitar and Khan, 2013) and firms with significant growth

opportunities (Campello et al., 2011). Using a case study of a listed Brazilian company, Zeidan and

Shapir (2017) show that a shorter cash conversion cycle increases shareholder value. The evidence

described above thus suggests that efficient working capital management can affect shareholder

value.

2.2 Financial Constraints

Financial constraints adversely affect firms’ prospects. In a survey of Chief Financial Officers

(CFOs), Campello et al. (2010) report that financial constraints cause firms to reduce their invest-

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ment in tech spending, capital expenditure and employment. Further, such firms pass up potentially

profitable investment opportunities and draw more heavily upon lines of credit. Musso and Schiavo

(2008) show that the presence of financial constraints significantly increases the likelihood of firms

exiting the market. The evidence that financial constraints affect investment is also backed up by

prior empirical research. For example, Almeida and Campello (2007) show that there is a positive

association between asset tangibility and access to external capital for financially con- strained

firms, suggesting that when firms face financial constraints, higher (lower) tangibility of assets

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makes it easier (more difficult) to obtain external financing. Fazzari et al. (1988) report that

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investment-cash flow sensitivity is high for financially constrained firms and Fazzari and Petersen

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(1993) show that financial constraints adversely affect working capital. Campello and Chen (2010)

show that the operating earnings and capital expenditures of financially constrained firms are
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significantly affected during periods of negative macro-economic shocks, suggesting that the effect
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of financial constraints is more prominent during bad economic periods. Using a sample of
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Japanese firms, Gan (2007) shows that collateral losses restrict the ability of firms to obtain bank

credit. This suggests that the risk of financial constraint is real. Consistent with this idea, Whited
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and Wu (2006) show that financial constraint is a priced risk factor.

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2.3 Hypotheses

In light of the above discussion, it becomes important to ask whether there are factors that

reduce the likelihood (or extent) of financial constraints. Erel et al. (2015) argue that acquisitions

could play a role in alleviating the financial constraints problem. Specifically, they report that

financially constrained target firms experienced significant reductions in the level of cash held, the

sensitivity of cash to cash flow, and the sensitivity of investment to cash flow, subsequent to being

acquired. Ratti et al. (2008) argue that greater market power increases banks’ incentive to produce

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information on potential borrowers. Consistent with this argument, they find that greater bank

concentration reduces the extent of financial constraints. Laeven (2003) and Love (2003) present

evidence that financial liberalisation and financial development reduce financial constraints.

The evidence discussed above shows the role of external factors in reducing financial

constraints. In this paper, we focus on an important firm-specific factor – the role of working capital

management. Much prior research (for example, Almeida et al., 2004; and Faulkender and Wang,

2006) shows that firms facing financial constraints tend to accumulate cash, suggesting that the

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availability of cash can help firms tide over periods of financial constraints. However, these studies

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do not examine how the management of cash affects the likelihood of the firm facing financial

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constraints in future. This is an important question, since it could potentially inform practice on

how to reduce the likelihood of financial constraints.

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Efficient working capital management is important because it enables companies to remain
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liquid and financially viable over the short and long-term. Indeed, Aktas et al. (2015) and Deloof
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(2003) find that efficient working capital management is value enhancing. In a study of Chinese

firms, Ding et al. (2013) show that good working capital management could alleviate the effect of
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financial constraints. These studies highlight the importance of efficient working capital
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management. Based on this research, we could argue that firms with more efficient working capital

management would be less likely to face financial constraints.

Efficient management of working capital minimises the idle investment in working capital and,

consequently, reduces the requirement of funds to finance the working capital. In this way, it

increases the return on working capital investment and enables the firm to bear higher cost of

borrowing. Financial constraints arise when the need for finance is high, and the ability to bear the

cost of finance is low. When the need for finance is less and the ability to bear cost of finance

higher, the likelihood of financial constraints becomes lower.

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Despite the theoretical reasons for the value-enhancing effects of efficient working capital

management, some studies find that investment in working capital does not enhance firm value.

For example, Kieschnick et al. (2013) show that a dollar investment in working capital increases

shareholder value by less than a dollar, and that, an incremental dollar invested in financially

unconstrained firms actually reduces firm value. This is because the valuation of an incremental

investment in working capital is influenced by several factors, such as future sales expectation,

bankruptcy risk, debt load, financial constraints, etc. Indeed, Fazzari and Petersen (2003) note that

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financial constraints could actually depress working capital investment. Similarly, using a sample

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of Brazilian firms, de Almeida and Eid Jr (2014) find that investment in working capital is actually

value reducing.
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Based on the discussion above, we state our first (refutable) hypothesis in the null form as
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follows:
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Hypothesis 1: Efficient working capital management is not associated with future financial
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constraints.

Prior research finds that financial constraints affect firm value. Lamont et al. (2001) show that
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financially constrained firms have low average stock returns, suggesting that financial constraints
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adversely affect share price growth and, hence, firm value. As Campello et al. (2010) note, firms

tend to pass up potentially profitable investment opportunities when they are financially

constrained, thereby adversely affecting their future prospects and valuations. Desai et al. (2007)

show that affiliates of US multinational firms increase their investment, assets and sales, relative

to local firms when the local currency depreciates. One of the reasons for this is the availability of

cash from internal capital markets, which local firms do not have access to. Shin and Park (1999)

examine the benefits of internal capital markets in Korea and find that firms affiliated to Korean

chaebols are less likely to be financially constrained, owing to access to internal capital markets.

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Similarly, focusing on the 2007-2009 Global Financial Crisis, Kuppuswamy and Villalonga (2015)

show that there is a value-increasing effect of corporate diversification, owing to the financing and

investment advantages of diversification. Denis and Sibilkov (2009) show that accumulated cash

holdings allow financially constrained firms to have higher investments.

Building on the above literature, we next examine how efficient working capital management

affects the valuations of financially constrained firms. One of the important objectives of working

capital management is to improve liquidity and ensure that assets are put to their most productive

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use.4 As the above discussion suggests, firms that are able to management their working capital

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effectively, would be more likely to have higher levels of investment when they are financially

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constrained. Denis and Sibilkov (2009) show that there is a positive association between

investment and value for financially constrained firms that have higher cash holdings. This leads
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to our second hypothesis (in the alternate form).
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Hypothesis 2: Firms with more efficient working capital management have higher future
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share prices.

2.4 Research Methodology

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2.4.1 Measuring Financial Constraints

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Most financial constraints studies use accounting variables to measure financial constraint in a firm.

However, textual analysis could also help identify financial constraints. Kaplan and Zingales (1997)

(hereafter KZ) and Hadlock and Pierce (2010) (hereafter HP) examine 10-K text to identify instances where

managers discuss difficulties in obtaining external financing, liquidity problems, or forced reduction in

investment. KZ and HP classify these firms as financially constrained and use accounting characteristics to

predict whether firms will be classified as financially constrained within their framework. Because of the time-

consuming nature of analysis, they focused on small samples of firms.

4
See [Link]
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Hoberg and Maksimovic (2014) also use textual analysis of 10-Ks focus on the liquidity and capital

utilsation subsection of the Management Discussion and Analysis (MD&A) section of the annual report to

identify financial constraints. Buehlmaier and Whited (2018) use manual searches of news articles that feature

financially constrained firms to construct their text-based measure of financial constraints. Their measures

extend the measures of Hoberg and Maksimovic (2014).

Bodnaruk et al (2015) measure of financial constraint expands on the KZ and HP’s approach of using

subjective information to measure firms' financial constraint. They measure the level of constraints using the

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frequency of negative words within the entire 10-Ks. This is because the tone of managers' words capture

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subtle signs that the company will face greater future financial challenges. Following the idea we use

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Bodnauk et al (2015) measure of financial constraint to do our analysis.

