The Effect of Working Capital Management on Reducing the Stock Price Crash Risk(Case Study: Companies Listed in Tehran Stock Exchange)

Transcription

1 Inernaional Research Journal of Applied and Basic Sciences 2013 Available online a ISSN X / Vol, 6 (9): Science Explorer Publicaions The Effec of Working Capial Managemen on Reducing he Sock Price Crash Risk(Case Sudy: Companies Lised in Tehran Sock Exchange) MajidAmeri 1, Mohsen Lofi 2 1. Faculy of Managemen and Accouning,universiy of Shahroud, Iran 2. Universiy of Economic Sciences, Tehran, Iran Corresponding Auhor: MajidAmeri ABSTRACT: Presen sudy examines he effec of working capial managemen on reducing he risk of decrease in sock prices. Decrease in sock prices can be due o weak and inefficien sraegies aken by managers. One of he mos imporan sraegies aken by managemen is working capial managemen. Working capial managemen deals wih managing he curren asses and curren liabiliies. In case of inadequae policies o manage he company's working capial, finance manager could decrease curren asses and increase curren liabiliies. Adoping his approach can lead he company o insolvency and bankrupcy due o poor liquidiy posiion. Delay in paymen of company s debs can affec he credi raing of company and diversely affec company s repuaion and consequenly weaken compeiive advanage which can finally lead o decrease in sock prices. Considering he imporance of working capial managemen in performance of firms, his research aims o answer he quesion wheher working capial managemen can affec he sock prices or no. To measure he working capial we made use of Giman s cash conversion cycle (1974) and Chen s negaive facor sock reurn skewness model (2001) o measure he sock prices falls in 59 lised companies in Tehran sock exchange beween 1998 and This sudy provides srong evidence ha working capial managemen is likely o significanly reduce he risk of falling sock prices. Keyword: working capial managemen, cash conversion cycle, Sock Price Crash Risk, Negaive Coefficien of Skewness of Sock Reurn INTRODUCTION Nowadays, in almos all of he companies, working capial consiues a considerable porion of he oal capial; herefore is managemen is very imporan. Working capial is an essenial facor in prosperiy of companies and requires due aenion and conrol. Working capial managemen seeks he siuaion in which here is no excess or shorage of cash. Failure o mainain an appropriae level of liquidiy for a company can cause a company o lose is shor-erm invesmen opporuniies and i may no have imely access o raw maerials for producions of goods. The company may also fail o fulfill is obligaions in a imely manner ha could have an adverse effec on is credi. Such a company will no be able o use he opporuniies in he marke and lucraive projecs because of lack of resources. This company will no be able o supply required equipmen and use cash discouns. Coninuaion of his siuaion can cause fall in sock prices and finally decrease in company s value. Given he above issue, in he presen research we ry o sudy he effec of working capial managemen on reducion of risk of fall in sock prices in lised companies in Tehran sock exchange. The Research Theoreical Review Working capial and is managemen The cash needed o run daily rouines in a firm is called working capial. According o his, working capial managemen is he opimized composiion of working capial s iems (curren asses and liabiliies), so ha i maximizes shareholders wealh. Generally, working capial managemen is associaed wih daily rouines and i has nohing o do wih long-erm decisions. For insance: access o raw maerials, giving credis o he cusomers and collecing maured debis, making abs for credi purchase, cash-accoun managemen and ec. These facors make everyday asks easier for he firm.

