Further Evidence Of The Creation Of Value Through The Management Of Net Working Capital: An Analysis Of S&P 500 Firms

Abstract

Net working capital is defined as the difference between current assets and current liabilities.  A firm’s net working capital policy is important because it affects the firm’s cost of capital and market value.  When net working capital is positive, it indicates that the firm is using long-term funds from lenders and/or shareholders to finance its current assets.  Since long-term funds, in general, are more expensive than short-term funds, theoretically, the greater use of net working capital will increase the firm’s cost of capital and lower its market value, ceteris paribus.  Consistent with the theory’s prediction, this study finds a negative relationship between the amount of net working capital used by S&P 500 firms and risk-adjusted shareholder returns in the 2009-2012 period.