To generate financial constraints, we start with the annual reports of all the Australian Stock
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Exchange Listed firms for the period 2000-2016, obtained from the Connect4 database. We con-
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verted the annual reports to the text format to facilitate our textual analysis. Specifically, graphics
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and images in the pdf or word version of the annual report have little textual content. This approach

is consistent with Bodnaruk et al. (2015).

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We use the financial constraint dictionary of Bodnaruk et al. (2015) to search the raw text files
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and construct our financial constraint variable. This dictionary has a list of 184 words (we provide

this word list in Appendix B) commonly used by firms facing financial constraints. We counted

the frequency of the financial constraint words in the annual reports, and also the total number of

words in the annual reports. Finally, we generated our financial constraint variable – the percentage

of financial constraint in the annual report. For example, if a firm has 5,000 words in its 2016

annual report, of which 500 words are financial constraint words, the financial constraint measure

for 2016 for that firm would be 0.10.

2.4.2 Measuring Working Capital Management

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Since working capital management involves both the amount of working capital, and the con-

version of working capital into cash, our measures reflect both these aspects of working capital

management. In this study, we use two main measures of working capital management – one

designed to measure the amount of working capital, and one to measure the conversion of working

capital to cash. Our measures are cash ratio (the ratio of cash to total assets), and the cash

conversion cycle (days receivables plus days inventory minus days payable). Our measures of

working capital management are based on prior research (for example, Deloof, 2003; Ding et al.,

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2011).

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2.4.3 Model to Test Hypothesis 1

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We estimate the following model to test Hypothesis 1:

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−𝑛 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑𝑗 𝛾𝑗 𝐼𝑛𝑑𝑗 +

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∑𝑡 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡 (1)
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In equation (1) above, FC it is our measure of financial constraints described above. The
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variable of interest in equation (1) above is WCMit−n . This variable measures the efficiency of

working capital. More efficient working capital is captured by higher values of current ratio, quick
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ratio, and cash ratio, and lower values of cash conversion cycle. H1 predicts that the coefficient β1
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is negative for cash ratio, and positive for cash conversion cycle. We include size (measured by

the natural logarithm of total assets) as a control variable, following prior research (for example,

Hadlock and Pierce, 2010) that finds that size is associated with financial constraints. We also

control for market-to-book ratio (measured as the ratio of market capitalisation to the book value

of equity), since a high market-to-book ratio represent growth opportunities, and leverage (ratio of

long-term and short-term debt to equity), following Denis and Sibilkov (2009). We also control for

profitability (ROA, defined as the ratio of net income to total assets) and stock return volatility

(StdRet, defined as the 12-month standard deviation of monthly stock returns). Finally, we include

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industry and year fixed effects. We present the list of constraining words in Table 1 and detailed

variable definitions in Table 2.

(Insert Tables 1 and 2 here)

2.4.4 Model to Test Hypothesis 2

As mentioned above, Hypothesis 2, predicts that financially constrained firms with more effi-

cient working capital management have higher future prices than those with less efficient working

capital management. In order to test this hypothesis, we first sort firms into terciles of working

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capital management (measured as above). Then, for each tercile, we estimate the following model:

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𝑃𝑖𝑡+1 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑𝑗 𝛾𝑗 𝐼𝑛𝑑𝑗 +

∑𝑡 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡 -p (2)

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In equation (2) above, Pit+1, measures the firm’s share price in year t + 1. The variable of interest
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is FC it . This variable (defined above), measures financial constraint in year t. Based on the

association between financial constraints and profitability and investment described above, we
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expect a negative coefficient β1. However, if efficient working capital management improves firm
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value, then the negative association between P and FC would become weaker for firms with more

efficient working capital management. Consequently, we expect β1 to be more negative for firms
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in the lowest (highest) tercile of cash ratio (cash conversion cycle).

3 Description of Data

Our empirical analysis is based on a sample of firms listed on the Australian Stock Exchange

during the period 2000-2016. We obtain the annual reports from Thomson Reuters' Connect4

database, financial statement data and annual stock price data from the Morningstar DatAnalysis

Premium database. We obtain stock returns data from the SIRCA Monthly Prices database.

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Finally, we obtain analyst target price data from IBES.5 Our initial sample consists of 8,010 firm-

year observations in the intersection of the DatAnalysis Premium, Connect4 and SIRCA Price

databases. This initial sample has a significant number of missing values of the dependent and

independent variables used in the study. For example, the number of missing values of cash

conversion cycle amounts to more than 40 per cent of the initial sample. We therefore lose 3,448

observations with missing values of the variables of interest. We exclude financial institutions and

utility firms from our sample. This leads to a further loss of 160 observations. Following

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convention, we winsorise our variables of interest in the 1st and 99th percentiles of their

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distribution. Our sample consists of 4,422 firm-year observations with non-missing values of our

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financial constraint variable. We present our sample selection criteria in Panel A of Table 3.
re
Table 3, Panel B presents descriptive statistics for some important variables. We see that the

mean (median) value of FC is 0.427 (0.426). This suggests that 0.43 percent of the words used by
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Australian firms are constraining words, as defined by Bodnaruk et al. (2015). This contrasts with
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the results reported by Bodnaruk et al. (2015) for their sample of US firms – Bodnaruk et al. (2015)

report a mean value of 0.69 for their full sample. Since ours is the first paper to use this measure
ur

of financial constraints for Australian firms, we do not have a benchmark to evaluate these
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numbers. The higher proportion of constraining words for US firms could be on account of the

fact that the US environment is highly litigious. This would naturally cause management to use

more defensive language. However, untabulated results show that the financial constraint measure

is significantly correlated with financial leverage (0.329). This is consistent with the fact that debt

is positively correlated with financial constraint (Buehlmaier and Whitted 2018). We further find

that our measure of financial constraints is significantly negatively correlated with return on assets

5
We use the IBES data only for additional analyses. Our final sample is much smaller if we use the IBES data.
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(-0.061), consistent with financial constraints being negatively associated with profitability

(Campello et al., 2010). This validates our financial constraint measure.

The mean (median) cash conversion cycle is 87.442 (20.186) days. Since days payables had

a large number of extreme values, we winsorised days payable at the 1st and 90th percentiles of

its distribution.6 The mean (median) cash ratio is 0.222 (0.126), suggesting that the average cash

balance of Australian firms is approximately 22 percent. The mean (median) current ratio is 5.482

(1.820), and the mean (median) quick ratio is 5.128 (1.360). This is consistent with Xu et al.

of
(2013).

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The mean total assets of our sample firms is $45.90 million, suggesting that larger firms

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dominate our sample. The mean market-to-book ratio is 3.146, and the mean leverage is 0.777.
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Our descriptive statistics are generally consistent with prior studies that use Australian data – for
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in- stance, Fergusson et al. (2019), Xu et al. (2013), Kent et al. (2013).

(Insert Table 3 here)

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We present the industry distribution of our sample in Panel C of Table 3. The Table shows that
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firms in the materials sector account for most observations, followed by firms in the energy,

industrials, healthcare and consumer discretionary sectors. This is consistent with the general
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distribution of firms in the Morningstar DatAnalysis Premium database.

4 Empirical Tests

4.1 Working Capital Management and Financial Constraints

We report the results for Hypothesis 1 (the association between working capital management

and financial constraints) in Table 4. Recall that we estimate equation (1) to test the hypothesis and

6
Winsorising at the conventional 1st and 99th percentiles produces a large negative mean cash conversion cycle, although the
median is still positive. Our results do not change as a result of winsorising days payable at the 90th percentile.
17
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that we predict a negative (positive) coefficient on WCM for cash ratio (cash conversion cycle) –

Table 4, Panel A (Panel B). Columns 1-3 of Panel A present results for WCMt−1 – WCMt−3

respectively. Consistent with expectations, we find that the coefficient on WCM is negative in all

three columns (coefficient=–0.031, -0.036, and -0.042 respectively; p-value=0.000 in all columns).