2 Inl. Res. J. Appl. Basic. Sci. Vol., 4 (0), 0000, 2013 One of he bes crieria o assess he qualiy of working capial managemen is cash conversion cycle. Cash conversion cycle represens he ime in which a firm consumes cash in operaive process o produce a produc. Cash conversion cycle includes hree crieria: Invenory conversion period i s is he lengh of ime on average needed o conver raw maerials ino finished goods and selling hese goods. Payable deferral period i s he average lengh of ime needed o purchase goods and he paymens for hem. Receivable conversion period i s he average number of days from he sale of goods o collecion of resuling receivables. According o he exising heoreic bases, reducion in cash conversion cycle is a desired feaure which firms should be afer as prolonging i requires heavy exernal coss. Therefore reducing he period in which cash is involved in working capial, a firm can achieve a beer performance. Cash conversion cycle could be reduced by reducing invenory conversion period hrough a quicker producion or sale, or by reducing he ime during which receivable accouns are colleced hrough expediing he collecion process, or by prolonging payable accouns mauriy dae hrough rebaing he paymens process o sellers. The Research Review of Lieraure Nobanee [1] in his sudy iled as working capial managemen and firm s profiabiliy says ha here is a radiional relaionship beween cash conversion cycle and a firm s profiabiliy. In fac, as cash conversion cycle decreases profiabiliy increases and vice versa. Also finding an opimized level for he invenories, payable accouns and receivable accouns (in which mainenance and opporuniy coss are minimized) and recalculaing cash conversion cycle considering hese opimized levels, gives us a precise and perfec view of efficiency of working capial managemen. This researcher believes ha cash conversion cycle is he bes and he mos exquisie crierion o assess working capial managemen. Kieschnick e al [2] analyzed he relaionship beween working capial managemen and shareholders wealh. The resuls of heir sudy showed ha a one Dollar invesmen can have a considerable effec on expeced sale level, financial resricions and deb pressures. Also more invesmens on increasing level of given credis o he cusomers han exra invesmens on socks have more effecs on shareholders wealh. Garcia e al [3] realized ha decreasing cash conversion cycle can improve profiabiliy as hey were sudying he effecs of working capial managemen on profiabiliy in small and medium size firms in Spain. Lazaridis e al [4] conduced a sudy on he relaionship beween working capial managemen and he profiabiliy in companies lised in Ahens sock exchange. Resuls of ha sudy impared ha here is a meaningful converse relaionship beween profiabiliy and cash conversion cycle. Managers can also increase profis hrough proper managemen of cash conversion cycle and mainaining is iems (receivable accouns, payable accouns, and invenories) in an opimized level. Chen e al [1] have been prediced sock price crash by hree variables ha include rading volume, pas reurns and sock price skewness. The resuls of his paper show ha he negaive skewness of daily sock reurns is imporan in a sock ha experienced he wo following: Firs, an increase in rading volume of sock compared o he pas six monhs and experienced he posiive reurns in more han 36 monh ago. Hong e al [2] are discussed ha he heerogeneiy of invesors opinions a reason o expedie he sock price crash risk phenomenon. On he oher hand, hey noed ha he lack of informaion asymmery beween invesors. Jin e al [3] were invesigaed relaionship beween lacks of informaional ransparency and sock price crash in he capial marke of differen counries. They found ha he lack of ransparency in he markes in which financial informaion is high, he sock price crash is more. Huon e al [4] sudied he relaionship beween ransparency in financial saemens and correlaion beween sock prices, financial informaion and sock prices crash phenomenon. The resuls sugges ha he lack of ransparency of accouning informaion caused o a lile change in sock prices due o new financial disclosure. On he oher hand, hese researchers have expressed a lower correlaion beween financial informaion and sock prices may lead o increase sock price crash risk. Kim e al [5] had been sudied abou he relaionship beween conservaive accouning and sock prices crash in America. The resuls indicae ha ax evasion make opporuniies for managers o hide bad news abou he aciviies ha mislead invesors and his problem led o sock price crash phenomena. In heir research, Callen and Fang [6] examined he relaion beween insiuional invesors and company`s sock price crash. They have esed wo opposie approaches i.e. supervisory view and expropriaion view abou insiuional invesors. The resuls have indicaed ha here is undoubedly an inverse relaion beween insiuional owners and sock price crash in fuure.

