Available online at www.sciencedirect.com ScienceDirect Procedia - Social and Behavioral Sciences 205 ( 2015 ) 499 504 6th World conference on Psychology Counseling and Guidance, 14-16 May 2015 The Relationship between the Efficiency of Working Capital Management Companies and Corporate Rule in Tehran Stock Exchange Shamsaldin Jamalinesari a *, Hossein Soheili b a Department of Management, ShirvanandChardavol Branch, Islamic Azad University, ShirvanandChardavol, Iran b Young Researchers and Elite Club, Ilam Branch, Islamic Azad University, Ilam, Iran Abstract The management of working capital, in the context of this study, refers to the management of current assets and liabilities which it is applied to equilibrate current assets and liabilities. So, the control of current assets and liabilities is of great importance. Therefore, mechanisms are essential to monitor and control this kind of management. Appropriate corporate governance includes of mechanisms that help maintain an optimal working capital in an organization. Hence, the purpose of the present study is to investigate the impact of corporate governance on the management efficiency of working capital in accepted companies in Tehran's stock exchange for the period of 2008-2013. To achieve the objectives of this study, a sample was selected of 115 companies through elimination sampling. This study used mechanisms such as size of the board of directors, independence of the board of directors, institutional stockholders and ownership concentration. The variables used for measuring the working capital management include accounts payable, cash conversion cycle, cash holdings, current ratio and management efficiency of working capital. The findings of this study indicate that corporate governance mechanisms play an important role in improving the efficiency of working capital 2015 The Authors. Published by by Elsevier Ltd. Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of Academic World Research and Education Center. Peer-review under responsibility of Academic World Research and Education Center. Keywords Corporate Governance, Management Efficiency of Working Capital, Equilibrium Theory, Hierarchy Theory. 1. Introduction * Shamsaldin Jamalinesari. Tel.: +989188419925; Fax: +988432228202 E-mail address:eyvan649@gmail.com 1877-0428 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of Academic World Research and Education Center. doi:10.1016/j.sbspro.2015.09.052
500 Shamsaldin Jamalinesari and Hossein Soheili / Procedia - Social and Behavioral Sciences 205 ( 2015 ) 499 504 Efficient management of working capital is necessary for the survival of the most companies and the management of working capital refers to the management of assets and liabilities. The optimization of residual working capital helps to the minimization related to the working capital management and increases the company's free cash flow (Gunsun, 2007). The inefficient policy of the working capital management arises from the weak corporate governance which has a negative impact on the stockholders' value. The influential corporate governance plays as a mechanism in the company's reservers management (Gill and Biger, 2013). According to Kinz's theory, companies save the cash for precautionary, speculative and transactional motives (Besley and Brigham, 2005; Gill and Shah, 2012). Kim et al. (2011) state that the precautionary and transactional motives have an important role in manifesting the determinant factors of cash holding. The surplus cash in the companies' accountings is not necessarily profitable for the company. The surplus cash may occur due to the weak corporate governance. Equilibrium, hierarchy and free cash flow theories are applied to explain the pattern of cash holding level. According to the equilibrium theory, the optimal cash holding is achieved by the weighted average of marginal costs and marginal benifits of cash holding (Afza and Adnan, 2007). Cash holding cost is the opportunity cost to invest in the current assets. Mariz's equilibrium theory (1984) suggest that, for financing the investment, companies first resort to the accumulated earnings and internal reservers (for example, cash in hand), then go towards the risk free and risky debts and finally select the financing through stock in order to minimize information asymmetry costs and other financial costs. According to Afza and Adnan's view (2007), holding the optimal level of liquidity is necessary for the organization in order to smooth the company's operation. The cash holding level is distinguishable through the company's policies about the requirements of the working capital management, cash flow management, dividend, investment and assets management (Epler et al., 1999). 