This suggests that firms with higher cash ratios are less likely to face financial constraints in the

next three years. Consistent with Bodnaruk et al. (2015), we find that the coefficients on MTB and

Size are negative (coefficient=-0.001, and -0.008 respectively; p-value=0.001 and 0.000

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respectively).7 Consistent with Korajczyk and Levy (2003), we find that the coefficient on Lev is

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positive (coefficient=0.003; p-value=0.038).

-p
(Insert Table 4 here)

From Panel B, we note that the coefficient on WCM is positive for all columns 1 and 2
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(coefficient=0.026, and respectively; p-value=0.006, and 0.001 respectively). This suggests that
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high cash conversion cycle increases the extent of financial constraint in the next two years. Stated
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differently, our results suggest that low cash conversion cycle reduces the extent of financial

constraint over the next two years. This result is consistent with Panel A, and further supports
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Hypothesis 1. The signs and significances on the control variables are consistent with Panel A
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above.

4.2 Working Capital Management and Future Share Price

We report the results for Hypothesis 2 (examining how efficient working capital management

affects the future price of financially constrained firms) in Table 5. Recall that we divide our sample

into terciles of the cash ratio and cash conversion cycle and estimate equation (2) for each tercile

in order to test Hypothesis 2. Hypothesis 2 predicts that the negative association between financial

constraints and future share price would be less negative for the highest (lowest) tercile of the cash

7
For brevity, we only describe results for the first column.
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ratio (cash conversion cycle). We present results for the cash ratio in Panel A of Table 5. Columns

1-3 present the results of the estimation of equation (2) for tercile 1-3 of the cash ratio respectively.

From Panel A, we note that the coefficient on FC is negative in column 1 (coefficient=-2.961; p-

value=0.023), suggesting that financially constrained firms have lower valuations. However, when

we consider Columns 2 and 3, we see that the coefficient on FC is not significant (p-value=0.406

and 0.613). This suggests that for firms with high cash ratios, financial constraints do not

negatively affect firm value, consistent with the idea that good working capital management reduces

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the negative impact of financial constraints on firm value. We note that the coefficient on MTB,

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Size, and StdRet are positive (coefficient=0.025, 0.228, and 0.003 respectively; p-value=0.001,

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0.000, and 0.014). These results are consistent with prior research (see for example, Barth, 2017).
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(Insert Table 5 here)
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From Panel B, we see that the coefficient on FC is negative for column 2 (coefficient=-5.695; p-

value=0.003), suggesting that financially constrained firms have lower valuations when their cash
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conversion cycles are moderately high. We note, however, that the coefficient on FC in Column 1
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is positive, suggesting that financial constraints do not negatively affect firm value for firms with

low cash conversion cycles (coefficient=1.127; p-values=0.090). Untabulated results suggest that
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the coefficient on column 1 is significantly greater than that in Column 3 (p-value=0.000),

suggesting that the market views efficient working capital management favourably. Seen in

conjunction with the results in Table 4, these results highlight the importance of good working

capital management, and echo the sentiments of practitioners described above.

4.3 Additional Analysis

We now examine whether financial analysts recognise the importance of good working capital

management. Specifically, do analysts consider the efficiency of a firm’s working capital

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management in setting target prices, when the firm is financially constrained? This is an important

analysis because analysts are superior users of financial information and serve an important

intermediary role in capital markets. A large volume of research (see for example, Beyer et al.,

2010) shows that financial analysts shape market expectations by generating quality equity

recommendation and forecasts. To perform this additional test, we replace Pt+1 in equation (2) with

analysts’ one-year ahead target prices (AFPt+1) and then we follow the procedure described above

for test- ing Hypothesis 2. If analysts do recognise the importance of good working capital

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management, we predict that their target prices would be lower for firms with lower (higher) cash

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ratios (cash conversion cycles). We present these results in Table 6.

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We present results for the three terciles of cash ratio in the three columns of Panel A, Table 6.
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We see from Table 8 that the coefficient on FC is negative for the lowest tercile of cash ratio
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(coefficient=- 0.949; p-value=0.036). It is not significant in Columns 2 and 3 (p-value=0.0.422 and

0.572 respectively). This is consistent with the results reported in Table 5, and suggests that
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analysts set lower target prices for financially constrained firms with lower cash ratios, consistent

with the idea that such firms are more likely to face liquidity issues in the future. In contrast, the
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insignificant coefficient on FC for the high cash ratio firms suggests that analysts believe that
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financial constraints are unlikely to have lasting impacts on these firms, since they have higher

liquidity and would likely be able to see through the period of financial constraints. The signs and

significances of the control variables are consistent with those reported in Table 5 above.

(Insert Table 8 here)

We present results for the cash conversion cycle in Panel B, Table 8. As in Panel A above, we

present results for the three terciles of the cash conversion cycle in the three columns of Panel B.

We note from the Table, that the coefficient on FC is negative and significant in column 2

(coefficient=-1.160 respectively; p-value=0.001). It is not significant in Column 1 (p-

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value=0.140). Although the coefficient on FC is not significant in column 3 (p-value=0.843), the

fact that the coefficient is not significant in column 1 suggests that analysts believe that financially

constrained firms with low cash conversion cycles to be less likely to face liquidity issues in the

future. Therefore, they do not lower target prices for such firms. Our results also suggest that

analysts do not seem to consider very high cash conversion cycles to impact value when firms are

financially constrained. By itself, this result is difficult to explain. However, when we consider the

results for cash ratio in Panel A above, we could argue that if financially constrained firms with

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high cash conversion cycles have large cash balances, it likely alleviates analysts’ concerns about

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liquidity for such firms. Our results in Table 6 generally verify the main results in Table 5 above.

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They also contribute to the literature by providing evidence that analysts do appear to factor in

working capital, when issuing target price forecasts.

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5 Robustness Tests
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We perform important robustness tests in this study. Specifically, we replicate our main results
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by using an alternate measure of financial constraints. Next, we use alternate measures of working

capital management. We also test the robustness of our results by explicitly controlling for the
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period of the Global Financial Crisis. Finally, we acknowledge that financial constraints might
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influence working capital management and test whether the direction of the association flows from

financial constraints to working capital, rather than the other way, as presented in our main tests.

5.1 Alternate Measures of Working Capital Management

We now replicate Table 4 with an alternate proxy of financial constraints – the current ratio

(Laurent, 1979). Higher values of current ratio suggests higher liquidity, and thus better working

capital management. We present these results in Tables 7 and 8. Table 7 shows the results of

Hypothesis 1 – the association between working capital management and financial constraints.

Recall that Hypothesis 1 predicts that firms with better working capital management are less likely
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to have financial constraints in the future. Accordingly, we expect a negative association between

current ratio and financial constraints, i.e., we expect the coefficient β1 in equation (1) to be

negative. We see from the Table that the coefficient on WC is negative in columns 1 and 2 (t − 1,

and t − 2), suggesting that firms with higher current ratios are less likely to be financially

constrained over the next two years (coefficient=-0.047, and -0.044 respectively; p-value=0.004,

and 0.033 respectively). This is consistent with Table 4 above.

(Insert Table 7 here)

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We present the results of Hypothesis 2 in Table 8. Hypothesis 2 predicts that the negative

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association between financial constraints and future share price is lower for firms with more

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efficient working capital management. As discussed above, we estimate equation (2) to test the
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Hypothesis. Following the approach above, we divide our sample into terciles of current ratio, and
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estimate equation (2) for each tercile. Hypothesis 2 predicts that the coefficient on FC (β1) is less

negative for tercile 3 of current ratio, since firms in tercile 3 have the highest levels of current ratio,
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and therefore have the most efficient working capital management. We find from Table 8 that the

esti- mated coefficient 𝛽̂1is negative for terciles 1 and 3 of current ratio (coefficient=-3.605 and -1.931
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respectively; p-value=0.031, and 0.092 respectively). We also find that 𝛽̂1 is significantly more
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negative for terciles 1 than 3 (p-value=0.000). This suggests that financial constraints affect firm

value significantly more negatively for firms with poorer working capital management, consistent

with the results reported in Table 5 above.

