Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance

Working capital management (WCM) has attracted increasing attention from businesses due to its sensitivity toward a firm’s financial efficiency and health. In any business, managing working capital (WC) is a never-ending task, and a constant inflow of funds needs to be ensured to keep the daily oper...

Full description

Saved in:

Bibliographic Details
Main Author:	Mohammad Reyad, Hossain
Format:	Thesis
Language:	English
Published:	2022
Subjects:	Working capital Macroeconomics
Online Access:	http://psasir.upm.edu.my/id/eprint/114064/1/114064.pdf
Tags:	Add Tag No Tags, Be the first to tag this record!

id	my-upm-ir.114064
record_format	uketd_dc
spelling	my-upm-ir.1140642024-12-06T02:08:06Z Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance 2022-12 Mohammad Reyad, Hossain Working capital management (WCM) has attracted increasing attention from businesses due to its sensitivity toward a firm’s financial efficiency and health. In any business, managing working capital (WC) is a never-ending task, and a constant inflow of funds needs to be ensured to keep the daily operations of the firm motoring along smoothly. To achieve this, firms need to understand which factors affect the investment of working capital. Macroeconomic risk factors draw major attention from businesses due to the inherent risk involved in working capital components, notably for firms in the United States, the United Kingdom, Germany, and China that are heavily involved in international trade. Therefore, the primary objective of this study is to examine the effect of macroeconomic risk factors on WCM. Subsequently, this study examines how the interaction between financial derivatives, corporate tax avoidance (CTA), and WCM influences the firms' performance amid volatility in macroeconomic risk factors. This research examines non-financial firms from 2006 to 2020, including 7645 firms from the USA, 1107 firms from the UK, 683 firms from Germany, and 4403 firms from China. The regression analysis begins with Ordinary Least Squares regression (OLS) to analyze the research objectives. However, Durbin–Wu–Hausman test indicates that endogeneity is a major issue in this study's OLS model. Hence, the two-step system Generalized method of moments (GMM) estimation technique is employed to examine the research objectives. This study finds that economic policy uncertainty (EPU) has a significantly negative relationship with CCC for firms in the USA, Germany, and China but a positive relationship for UK firms. On the other hand, foreign exchange risk (FX risk) has a significantly positive effect on CCC for firms in the USA, the UK, and China but a negative effect for firms in Germany. Furthermore, the current study reveals a positive association between the interaction of CCC and CDS on the ROA of all the countries' firms. This may be related to CDS adoption enhancing firms' WC financing, allowing them to maintain a higher CCC level. The adoption of CDS may drive firms to invest more in WC to dominate sales and grab market potential. Therefore, higher investment in WC yields a firm to have a higher ROA. Similarly, the current research discovers a positive effect of the interaction between CCC and CTA on ROA for all the sample countries' firms. As a kind of operational hedging, tax avoidance may insulate businesses from cash flow uncertainties during increased macroeconomic volatility. Firms may conserve the tax money for better WC management, greater WC investment to boost sales, and a better ROA. Nonetheless, this research sheds light on the literature demonstrating that firms may increase WC investment to achieve higher profitability when CDS and CTA are present to handle WC financing constraints. The study's most important implication is that financial derivatives should be widely used during periods of macroeconomic instability. Businesses need government-enforced laws to help them avoid paying taxes. As a result, businesses are resilient even under harsh economic conditions. Working capital Macroeconomics 2022-12 Thesis http://psasir.upm.edu.my/id/eprint/114064/ http://psasir.upm.edu.my/id/eprint/114064/1/114064.pdf text en public http://ethesis.upm.edu.my/id/eprint/18079 doctoral Universiti Putra Malaysia Working capital Macroeconomics Mohd Ashhari, Zariyawati
institution	Universiti Putra Malaysia
collection	PSAS Institutional Repository
language	English
advisor	Mohd Ashhari, Zariyawati
topic	Working capital Macroeconomics
spellingShingle	Working capital Macroeconomics Mohammad Reyad, Hossain Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance
description	Working capital management (WCM) has attracted increasing attention from businesses due to its sensitivity toward a firm’s financial efficiency and health. In any business, managing working capital (WC) is a never-ending task, and a constant inflow of funds needs to be ensured to keep the daily operations of the firm motoring along smoothly. To achieve this, firms need to understand which factors affect the investment of working capital. Macroeconomic risk factors draw major attention from businesses due to the inherent risk involved in working capital components, notably for firms in the United States, the United Kingdom, Germany, and China that are heavily involved in international trade. Therefore, the primary objective of this study is to examine the effect of macroeconomic risk factors on WCM. Subsequently, this study examines how the interaction between financial derivatives, corporate tax avoidance (CTA), and WCM influences the firms' performance amid volatility in macroeconomic risk factors. This research examines non-financial firms from 2006 to 2020, including 7645 firms from the USA, 1107 firms from the UK, 683 firms from Germany, and 4403 firms from China. The regression analysis begins with Ordinary Least Squares regression (OLS) to analyze the research objectives. However, Durbin–Wu–Hausman test indicates that endogeneity is a major issue in this study's OLS model. Hence, the two-step system Generalized method of moments (GMM) estimation technique is employed to examine the research objectives. This study finds that economic policy uncertainty (EPU) has a significantly negative relationship with CCC for firms in the USA, Germany, and China but a positive relationship for UK firms. On the other hand, foreign exchange risk (FX risk) has a significantly positive effect on CCC for firms in the USA, the UK, and China but a negative effect for firms in Germany. Furthermore, the current study reveals a positive association between the interaction of CCC and CDS on the ROA of all the countries' firms. This may be related to CDS adoption enhancing firms' WC financing, allowing them to maintain a higher CCC level. The adoption of CDS may drive firms to invest more in WC to dominate sales and grab market potential. Therefore, higher investment in WC yields a firm to have a higher ROA. Similarly, the current research discovers a positive effect of the interaction between CCC and CTA on ROA for all the sample countries' firms. As a kind of operational hedging, tax avoidance may insulate businesses from cash flow uncertainties during increased macroeconomic volatility. Firms may conserve the tax money for better WC management, greater WC investment to boost sales, and a better ROA. Nonetheless, this research sheds light on the literature demonstrating that firms may increase WC investment to achieve higher profitability when CDS and CTA are present to handle WC financing constraints. The study's most important implication is that financial derivatives should be widely used during periods of macroeconomic instability. Businesses need government-enforced laws to help them avoid paying taxes. As a result, businesses are resilient even under harsh economic conditions.
format	Thesis
qualification_level	Doctorate
author	Mohammad Reyad, Hossain
author_facet	Mohammad Reyad, Hossain
author_sort	Mohammad Reyad, Hossain
title	Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance
title_short	Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance
title_full	Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance
title_fullStr	Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance
title_full_unstemmed	Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance
title_sort	impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance
granting_institution	Universiti Putra Malaysia
publishDate	2022
url	http://psasir.upm.edu.my/id/eprint/114064/1/114064.pdf
_version_	1818586184563032064

Impact of macroeconomic risk factors, adoption of financial derivatives and corporate tax avoidance on working capital management, and firm performance

Similar Items