3 Inl. Res. J. Appl. Basic. Sci. Vol., 4 (0), 0000, 2013 Tools for Daa Collecion and Analysis of Their Since he research mehod of his paper is a field mehod and dealing wih real daa and o provide he informaion abou companies wih respec o research variables ha are relaed o financial informaion, various sources have been used ha including CDs of Tehran Sock Exchange, adbir sofware and websie of Tehran sock exchange. For daa processing, Excel and SPSS sofware are used. Populaion and Saisical Sample The populaion of his sudy includes all companies lised in Tehran Sock Exchange. For sampling, he companies have been seleced ha 1. They are acive in Sock Exchange from 1998 o 2011, 2. Fiscal year ended in March, 3. Financial changes have no accrued in he course of he sudy, 4. This company is no member of invesmen firms and financial inermediaries, 5. A leas 6 monhs of he year have monhly reurns, 6. Informaion of company is available. Finally wih he above resricions, 58 companies are seleced for his research. Hypohesis of Research There s a meaningful relaionship beween working capial managemen and sock price crash risk in firms. The Research Variables Dependen Variable Considering he research hypohesis, he dependen variable of his sudy is sock price crash for measuring which negaive coefficien of skewness model (Chen, 2001) has been used as follows: NCSKEW i = - [n (n-1) 3/2 W i ] / [(n-1)(n-2)( W i ) 3/2 ] In his model W i indicaes he monhly special reurn of company i in he monh. The leer n is he number of monhly reurns observed during financial year. According o his model, he higher he negaive coefficien of skewness, he more likely he company will be liable o sock price crash. "Special monhly reurns of company," We show ha i W (Eq. (1)) is equal o he naural logarihm of number one plus he number of ε ha is obained by Eq. (2). W j, = ln(1+ε j, ) (1) r j, = α j +β 1 r m,-2 + β 2 r m,-1 + β 3 r m, + β 4 r m,+1 + β 5 r m,+2 + ε j, (2) In Eq. (2), is he sock reurn of J Company in he monh and is he monhly marke reurn (based on marke indicaors). Independen variable ` Considering he research hypohesis, he independen variable of his sudy is Working capial managemen for measuring which cash conversion cycle model (Lazaridis, 2006) has been used as follows: Cash conversion cycle = Invenory conversion period + Receivable conversion period - Payable deferral period Each one of he facors in cash conversion cycle is calculaed by he equaions given: Receivable conversion period = receivable accouns average/ sale* 365 Invenory conversion period = Invenory average/ Cos of Goods Sold* 365 Payable deferral period= payable accouns average/ Cos of Goods Sold* 365 The conrolled Variables of he Research To deermine he precise effec of conservaism on sock price crash risk, several conrol variables ha may affec he sock price crash have been used. Heerogeneiy of Invesors' Beliefs Chen e al found ha he heerogeneiy in invesor beliefs in he curren year has a srong relaionship wih negaive skewness of sock reurns in he nex year. In his sudy, for measuring his variable, difference beween he average monhly rading volume in he curren year and he average monhly rading volume in he previous year were used. Negaive Coefficien of Skewness (NCSKEW) Chen e al also concluded in heir sudy ha he companies have a negaive coefficien of skewness in he curren year, will have a less negaive coefficien of skewness in he nex year. Sandard Deviaion of Monhly Reurns Chen e al also concluded in heir sudy ha he companies have a more flucuae in he curren year will have a more negaive coefficien of skewness in he nex year.

4 Inl. Res. J. Appl. Basic. Sci. Vol., 4 (0), 0000, 2013 Monhly Average of Reurn Chen e al also presened evidence which saed ha he crash of fuure sock price in he long run will increase, for example a period of 12 o 36 monhs. Because of his and for conrolling variables, we have enered a monhly average reurns for he las 12 monhs in he original model. Profiabiliy Index For conrolling beween company profiabiliy and risk of sock price crash, we used he raio of ne profi o oal shareholders' equiy. Financial Leverage According o Huon e al, increasing he amoun of deb can increase he ineres cos. Therefore, he increase of financial leverage can lead o reduced profis. Increasing he amoun of deb in capial srucure can lead o increase negaive coefficien of skewness. In his sudy, for conrolling he effec of variables, we have used he long ime deb raio o oal of asses a he end of he period. Size of Company To conrol he size of our company, we