(Insert Table 8 here)

5.2 The Hadlock-Pierce (2010) SA Index as an Alternate Proxy for Financial Constraints

Bodnaruk et al. (2015) argue that their measure of financial constraints (our main measure) is

superior to other commonly used financial constraint proxies. However, we check the robustness

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of our results using the SA Index of Hadlock and Pierce (2010) as an alternate measure of financial

constraints. Unlike the Bodnaruk et al. (2015) measure, the SA Index is not text-based. Rather, it is

based on the size and age of the firm. We replicate our results in Table 3 using this alternate measure

of financial constraints. We present results in Table 9. Table 9 presents the results for Hypothesis 1,

using the SA Index. It shows that the coefficient on WC is positive for all three columns (t – 1 to t

− 3) when we use the cash ratio as the proxy of working capital management, suggesting that firms

with higher cash ratios are more likely to be financially constrained over the next three years

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(coefficient=0.312, 0.390, and 0.461 respectively; p-value=0.000 in all three columns). In contrast,

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the coefficient on WC is negative when we use the cash conversion cycle (coefficient=- 0.106, -

-p
0.143, and -0.224 respectively; p-value=0.084, 0.067, and 0.013 respectively). This is not

consistent with Tables 3 and 4. However, this result is not surprising because the SA Index is a
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poor proxy of financial constraint. Indeed, as Bodnaruk et al. (2015) show, the SA Index (and
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similar measures) predict liquidity events very poorly.

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(Insert Table 9 here)

5.3 Controlling for the effect of the Global Financial Crisis

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Our sample period includes the period of the Global Financial Crisis (2008-2009). Although
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Australia was not significantly affected by the crisis, it could be argued that Australian firms with

exposure to affected markets would feel the effect of the crisis. Thus, they might use the

constraining words more frequently during this period. If this is so, it could affect our empirical

result. To rule out this effect, we now explicitly control for the crisis period. Specifically, we modify

equation (1) as follows:

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡−𝑛 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + 𝛽7 𝐺𝐹𝐶𝑡 +

∑𝑗 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑𝑡 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡 (3)

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In equation (3) above, GFC t is a dummy variable equal to 1 for the years 2008 and 2009; it is

zero otherwise. We present these results in Table 10, Panel A. Column 1 of Table 10 reports results

for the cash ratio and Column 2 for the cash conversion cycle. We note that the coefficient on GFC

is positive (coefficient=0.245 and 0.246 respectively; p-value=0.000 and 0.000 respectively),

suggesting that the period of GFC increased the likelihood of the firm being financially constrained

one year later. The Table also shows that the coefficient on cash ratio is negative (coefficient=-

0.035; p-value=0.000) and that on the cash conversion cycle is positive (coefficient=0.026; p-

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value=0.006), consistent with Tables 4 and 5 above. This shows that our results are not driven by

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the crisis.

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(Insert Table 10 here)
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We also test for the effect of GFC by re-estimating equation (1) for the non-GFC years only.
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We present these results in Panel B of Table 10. We present results for cash ratio (cash conversion

cycle) in column 1 (column 2). Consistent with Table 4, we find that the coefficient on cash ratio is
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negative (coefficient=-0.037; p-value=0.000) and that on cash conversion cycle is positive

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(coefficient=0.028; p-value=0.006).

5.4 Testing whether Financial Constraints reduce the Efficiency of Working Capital
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Management

Hypothesis 1 above tests the notion that firms with more efficient working capital manage-

ment practices would be less likely to be financially constrained in the future. However, one could

plausibly argue that the existence of financial constraints could have an adverse effect on work-

ing capital policy. Indeed, Fazzari and Petersen (1993) show that financial constraints negatively

affect the investment in working capital. Fazzari and Petersen (1993), however, examine whether

financially constrained firms reduce their investment in working capital in the current period. As

discussed above, we study whether current working capital management is associated with the firm
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facing financial constraints in future. Therefore, it is unlikely that our empirical results would be

affected by the contemporaneous effect of financial constraints on working capital investment.

However, to rule out this possibility explicitly, we now examine how financial constraints affect

future working capital investment. Specifically, we estimate the following model:

𝑊𝐶𝑀𝑖𝑡 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡−𝑛 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 +

∑𝑗 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑𝑡 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡 (4)

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In equation (4) above, the dependent variable is working capital management (cash ratio and

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cash conversion cycle) and the independent variable of interest is financial constraints. If the

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argument that current financial constraints affects future working capital management adversely is

true, we would observe a negative (positive) coefficient on financial constraints when the
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dependent variable is cash ratio (cash conversion cycle). We present these results in Table 11. The
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dependent variable in Column 1 (2) is cash ratio (cash conversion cycle). The Table shows that the

coefficient on FC it is not significant (p-value=0.455 and 0.206 respectively). This suggests that
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current financial constraints do not affect future working capital management. This result alleviates
ur

concerns that there might be reverse causality, i.e., future working capital management might be
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affected by current financial constraints.

(Insert Table 11 here)

5.5 Potential Endogeneity in Working Capital Management: Propensity Score Matching

It is possible that firms with high working capital have certain other characteristics that reduce

their likelihood of facing financial constraints in the future. To address this issue we use a

propensity score matching approach to identify a sample of control firms that do not differ on other

observable characteristics. Specifically, we estimate the following logit model:

𝐻𝑖𝑔ℎ𝑖𝑡 = 𝛽0 + 𝛽1 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝐿𝑒𝑣𝑖𝑡 + ∑𝑗 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑𝑡 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡 (5)

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In equation (5) above, Highit is a dummy variable equal to 1 if the firm has a lower cash

conversion cycle than the median of the distribution for each year and industry; 0 otherwise. We

use three explanatory variables in the model – size, market-to-book ratio, and leverage to account

for observable firm characteristics that might affect working capital management. We also include

industry and year fixed effects in the model. We form our matched sample based on the propen-

sity score generated by the first-stage estimate from equation (5). For each high working capital

management firm, we identify one control firm with the closest propensity score within a caliper

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of 0.001. We use this approach following prior research (Rosenbaum and Rubin, 1983). We then

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estimate equation (1) above on the propensity score matched sample.

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We present the results for the propensity score matched sample in Table 12. Panel A of Table

12 compares the descriptive statistics of the observable firm characteristics for the high and low
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working capital samples. As the Table shows, the two samples are not significantly different in
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terms of size (p-value=0.920), market-to-book ratio (p-value=0.620) and leverage (p-value=0.790).

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We present the results of equation (1) in Panel B of Table 12. The first (second) column describes

the results for the cash ratio (cash conversion cycle). For brevity, we only report results for financial
ur

constraints one year ahead. As the Table shows, the coefficient on cash ratio (cash conversion
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cycle) is negative (positive) – coefficient=-0.036 (0.001); p-value=0.038 (0.024). This is consistent

with our main results above.

(Insert Table 12 here)

5.6 Controlling for the Effect of Potential Unobservable Factors on Financial Constraints

Although we have included many control variables in our regressions, it is possible that there

are some unobservable factors that affect financial constraints. Not controlling for these factors

could potentially cause us to over-estimate the effect of working capital management on future

financial constraints. Since it is difficult to identify the unobservable factors, we include firm

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effects in equation (1) above in place of industry fixed effects and re-estimate the model. We

present the results in Table 13. We show results for cash ratio in column 1 and cash conversion

cycle in column 2. Consistent with Table 4, we find that the coefficient on cash ratio is negative

(coefficient=-0.023; p-value=0.064), and that on cash conversion cycle is positive

(coefficient=0.017; p-value=0.035). These results provide further support for our hypothesis.