2. Literature Review Nadiri (1969) was the first person who studied the working capital management. Since 1969, several researchers established new theories about holding an optimal level of cash balances by using Nadiri's model. But few studies have been already done about the impact of corporate governance mechanisms and the management efficiency of working capital. Among working capital items, cash is considered the most important cash assets which is the criterion of the company's ability to fulfil its obligations. Although cash holding is important for fulfilling the obligations, the idle cash does not add value to the company. Yet, the companies need to maintain cash reserve's in order to ensure that timing of cash movement provides the positive cash flow. So, the optimal level of held reserves is a vital element which allows the companies to enhance their business (Gill and Shah, 2012). Corporate governance plays an important role in controlling the working capital management through regulating policies. You cannot ignore the managing directors role, size of the board of directors, independence of the board of directors, managerial ownership and audit committee in the working capital management (Gill and Biger, 2013). Duality status of the managing director, size of the board of directors and nonexecutive directors ratio help to the maintence and optimal level of the working capital of the organization. Also, the period of office of board of directors helps improving the working capital management (Gill and Shah, 2012). By using Canadian companies data, Gill and Mathur (2011) explored that sale growth positively influences cash holding level for the financial period of 2009-2011. The findings also suggest that duality status of the board of directors and its size reversely effect on the net working capital. By using 83 Iranian companies in Tehran's stock exchange for the period of 2001-2010, Valipor et. al (2012) explored that there was a negative relationship between sales growth and cash conversion cycle. 3. Research Hypotheses 1. There is a relationship between corporate governance mechanisms and accounts payable management.
Shamsaldin Jamalinesari and Hossein Soheili / Procedia - Social and Behavioral Sciences 205 ( 2015 ) 499 504 501 2. There is a relationship between corporate governance mechanisms and cash conversion cycle management. 3. There is a relationship between corporate governance mechanisms and cash management. 3.1. Statistical Population and Sampling Method The statistical population of this study was all accepted companies in Tehran's stock exchange in the period of 2006-2011. The sampling method of this study was a systematic elimination one. 4. Research Variables Dependent variables: The dependent variables of this study are average debt payment period, cash conversion cycle, cash holding level and current ratio. Independent variables: The independent variables of this study are size of the board of directors, independence of the board of directors' members, institutional stockholders and institutional ownership concentration. 5. Research Findings Table 1. Shows Descriptive Statistics of the Study's Variables. The Average Debts Paying Period is 65.97 days. Table 1. Descriptive Statistics of the Study's Variables Maximum Minimum Standard Abbreviation Mode Mean Deviation signs Variable's Name 766.46 0.303 95.49 58.51 83.43 AR Accounts Payable 414.32 2.020 67.54 103.27 112.06 INV Cash Conversion Cycle 312.11 2.723 42.05 57.83 65.97 AP Cash Holding 980.36 0.000 108.20 86.48 113.40 CCC Current Ratio 3.509 0.023 0.521 1.955 1.861 CH Size of Board of Directors 2.306 0.000 0.266 0.167 0.248 CR Independence of Board of Directors 4.085 0.000 0.271 0.168 0.242 CCE Institutional Stockholders 9 2 0.926 6.00 5.65 BRDSIZE Ownership Concentration 13.99 10.77 0.571 11.85 11.89 SIZE Size 12.47 0.067 1.604 1.134 1.667 GO Growth Opportunities 3.060 0.040 0.222 0.603 0.586 FL Financial Leverage 0.916-0.207 0.155 0.161 0.185 ROA Return on Assets 8 1 2.086 3.00 3.54 TENURE Tenure of Auditor