have used he logarihm of oal asses a he end of period. Conservaiveness Zhang and Kim have examined he relaion beween conservaive accouning and sock price crash. The resuls have shown ha conservaive accouning decreases he possibiliy of crash in sock price. For measuring his variable, Givoly'se al model has been used. Inroducing he Research Model For esing he research hypohesis he model below has been used: NCSKEW +1 = m CCC i + q q h Conrol Variables + q=2 ε This model signifies he negaive coefficien of skewness of sock reurn in he nex year. The higher he negaive coefficien of skewness is, he more likely he company is liable o sock price crash. In addiion is a measure of working capial managemen used in he model of Lazaridis (2006). Descripive saisics The mean and he median of he variable he negaive coefficien of skewness of sock reurn, esimaed based on Chen s model e al [6] are and , respecively. On he oher hand, for cash conversion cycle mean and median are and respecively. Cash conversion cycle, financial leverage, profiabiliy and sandard deviaion of monhly reurnsare skewed o he righ. Oher variables are almos symmeric.before applying he regression model and calculaion of final model for he sudy, necessary presupposiion ess were applied using he informaion according o he independen and dependen variables. Resuls are shown in able 1.(in end of aricle). Tesing he Research Hypohesis The able 2(in end of aricle) shows he resuls of he general regression model es assessmen in he research. According o his able we can conclude ha he main independen variable, working capial managemen, (+) and among he conrolled variables profiabiliy (+), he invesors' opinions heerogeneiy (-), conservaiveness (+) and he negaive coefficien of skewness of he sock reurn (+) are significan and heir direcions are shown in he parenheses. The variables profiabiliy and he negaive coefficien of skewness are significan a a 90% confidence level and he oher menioned variables are significan a a 95% confidence level. In inerpreaion of hese variables should be noedha he negaive sign (reverse), which means by increasing i, he value of he dependen variable decreases. (Moving oward he negaive and increase he likelihood of falling prices) and a posiive relaionship (direc) means ha by increasing i, he value of he dependen variable increases. To esimae he appropriae model, sepwise regression mehod has been used. In his mehod, he independen variables are insered ino he model according o heir significance unil all he significan variables ener he model. Table 3 shows he resuls of sepwise regression for deermining he appropriae model. To deermine he appropriae model, he process of variables significance es has been conduced in 6

5 Inl. Res. J. Appl. Basic. Sci. Vol., 4 (0), 0000, 2013 seps. The coefficienofdeerminaion a he 6 h sep equals o 0.09 which shows only nearly 1% decrease compared o he complee model. In he oher words, in he final model 6 variables ou of 10 were significan.

6 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (9), , 2013 Inerpreaion of he coefficiens indicaes ha if working capialmanagemen increases; he negaive coefficien of skewness increases. I means movemen oward posiive direcion and decreasesof he possibiliy of sock price crash. Similar inerpreaion can be concluded from oher coefficiens. CONCLUSION According o he exising heories, reducion in cash conversion cycle is an ideal posiion ha companies are looking for, and probably will reduce he risk of fall in sock prices. The resuls obained from he presen research show ha here is a posiive significan relaionship beween cash conversion cycle and fall in sock prices, meaning ha when he cash conversion cycle decreases, he risk of fall in sock prices also decrease. Cash conversion cycle implies he ime needed for he funds o be convered o a produc during he regular operaion of he company. Reducing his period means ha o produce a cerain produc less cash is required. A company can decrease he cash conversion cycle by shorening he period in which cash in he form of invenory or shorening he ime required for collecion of receivables. Lower he cash conversion cycle means company is in beer financial posiion. Therefore, if a company keeps high amoun of curren asses, he profiabiliy of he company will be weakened. This can be due o he fac ha keeping high amoun of curren asses such as invenory can increase he cos of mainaining maerials and also insurance fees. Also increase in credi sales can increase he risk of no receiving receivables which can lead o deb financing and