(Insert Table 13 here)

6 Conclusion

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We examine whether efficient working capital management reduces the likelihood of firms fac-

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ing financial constraints in the future. Prior research (for instance, Campello et al., 2010; Almeida

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and Campello, 2008) shows that financial constraints negatively affect firms’ investment and that

they could lead to firms exiting the market (Musso and Schiavo, 2008). Given the serious impact
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of financial constraints on firms’ prospects, it is important to understand whether the likelihood
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of financial constraints could be reduced by suitable corporate strategy. We examine the role of
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working capital management in this context.

Working capital is an important source of liquidity (Fazzari and Petersen, 1993). Therefore,
ur

managing working capital efficiently helps firms tide over adverse economic periods and increase
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shareholder value (Zeidan and Shapir, 2017). Working capital management involves managing

both the amount of working capital and the cash conversion cycle. However, extant literature has

typically examined only one aspect of working capital management. In our study, we focus on both

the level of working capital (we focus primarily on the cash ratio) and the cash conversion cycle

and examine how efficient working capital management affects the likelihood of firms facing

financial constraints up to two years into the future. Using a new text-based measure of financial

constraints based on a recent study by Bodnaruk et al. (2015), and focusing on a sample of firms

listed on the Australian Stock Exchange, we show that a high (low) cash ratio (cash conversion

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cycle) significantly reduces the likelihood of financial constraints up to two years into the future.

This suggests that efficient management of working capital can reduce the likelihood of firms

facing financial constraints in the future.

We examine the benefits of working capital management further by next examining whether

financially constrained firms with more efficient working capital policies enjoy higher valuations.

Our conjecture is based on the notion that more efficient working capital management allows firms

to absorb the liquidity shocks created by financial constraints. Prior research (Ding et al., 2013)

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shows that financially constrained firms with more investment in working capital can invest to a

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significantly greater degree than those with lower investment in working capital. We find that

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financially constrained firms with higher (lower) cash ratios (cash conversion cycles) tend to have

higher one year ahead prices and higher analyst target prices, suggesting that efficient working
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capital policies can mitigate the adverse effects of financial constraints on firm value.
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Our study is timely given recent reports by PricewaterhouseCoopers (PwC) and EY on the
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deteriorating trend of working capital performance by firms in the US, Europe and Australia.8

Specifically, the 2018/19 Working Capital Report by PricewaterhouseCoopers reveals that firms
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seem to be managing cash flows by cutting back on capital expenditure.9 This has potentially
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adverse consequences for long-term growth. The PwC survey suggests that firms could pay for a

55 per- cent increase in capital expenditure by managing working capital efficiently. This

highlights the importance of our study. Our findings will therefore be of interest to practitioners,

as it provides large scale empirical evidence on the benefits of efficient working capital

management.

8
See [Link]
[Link].
9
See [Link]
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Our study has an important caveat.10 Although our measure of financial constraints is based

on prior research (Bodnaruk et al., 2015), it may not always capture financial constraints. Indeed,

it is possible that some of the words that appear in the list, for example, “obligation” could be used

to convey some other information. For instance, a company outlining that it does not have any

more financial obligation towards a lender does convey a positive message. We recognise this as

a limitation of our study.

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na
ur
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10
We thank the anonymous reviewer for pointing this out.
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Tables

Table 1: List of Constraining Words

abide earmark irrevocable prevents

abiding earmarked irrevocably prohibit
bound earmarking Limit prohibited
bounded earmarks Limiting prohibiting

commit encumber Limits prohibition

of
commitment encumbered mandate prohibitions
commitments encumbering mandated prohibitive

ro
commits encumbers mandates prohibitively
committed encumbrance
-p
mandating prohibitory
re
committing encumbrances mandatory prohibits
compel entail mandatorily refrain
lP

compelled entailed necessitate refraining

compelling entailing necessitated refrains
na

compels entails necessitates require

ur

comply entrench necessitating required

compulsion entrenched noncancelable requirement
Jo

compulsory escrow noncancellable requirements

confine escrowed obligate requires

confined escrows obligated requiring
confinement forbade obligates restrain
confines forbid obligating restrained
confining forbidden obligation restraining
constrain forbidding obligations restrains
constrained forbids obligatory restraint

34
 Journal Pre-proof

constraining impair oblige restraints

constrains impaired obliged restrict
constraint impairing obliges restricted
constraints impairment permissible restricting
covenant impairments permission restriction
covenanted impairs permissions restrictions
covenanting impose permitted restrictive

covenants imposed permitting restrictively

of
depend imposes pledge restrictiveness

ro
dependence imposing pledged restricts
dependences
dependant
imposition
impositions
-p
pledges
pledging
stipulate
stipulated
re
dependencies indebted preclude stipulates
lP

dependent inhibit precluded stipulating

depending inhibited precludes stipulation
na

depends inhibiting precluding stipulations

dictate inhibits precondition strict
ur

dictated insist preconditions stricter

Jo

dictates insisted preset strictest

dictating insistence prevent strictly

directive insisting prevented unavailability
directives insists preventing unavailable

The Table above lists the constraining words identified by Bodnaruk et al. (2015). These are the words
typically used by firms facing financial constraints.

35
 Journal Pre-proof

Table 2: Variable Definitions

Variable Name Definition

FC Percentage of financially constraining words in the Australian annual
reports. See Table 1 for the list of constraining words.
MTB The ratio of market capitalisation (closing share price for the year mul-
tiplied by common shares outstanding) to the book value of equity
Size Natural logarithm of total asset
Lev Short term debt plus long term debt scaled by total shareholders’ equity.
ROA Net income (net profit after tax) scaled by total assets
StdRet Standard deviation of monthly stock returns

of
CCC Cash conversion cycle. It is the sum days receivables and days inven-
tory, minus days payables. We scale CCC by 1,000 in our regression
models in order to generate meaningful regression coefficients.

ro
CashRatio Ratio of cash and short-term investments to total assets
CR Current ratio – defined as the ratio of current assets to current liabilities
Age
SA_Index -p
The difference between the IPO date and the current date
Following Hadlock and Pierce (2010), the SA index is defined as [-
re
0.737*ln(Total Assets)]+[0.043*ln(Total Assets)2 ]-(0.040*Age).
GFC A dummy variable equal to 1 if the observation is from the period of the
Global Financial Crisis (2008-2009); zero otherwise.
lP

The Table above presents definitions of variables used in the empirical analyses.
na
ur
Jo

36
 Journal Pre-proof

Table 3: Description of the Sample

Panel A: Sample Selection

Details N
Initial Sample in the intersection of the
DatAnalysis Premium, Connect4 and SIRCA 8,010
Price databases
Less:
Missing values of key variables 3,448
Financial Institutions and Utilities 160

of
Total 4,402

The Table above presents the sample selection criteria for our study. Our study is based on a sample of

ro
Australian firms for the period 2000- 2016. The sample does not include financial institutions and utility
firms. The sample consists of 4,422 firm-year observations with non-missing values of the financial

-p
constraint variable. We present detailed variable definitions in Table 2.
re
Panel B: Descriptive Statistics
lP

P25 Mean Median P75 SD

FC 0.352 0.427 0.426 0.502 0.117
CCC -62.474 87.442 20.186 74.472 1468.828
na

CashRatio 0.045 0.222 0.126 0.312 0.240

QuickRatio 0.800 5.128 1.360 3.450 28.993
ur

CurrentRatio 1.120 5.482 1.820 3.930 28.980

Size 16.008 17.642 17.336 19.128 2.303
MTB 0.862 3.146 1.620 3.293 4.865
Jo

Lev 0.123 0.777 0.348 0.814 1.370

Std_Ret 0.088 0.174 0.134 0.208 0.153
ROA -0.24 -0.241 0.000 0.080 0.828
AFP 0.867 6.162 2.175 5.300 13.026
P 0.100 2.645 0.390 2.105 7.839
SA_Index -1.207 0.058 -0.317 1.002 1.790

The Table above presents the descriptive statistics for our sample of Australian firms for the period 2000-
2016. The sample does not include financial institutions and utility firms. The sample consists of 4,422
firm-year observations with non-missing values of the financial constraint variable. We present detailed
variable definitions in Table 2.