It seems that different credit conditions govern in the supply market of sample companies' products and supply market of materials and goods so that the average credit period in the supply market and materials and goods supply market is 83 and 66 days, respectively. The average cash holding level and current ratio is 1.861 and 0.248, respectively which are significantly consistent with the studies of Gill and Shah (2012) and Gill and Biger (2013). The results of table 2 indicate that there is a negative and significant relationship between the size of the board of directors and debt payment period so the accounts payable management (increase of payment period) is more effective in companies with small boards of directors compared to companies with big ones. Also, there is a positive relationship between the independence of the board of directors and the debt payment period and it denotes that the increase of nonexecutive directors of the board of directors causes the improvement of
502 Shamsaldin Jamalinesari and Hossein Soheili / Procedia - Social and Behavioral Sciences 205 ( 2015 ) 499 504 accounts payable management. Adjusted determination coefficient indicates that 6.1% of the changes of debt payment period (dependent variable) is explained by control and independent variables. Durbin-Watson statistic which is 1.780 indicates the non-exsitence of autocorrelation between error functions in regression equation. The amount of F significance level is 0.000 and less than 0.05 which denotes significance of the model. Table 2. Relationship between Corporate Governance Mechanisms and Debt Payment Period INV=α 0+β 1 BRDSIZE it + β 2 BRDIND it + β 3 INOWN it + β 4 OWNCON it + β 5 SIZE it + β 6 MBV it + β 7 LEV it + β 8 ROA it + β 9 TENURE it + ε it VIF P-Value t Beta - 0.011 2.536 246.33 C 1.022 0.000-4.091-19.14 BRDSIZE 1.034 0.001 3.413 99.03 BRDIND 1.053 0.092 1.687 36.79 INOWN 1.00 0.528 0.632 7.661 OWNCON 1.014 0.438-0.777-5.865 SIZE 1.552 0.440 0.772 2.569 MBV 1.282 0.906-0.118-2.577 LEV 1.527 0.002-3.063-104.55 ROA 1.009 0.045-2.010-4.147 TENURE 0.061=R 2 D-W=1.780 F (Statistic)=0.000 F=5.319 The results of table 3 indicate that there is a negative and significant relationship between the size of the board of directors and institutional stockholders and cash conversion cycle, so, in companies which the members of the board of directors are low and the rate of institutional stockholders ownership is small, cash conversion cycle is shorter than other companies. Adjusted determination coefficient indicates that 5% of the changes of cash conversion cycle (dependent variable) is explained by control and independent variables. Durbin-Watson statistic which is 1.619 denotes the non-existence of autocorrelation between error functions in regression equation. The amount of F significance level is 0.000 and less than 0.05 which represents significance of the model. Table 3. Relationship Between Corporate Governance Mechanisms and cashconversion Cycle INV=α 0+β 1 BRDSIZE it + β 2 BRDIND it + β 3 INOWN it + β 4 OWNCON it + β 5 SIZE it + β 6 MBV it + β 7 LEV it + β 8 ROA it + β 9 TENURE it + ε it VIF P-Value t Beta - 0.000 5.224 495.85 C 1.022 0.008-2.645-12.092 BRDSIZE 1.034 0.259 1.130 32.030 BRDIND 1.053 0.005-2.803-59.73 INOWN 1.00 0.356-0.923-10.93 OWNCON 1.014 0.005-2.832-20.89 SIZE 1.552 0.015 2.445 79.85 MBV 1.282 0.529-0.630-13.38 LEV 1.527 0.867 0.167 5.572 ROA 1.009 0.491-0.689 5.572 TENURE 0.050=R 2 D-W=1.619 F (Statistic)=0.000 F =4.535 Table 4 indicates that there is a negative and significant relationship between the size of the board of directors and cash holding level, so cash management is more effective in companies with small boards of directors compared to companies with big ones. Also, there is a positive relationship between the independence of the board of directors and cash holding level and it denotes that the increase of number of nonexecutive directors of the board of directors causes improvement of cash management. Adjusted determination coefficient represents that 5.1% of the changes of cash holding level (dependent variable) is explained by control and independent variables. Durbin-Watson statistic which is 1.534 denotes the non-existence of autocorrelation between error functions in regression equation. The amount of F significance level is 0.000 and less than 0.05 which indicates the significance of the model.
