Optimal Level of Working Capital Management and Financial Constraint

Today, working capital accounts for the major part of a firm's capital and consequently Working Capital Management (WCM) which is one of the important duties of financial managers, plays an important role in achieving a firm's objectives, policies and success. This study is aimed to investigate the optimum level of working capital management when costs and benefits of investment in working capital are equal and the firm value is maximized and to review the impact of financial constraints on this optimal level. The sample consists of 177 firms listed in Tehran Stock Exchange in the period from 2005 to 2014. Working capital management and financial constraints are measured through cash conversion cycle and the combined scoring method, respectively. To test the hypothesis, this study uses multivariate nonlinear regression, generalized least squares and panel data. The results show that there is an optimal level for Working Capital Management, in which the firm value is optimal too. The results also show that financial constraints have a significant direct impact on this optimal level