37
 Journal Pre-proof

Panel C: Industry Distribution

Industry N Mean Median Std Dev

Communications 144 0.434 0.432 0.117

Consumer Discretionary 374 0.417 0.418 0.126

Consumer Staples 137 0.429 0.445 0.102
Energy 602 0.433 0.434 0.116
Healthcare 470 0.417 0.416 0.111
Industrials 521 0.443 0.437 0.130
Information Technology 261 0.408 0.416 0.116

of
Materials 1,732 0.434 0.432 0.113

ro
Real Estate 181 0.366 0.364 0.116
Total 4,422 0.427 0.427 0.117

-p
The Table above presents the industry distribution for our sample of Australian firms for the period 2000-
2016. The sample does not include financial institutions and utility firms. The sample consists of 4,422
re
firm-year observations with non-missing values of the financial constraint variable. We present detailed
variable definitions in Table 2
lP
na
ur
Jo

38
 Journal Pre-proof

Table 4: Cash Ratio and Financial Constraints

Panel A: Cash Ratio

CashRatio in year

t-1 t-2 t-3

∗∗∗ ∗∗∗ ∗∗∗
WCM -0.031 -0.036 -0.042
(0.000) (0.000) (0.000)
∗∗ ∗∗ ∗∗
MTB -0.001 -0.002 -0.002
(0.001) (0.002) (0.002)
∗∗∗ ∗∗∗ ∗∗∗
Size -0.008 -0.008 -0.008

of
(0.000) (0.000) (0.000)
∗∗ ∗∗∗ ∗∗∗
Lev 0.003 0.006 0.006

ro
(0.038) (0.000) (0.001)
ROA 0.001 0.000 0.004

StdRet
-p
(0.828)
-0.013
(0.316)
(0.957)
-0.015
(0.212)
(0.431)
0.001
(0.927)
re
∗∗∗ ∗∗∗ ∗∗∗
Constant 0.397 0.413 0.459
(0.000) (0.000) (0.000)
lP

Observations 4,334 4,015 3,634

Industry and Year Effect Included Included Included
Adjusted R2 0.299 0.261 0.191
na

∗∗∗ ∗∗
, and represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
ur

The Table above presents results of the equation below, testing the association between financial constraints
Jo

and working capital management. In this Table, we use the cash ratio (CashRatio) to measure working
capital management:

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−𝑛 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗

𝑗

+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
𝑡

All variables are defined in Table 2.

39
 Journal Pre-proof

Panel B: Cash Conversion Cycle

CCC in Year

t-1 t-2 t-3

∗∗ ∗∗∗
WCM 0.026 0.029 0.012
(0.006) (0.001) (0.274)
∗∗∗ ∗∗∗ ∗∗∗
MTB -0.003 -0.003 -0.003
(0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗
Size -0.007 -0.007 -0.007
(0.000) (0.000) (0.000)

of
∗∗ ∗∗∗ ∗∗∗
Lev 0.005 0.008 0.008
(0.000) (0.000) (0.000)

ro
ROA -0.005 -0.005 0.000
(0.259) (0.467) (0.987)
StdRet

Constant
-p
-0.002
(0.913)
0.359
∗∗∗
-0.012
(0.408)
0.375
∗∗∗
0.006
(0.736)
0.415
∗∗∗
re
(0.000) (0.000) (0.000)
Observations 2,990 2,792 2,539
lP

Industry and Year Effect Included Included Included

Adjusted R2 0.350 0.305 0.217
na

∗∗∗ ∗∗
, and represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
ur

The Table above presents results of the equation below, testing the association between financial constraints
and working capital management. In this Table, we use the cash conversion cycle (CCC) to measure
Jo

working capital management:

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−𝑛 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗

𝑗

+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
𝑡

All variables are defined in Table 2.

40
 Journal Pre-proof

Table 5: Cash Ratio, Financial Constraints and Future Share Price

Panel A: Cash Ratio

CashRatio Terciles

Tercile 1 Tercile 2 Tercile 3

∗∗
FC -2.961 -2.815 -0.398
(0.023) (0.406) (0.613)
∗∗∗ ∗∗∗ ∗∗∗
MTB 0.427 0.948 0.158
(0.000) (0.000) (0.000)

of
∗∗∗ ∗∗∗ ∗∗∗
Size 1.180 2.208 0.854
(0.000) (0.000) (0.000)

ro
∗∗∗ ∗∗∗ ∗∗∗
Lev -0.421 -1.559 -0.244
(0.001) (0.000) (0.001)
ROA

StdRet
-p-0.158
(0.596)
-2.949
∗∗
-0.741
(0.103)
0.996
0.146
(0.259)
0.449
re
(0.006) (0.462) (0.407)
∗∗∗ ∗∗∗ ∗∗
Constant -19.270 -42.310 -10.590
lP

(0.000) (0.000) (0.002)

Observations 1,070 1,062 1,039
Industry and Year Effect Included Included Included
na

Adjusted R2 0.385 0.315 0.619

∗∗∗ ∗∗ ∗
ur

, , and represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
Jo

The Table above presents results of the equation below, testing how the association between financial
constraints and future share price (P) is moderated by working capital management. In this Table, we use
the cash ratio (CashRatio) to measure working capital management:

𝑃𝑖𝑡+1 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡

𝑗 𝑡
+ 𝜖𝑖𝑡

All variables are defined in Table 2.

41
 Journal Pre-proof

Panel B: Cash Conversion Cycle

CCC Terciles

Tercile 1 Tercile 2 Tercile 3

∗ ∗∗
FC 1.127 -5.695 -0.423
(0.090) (0.003) (0.897)
∗∗∗ ∗∗∗ ∗∗∗
MTB 0.142 0.500 0.603
(0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗
Size 0.759 1.642 1.691
(0.000) (0.000) (0.000)
∗∗∗ ∗∗ ∗∗∗
Lev -0.345 -0.652 -0.800

of
(0.000) (0.003) (0.001)
ROA 0.009 -0.078 0.555
(0.919) (0.860) (0.257)

ro
∗∗
StdRet -0.098 -2.549 -1.482
(0.854) (0.006) (0.261)
Constant -15.450
(0.000)-p ∗∗∗
-28.590
(0.000)
∗∗∗
-31.220
(0.000)
∗∗∗
re
Observations 993 1,086 1,092
Industry and Year Effect Included Included Included
Adjusted R2 0.598 0.304 0.355
lP

∗∗∗ ∗∗ ∗
, , and represent statistical significance at the 1%, 5% and 10% levels of significance respectively. The
na

p-values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.

The Table above presents results of the equation below, testing how working capital management moderates
ur

the association between financial constraints and future share price (P). In this Table, we use the cash
conversion cycle (CCC) to measure working capital management:
Jo

𝑃𝑖𝑡+1 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡

𝑗 𝑡
+ 𝜖𝑖𝑡

All variables are defined in Table 2.