Shamsaldin Jamalinesari and Hossein Soheili / Procedia - Social and Behavioral Sciences 205 ( 2015 ) 499 504 503 Table 4. Relationship Between Corporate Governance Mechanisms and cash Management INV=α 0+β 1 BRDSIZE it + β 2 BRDIND it + β 3 INOWN it + β 4 OWNCON it + β 5 SIZE it + β 6 MBV it + β 7 LEV it + β 8 ROA it + β 9 TENURE it + ε it VIF P-Value t Beta - 0.000 7.925 3.757 C 1.022 0.039-2.071-0.047 BRDSIZE 1.034 0.015 2.446 0.346 BRDIND 1.053 0.441 0.772 0.082 INOWN 1.00 0.435 0.781 0.046 OWNCON 1.014 0.000-4.213-0.155 SIZE 1.552 0.043-2.028-0.033 MBV 1.282 0.726 0.350 0.037 LEV 1.527 0.488 0.693 0.115 ROA 1.009 0.560-0.583-0.006 TENURE 0.051=R 2 D-W=1.534 F (Statistic)=0.000 F =3.504 6. Discussion and Conclusion The present study aims to investigate the relationship between corporate governance mechanisms and management efficiency of working capital of the accepted companies in Tehran's stock exchange. Therefore, considering the sample conditions, 115 companies were selected as the sample. For corporate governance, mechanisms of the size of the board of directors, independence of the board of directors, institutional stockholders and ownership concentration were used. Also, accounts payable, cash conversion cycle, cash holding, liquidity ratio and management efficiency of working capital variables were used to measure working capital management. The results indicated that corporate governance mechanisms cause the improvement of management efficiency of working capital. These results are consistent with the findings of Gill and Mathur (2011), Gill and Shah (2012) and Gill Biger (2013). They indicated that small boards of directors have more effectiveness compared to big boards of directors in decision-making process. Among control variables, it was indicated that there is a positive and significant relationship between the company's size and liquidity management while there is a negative and significant relationship between the company's size and accounts payable management, cash conversion cycle and cash holding level. Results indicate that there is a positive and significant relationship between the growth opportunities and working capital management. The obtained evidences are consistent with the findings of Gill and Shah (2013). Hence, working capital management is conducted more effectively in companies whose growth opportunities are high. There is a negative and significant relationship between the financial leverage and cash management. References Afza, T., & Adnan, S.M. (2007). Determinants of corporate cash holdings: A case study of Pakistan. Proceedings of Singapore Economic Review Conference (SERC) 2007, August 01-04, Organized by Singapore Economics Review and The University of Manchester (Brooks World Poverty Institute), Singapore, pp. 164-5. Dittmar, A., Mahrt-Smith, J., & Servaes, H. (2003). International corporate governance and corporate cash holdings. Journal of Financial and Quantitative Analysis, Vol. 3 No. 1, pp. 111-133. Fama, E. F. and Jensen, M. C. (1983), Agency problems and residual claims, Journal of Law & Economics Vol. 26, pp. 327-49. Ganesan, V. (2007). An Analysis of Working Capital Management Efficiency in Telecommunication Equipment Industry, River Academic Journal, Vol. 3, No. 2, pp 1-10. Gill, A. and Mathur, N. (2011). "The impact of board size, and corporate liquidity onthe profitability of Canadian service firms", journal of Applied Finance and Banking, Vol. 1 No. 3, pp. 83-95. Gill, A. and Shah, C. (2012), "Determinants of corporate cash holdings: evidence from Canada", International Journal of Economics and Finance, Vol. 4 No. I, pp. 70-9. Isshaq, Z Bokpin, G.A. and Oinimah, J.M. (2009), "Corporate governance, ownership structure, cash holdings, and firm value on {he Ghana Stock Exchange", The Journal of Risk Finance, Vol. 10 No. 5, pp. 488-99.
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