increasing he ineres cos. According o he resuls obained from his research i is recommended o financial managers o ake ino accoun he advanage and disadvanages of reducing he cash conversion cycle o efficienly manage he working capial because excessive reducion of cash conversion cycle can adversely affec he abiliy of company o pay is due debs which can lead o decrease in company s credi raing and increase he risk of bankrupcy and finally fall in sock prices. Table 1. The resuls of regression es Defaul Type of es Resul Residuals are normal Kolmogorov- Smironov Values 0/05 for significan level of negaive coefficien skewness from 1998 o 2011 is higher han 0/05 and herefore can be concluded ha he amouns remaining in he regression line are normally disribued. Homogeneiy of variance graph of residual values versus Scaered in almos all random graphs and no paern. Their lack of correlaion beween Durbin-Wason values close o 2 indicae a correlaion of heir residuals residuals. There is linear relaionship and here Dispersion curves In some, linear relaionship was good, in ohers here is no are no influenial poins The lack of lineariy beween independen variables VIF saisics REFERENCES significan relaionship. These values for esimaing model are calculaed and in all cases less han 5.1 Callen JL, Fang X "Insiuional Invesors and Crash Risk: Monioring or Expropriaion? Chen J, Hong H, e al "Forecasing crashes: rading volume, pas reurns, and condiional skewness in sock prices*."journal of financial Economics 61(3): Deloof M Does Working Capial Managemen Affec Profiabiliy of Belgian Firms? Journal of Business Finance and Accouning 30, Blackwell Publishing: 30. Deloof M Does Working Capial Managemen Affec Profiabiliy of Belgian Firms? Journal of Business Finance and Accouning 30, Blackwell Publishing: 30. Filbeck G, Krueger G, Krueger TM An Analysis of Working Capial Managemen Resuls across Indusries.Mid-American Journal of Business, Vol. 20, Issue 2: Garcia T, Marinez Solano P Effecs of working capial managemen on SME profiabiliy.inernaional Journal of Managerial Finance 3: Givoly D, Hayn C "The changing ime-series properies of earnings, cash flows and accruals: Has financial reporing become more conservaive?* 1."Journal of accouning and economics29(3): Hong H, Sein JC "Differences of opinion, shor sales consrains, and marke crashes."review of financial sudies16(2): 487. Huon A, Marcus A, e al "Opaque financial repors and he disribuion of sock reurns."journal of financial Economics94: Jin L, Myers SC "R2 around he world: New heory and new ess."journal of financial Economics79(2): Kieschnick R, LaPlane M Working Capial Managemen, Access o Financing, and Firm Value. Universiy of Texas a Dallas School of Managemen: Kim JB, Zhang L "Does accouning conservaism reduce sock price crash risk? firm-level evidence."unpublished working paper. Ciy Universiy of Hong Kong. Kirschenheier M,. Melumad ND "Can Big Bah and Earnings Smoohing Co exis as Equilibrium Financial Reporing Sraegies?"Journal of Accouning Research 40(3): Lazaridis I, Tryfonidis D Relaionship beween Working Capial Managemen and Profiabiliy of Lised Companies in he Ahens Sock Exchange.Journal of Operaions Managemen, Vol. 25, No. 4: Nobanee H Working Capial Managemen and Firm's Profiabiliy: an Opimal Cash Conversion Cycle.Deparmen of Banking and Finance, he Hashemie Universiy: Sloan RG "Do sock prices fully reflec informaion in accruals and cash flows abou fuure earnings?"accouning Review:

7 Inl. Res. J. Appl. Basic. Sci. Vol., 6 (9), , 2013 Table 2. Coefficiens of model Coefficien Nonsandard Coefficiens Sandardized coefficiens Model ß Sandard error ß saisic Significan The linear level saisic Consan value working capial managemen Size of firm Profiabiliy (+1) Leverage Heerogeneiy of invesor beliefs Conservaism lack of Transparency of financial informaion Average monhly reurn negaive coefficien skewness Coefficien of deerminaion F saisic Significan level of F saisic Adjused coefficien of deerminaion Durbin-Wason saisic 2.01 Table 3. Esimaed model and is coefficien Coefficien Nonsandard Coefficiens Sandardized coefficiens Model ß Sandard error ß saisic Significan The linear level saisic Consan value negaive coefficien skewness Profiabiliy (+1) lack of Transparency of financial informaion Heerogeneiy of invesor beliefs Cash convenion cycle conservaism Coefficien of deerminaion in he sixh sage Coefficien of deerminaion in he fifh sage Durbin-Wason saisic Esimaed model: NCSKEW 1 0 /174NCSKEW 0 / / 002CCC 0 / 582OPAQUE 0 / 416ROE 1 7DTURN 0 / 864CONSER 1228