42
 Journal Pre-proof

Table 6: Cash Ratio, Financial Constraints and Analyst Target Price

Panel A: Cash Ratio

CashRatio Terciles

Tercile 1 Tercile 2 Tercile 3

∗∗
FC -0.949 -0.343 -0.231
(0.036) (0.572) (0.422)
∗∗∗ ∗∗∗ ∗∗∗
MTB 0.049 0.148 0.080
(0.001) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗
Size 0.223 0.317 0.231

of
(0.000) (0.000) (0.000)
∗∗ ∗∗∗ ∗∗∗
Lev -0.106 -0.272 -0.129

ro
(0.019) (0.000) (0.000)
∗∗
ROA 0.744 0.212 -0.087

StdRet -p
(0.013)
-0.460
∗
(0.482)
-0.029
(0.622)
-0.266
re
(0.051) (0.934) (0.265)
∗∗∗ ∗∗∗ ∗∗∗
Constant -2.414 -5.386 -3.993
(0.000) (0.000) (0.000)
lP

Observations 472 426 426

Industry and Year Effect Included Included Included
Adjusted R2 0.472 0.592 0.497
na

∗∗∗ ∗∗ ∗
, , and represent statistical significance at the 1%, 5% and 10% levels of significance respectively. The
ur

p-values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.

Jo

The Table above presents results of the equation below, testing how the association between financial
constraints and analyst target price (AFP ) is moderated by working capital management. In this Table, we
use the cash ratio (CashRatio) to measure working capital management:

𝐴𝐹𝑃𝑖𝑡+1 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡

𝑗 𝑡
+ 𝜖𝑖𝑡

All variables are defined in Table 2.

43
 Journal Pre-proof

Panel B: Cash Conversion Cycle

CCC Terciles

Tercile 1 Tercile 2 Tercile 3

∗∗
FC -0.077 -1.160 -0.092
(0.870) (0.001) (0.843)
∗∗∗ ∗∗∗ ∗∗∗
MTB 0.087 0.105 0.098
(0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗
Size 0.201 0.327 0.274
(0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗
Lev -0.131 -0.303 -0.143

of
(0.000) (0.000) (0.068)
ROA 0.208 0.298 0.395
(0.232) (0.414) (0.136)

ro
∗∗∗
StdRet 0.007 -0.617 0.244
(0.990) (0.000) (0.430)
Constant
-p
-2.946
(0.000)
∗∗∗
-5.322
(0.000)
∗∗∗
-4.154
(0.000)
∗∗∗
re
Observations 383 469 472
Industry and Year Effect Included Included Included
Adjusted R2 0.478 0.617 0.528
lP

∗∗∗ ∗∗ ∗
, , and represent statistical significance at the 1%, 5% and 10% levels of significance respectively. The
na

p-values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.

The Table above presents results of the equation below, testing how the association between financial
ur

constraints and analyst target price (AFP ) is moderated by working capital management. In this Table, we
use the cash conversion cycle (CCC) to measure working capital management:
Jo

𝐴𝐹𝑃𝑖𝑡+1 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡

𝑗 𝑡
+ 𝜖𝑖𝑡

All variables are defined in Table 2.

44
 Journal Pre-proof

Table 7: Current Ratio and Financial Constraints

CR in year

t-1 t-2 t-3

∗∗ ∗∗
WCM -0.047 -0.044 -0.007
(0.004) (0.033) (0.691)
∗∗∗ ∗∗∗ ∗∗∗
MTB -0.002 -0.002 -0.002
(0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗
Size -0.006 -0.006 -0.005
(0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗
Lev 0.007 0.010 0.010
(0.000) (0.000) (0.000)

of
ROA 0.006 0.004 0.007
(0.147) (0.372) (0.174)

ro
∗
StdRet -0.017 -0.021 -0.004
(0.169) (0.072) (0.755)
∗∗∗ ∗∗∗ ∗∗∗
Constant

Observations
-p
0.354
(0.000)
4,421
0.368
(0.000)
4,051
0.405
(0.000)
3,643
re
Industry and Year Effect Included Included Included
Adjusted R2 0.278 0.243 0.171
lP

∗∗∗ ∗∗ ∗
, , and represent statistical significance at the 1%, 5% and 10% levels of significance respectively. The
p-values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
na

The Table above presents results of the equation below, testing the association between financial constraints and
working capital management. In this Table, we use the current ratio (CR) to measure working capital management:
ur
Jo

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−𝑛 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡

𝑗 𝑡
+ 𝜖𝑖𝑡

All variables are defined in Table 2.

45
 Journal Pre-proof

Table 8: Current Ratio, Financial Constraints and Future Share Price

CR Terciles

Tercile 1 Tercile 2 Tercile 3

∗∗ ∗
FC -3.605 -0.767 -1.931
(0.031) (0.759) (0.092)
∗∗∗ ∗∗∗ ∗∗∗
MTB 0.369 0.707 0.277
(0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗
Size 1.465 1.732 0.813
(0.000) (0.000) (0.000)
∗∗∗ ∗∗ ∗
Lev -0.471 -1.417 -1.488

of
(0.000) (0.011) (0.058)
ROA -0.240 0.964 0.163
(0.203) (0.184) (0.335)

ro
∗∗
StdRet -0.913 -3.276 -0.143
(0.415) (0.025) (0.759)
Constant
-p
-25.450
(0.000)
-31.440
(0.000)
∗∗∗
-12.940
(0.000)
∗∗∗
re
Observations 1,008 1,086 1,077
Industry and Year Effect Included Included Included
Adjusted R2 0.419 0.198 0.695
lP

∗∗∗ ∗∗ ∗
, , and represent statistical significance at the 1%, 5% and 10% levels of significance respectively. The
na

p-values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.

The Table above presents results of the equation below, testing how the association between financial
ur

constraints and future share price (P ) is moderated by working capital management. In this Table, we use
the current ratio (CR) to measure working capital management:
Jo

𝑃𝑖𝑡+1 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗 + ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡

𝑗 𝑡
+ 𝜖𝑖𝑡

All variables are defined in Table 2.

46
 Journal Pre-proof

Table 9: Working Capital Management and Financial Constraints: Using the Hadlock and Pierce
(2010) SA Index

CashRatio in Year CCC in Year

t-1 t-2 t-3 t-1 t-2 t-3
∗∗∗ ∗∗∗ ∗∗∗ ∗ ∗ ∗∗
WCM 0.312 0.390 0.461 -0.106 -0.143 -0.224
(0.000) (0.000) (0.000) (0.084) (0.067) (0.013)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗
MTB 0.025 0.030 0.030 0.030 0.038 0.037
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗ ∗∗∗
Size 0.819 0.815 0.811 0.813 0.803 0.794
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗ ∗∗∗ ∗∗∗ ∗∗∗
Lev -0.040 -0.047 -0.041 -0.053 -0.062 -0.059

of
(0.000) (0.000) (0.006) (0.000) (0.000) (0.000)
∗∗∗ ∗∗∗ ∗∗ ∗∗∗ ∗∗∗ ∗∗
ROA -0.135 -0.141 -0.118 -0.142 -0.118 -0.086

ro
(0.000) (0.000) (0.002) (0.000) (0.000) (0.014)
∗∗∗ ∗∗∗ ∗∗ ∗∗∗ ∗∗ *
StdRet 0.361 0.331 0.236 0.319 0.262 0.186
(0.000) (0.001) (0.028) (0.000) (0.003) (0.060)
Constant -14.530
(0.000)
∗∗∗
-14.490
(0.000)
-p
∗∗∗
-14.390
∗∗∗

(0.000)
-14.380
∗∗∗

(0.000)
-14.230
∗∗∗

(0.000)
-14.050
∗∗∗

(0.000)
re
Observations 4,017 3,542 3,105 4,687 4,224 3,786
Industry and Year Effect Included Included Included Included Included Included
lP

Adjusted R2 0.889 0.858 0.832 0.885 0.850 0.820

∗∗∗ ∗∗ ∗
, , and represent statistical significance at the 1%, 5%, and 10% levels of significance respectively. The
na

p-values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.

ur

The Table above presents results of the equation below, testing the association between financial constraints
and working capital management. In this Table, we use the cash ratio (CashRatio) and cash conversion
cycle (CCC) to measure working capital management:
Jo

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−1 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗

𝑗

+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
𝑡

All variables are defined in Table 2.

47
 Journal Pre-proof

Table 10: Working Capital Management and Financial Constraints: Controlling for the Global
Financial Crisis

Panel A: With Year Fixed Effects

CashRatio CCC
∗∗∗ ∗∗∗
WCM -0.035 0.026
(0.000) (0.006)
∗∗∗ ∗∗∗
MTB -0.003 -0.002
(0.000) (0.000)
∗∗∗ ∗∗∗
Size -0.007 -0.008

of
(0.000) (0.000)
∗∗ ∗∗
Lev 0.005 0.003
(0.005) (0.046)

ro
ROA -0.005 -0.005
(0.259) (0.241)
StdRet
-p -0.002
(0.913)
∗∗
-0.002
(0.888)
∗∗∗
re
GFC 0.245 0.246
(0.000) (0.000)
∗∗∗ ∗∗∗
Constant 0.359 0.393
lP

(0.000) (0.000)
Observations 2,990 2,990
Industry and Year Effect Included Included
na

Adjusted R2 0.350 0.352

ur

∗∗∗ ∗∗
, and represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
Jo

The Table above presents results of the equation below, testing the association between financial constraints
and working capital management. In this Table, we use the cash ratio (CashRatio) and cash conversion
cycle (CCC) to measure working capital management:

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−1 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + 𝛽7 𝐺𝐹𝐶𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗

𝑗

+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
𝑡

All variables are defined in Table 2.

48
 Journal Pre-proof

Panel B: Without GFC years

CashRatio CCC
∗∗∗ ∗∗∗
WCM -0.035 0.026
(0.000) (0.006)
MTB ∗∗∗ ∗∗∗
-0.007 -0.008
(0.000) (0.000)
Size ∗∗ 0.003
0.004
(0.027) (0.144)
Lev -0.002 -0.001
(0.686) (0.690)

of
ROA -0.014 -0.014
(0.418) (0.407)

ro
StdRet ∗∗∗ ∗∗∗
-0.007 -0.008
(0.000) (0.000)
∗∗∗ ∗∗∗
Constant

Observations
-p 0.361
(0.000)
2,570
0.396
(0.000)
2,570
re
Industry and Year Effect Included Included
Adjusted R2 0.370 0.368
lP

∗∗∗ ∗∗
, and represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
na

The Table above presents results of the equation below, testing the association between financial constraints
ur

and working capital management. In this Table, we use the cash ratio (CashRatio) and cash conversion
cycle (CCC) to measure working capital management:
Jo

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−1 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗

𝑗

+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
𝑡

All variables are defined in Table 2.

49
 Journal Pre-proof

Table 11: The Effect of Financial Constraints on Future Working Capital Management

CashRatio CCC
FC -0.050 -0.020
(0.206) (0.455)
∗∗∗
MTB 0.012 0.000
(0.000) (0.775)
∗∗∗ ∗∗∗
Size -0.037 -0.003
(0.000) (0.035)
∗∗∗ ∗∗∗
Lev -0.034 -0.005
(0.000) (0.001)
∗∗ ∗∗
ROA -0.028 0.019

of
(0.020) (0.001)
StdRet -0.026 -0.009

ro
(0.321) (0.646)
∗∗∗ ∗∗
Constant 0.869 0.092
(0.000) (0.017)
Observations
Industry and Year Effect -p 3,299
Included
3,299
Included
re
Adjusted R2 0.324 0.009
lP

∗∗∗
, and ∗∗ represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
na

The Table above presents results of the equation below, testing the association between financial constraints
and working capital management. In this Table, we use the cash ratio (CashRatio) and cash conversion
cycle (CCC) to measure working capital management:
ur

𝑊𝐶𝑀𝑖𝑡 = 𝛽0 + 𝛽1 𝐹𝐶𝑖𝑡−𝑛 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗

Jo

+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
𝑡

All variables are defined in Table 2.

50
 Journal Pre-proof

Table 12: Using Propensity Score Matching to Control for Endogeneity in Working Capital
Management

Panel A: Descriptive Statistics of Observable Characteristics

Variable Mean (High) Mean (Low) Median (High) Median (Low) p-value
Size 17.953 17.963 17.530 17.690 0.920
MTB 2.540 2.480 1.490 1.720 0.620
Lev 0.640 0.630 0.340 0.350 0.790

Panel B: Working Capital Management and Future Financial Constraints

of
CashRatio CCC
WCM -0.036*** 0.025***

ro
(0.001) (0.002)
MTB -0.004*** -0.003***

Size -p (0.000)
-0.007***
(0.000)
-0.008***
re
(0.000) (0.000)
Lev 0.006*** 0.005**
lP

(0.009) (0.037)
ROA -0.008 -0.009
(0.158) (0.138)
na

StdRet 0.001 0.001

(0.956) (0.956)
Constant 0.354*** 0.388***
ur

(0.000) (0.000)
Observations 2,186 2,186
Jo

Adjusted R2 0.350 0.352

***
, and ** represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.

The Table above presents results of the equation below, testing the association between financial constraints
and working capital management. In this Table, we use the cash ratio (CashRatio) and cash conversion
cycle (CCC) to measure working capital management:

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−1 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑗 𝐼𝑛𝑑𝑗

𝑗

+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
𝑡

All variables are defined in Table 2.

51
 Journal Pre-proof

Table 13: Working Capital Management and Future Financial Constraints with Firm Fixed Effects

Working Capital Proxy

CashRatio CCC
WCM -0.023* 0.017**
(0.064) (0.035)
***
MTB -0.002 -0.002***
(0.000) (0.000)
Size -0.004* -0.005*
(0.100) (0.056)
*
Lev 0.004 0.003
(0.065) (0.113)
ROA 0.000 0.001
(0.962) (0.882)

of
StdRet -0.011 -0.011
(0.459) (0.458)

ro
Constant 0.281*** 0.298***
(0.000) (0.000)
Observations 3,030 3,030
Firm and Year Effect
Adjusted R2
-p Included
0.649
Included
0.650
re
***
, and ** represent statistical significance at the 1% and 5% levels of significance respectively. The p-
values (presented in parentheses) are based on heteroscedasticity-adjusted robust standard errors.
lP

The Table above presents results of the equation below, testing the association between financial constraints
and working capital management. In this Table, we use the cash ratio (CashRatio) and cash conversion
na

cycle (CCC) to measure working capital management:

𝐹𝐶𝑖𝑡 = 𝛽0 + 𝛽1 𝑊𝐶𝑀𝑖𝑡−1 + 𝛽2 𝑀𝑇𝐵𝑖𝑡 + 𝛽3 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽4 𝐿𝑒𝑣𝑖𝑡 + 𝛽5 𝑅𝑂𝐴𝑖𝑡 + 𝛽6 𝑆𝑡𝑑𝑅𝑒𝑡𝑖𝑡 + ∑ 𝛾𝑖 𝐹𝑖𝑟𝑚𝑖

ur

𝑖
+ ∑ 𝛿𝑡 𝑌𝑒𝑎𝑟𝑡 + 𝜖𝑖𝑡
Jo

All variables are defined in Table 2.

Highlights
 We show that firms with efficient working capital management are less likely to be financially
constrained in the future.
 We show that financially constrained firms with efficient working capital management have higher
valuations.
 We use a novel text-based measure of financial constraints for a sample of Australian firms.

52