Access to External Financial Resources, Bargaining Power, and Speed of Working Capital Adjustment

Since Smith (1980) emphasized the importance of working capital management1 due to its impact on the firm's profitability and risk, the theoretical and empirical literature has focused on working capital management. In this regard, some studies have focused more on how investment in working capital affects business unit performance and a few studies have focused on the determinants of this investment. However, some studies have ignored the risk of a decrease in sales and disruption in the production process due to a decrease in the amount of investment in working capital. Furthermore, some researches have not considered the increase in the risk of bankruptcy that may be caused by the increase in the amount of investment in working capital. Therefore, investing more or less than the optimal amount in working capital may have a negative impact on the firm's performance. Based on the trade-off theory, firms may have an optimal (or target) level of working capital whose benefits and risks are balanced. However, firms adjust the amount of working capital only when the benefits of doing so exceed the costs of adjustment. Various factors such as financial costs, company size, growth opportunities, financial crises, company profitability, economic growth, etc. affect working capital adjustment costs; but the two variables of access to external financial resources and the bargaining power of the business unit have received less attention. Although the existence of the target working capital level and the factors affecting the speed of its achievement in foreign researches, but in domestic research, only Dadashzadeh and Hejazi (2019) paid attention to some aspects of this issue. Therefore, due to the importance of the topic, in this research, the speed of adjustment of working capital has been discussed and the effect of access to external financial resources and the bargaining power of the business unit on the speed of adjustment has been the focus of attention.

The research sample includes 137 firms (2,466 firm-year observations) listed on the Tehran Stock Exchange during the period 2003-2020, which are set in the form of unbalanced panel data. In order to measure the speed of working capital adjustment and also to test the hypotheses, a partial adjustment approach with a dynamic model using the system generalized method of moments estimator (System-GMM) has been used. For robustness tests, we use the difference generalized method of moments estimator (Difference-GMM). Furthermore, to address the heterogeneity of speed of adjustment, we use Orlova and Rao’s (2018) two-stage approach.

Overall, the results show that compared with other firms, firms that have more access to external financing and have more bargaining power in business negotiations, have a faster working capital speed of adjustment. Findings from robust tests that confirm our initial results are consistent with the trade-off (between costs and benefits of debts) theory. The results of this research are useful for managers and investors. Considering the importance and benefits of having the optimal level of working capital and its positive effect on firm's performance and its value, and the fact that firms with a higher adjustment speed achieve the aforementioned benefits faster, managers are advised to increase and facilitate access to external financial resources and increase the firm's ability to participate in business negotiations, because access to more financial resources and bargaining power and a higher hand in business negotiations will reduce adjustment costs and benefit the firm faster from the benefits of the optimal working capital ratio. On the other hand, investors are also advised to consider the components of access to external financial resources and the bargaining power of the business unit when making investment decisions, because these two variables that affect the speed of adjustment of working capital ultimately affect profitability and efficiency.

Awareness of the role of external financial resources and bargaining power in increasing the speed of working capital adjustment in order to achieve an optimal level can provide useful information to business managers and investors. In all stages of this research, procedures have been chosen and implemented so that the results of the research have appropriate generalizability; however, there may be limitations that prevent this from happening. One of the things that may influence the results is the use of only one macroeconomic variable (GDP growth) and not using the variable at the industry level to explain working capital management. Although this action has been carried out following previous researches, it is possible that the use of other economic variables as well as the use of a variable at the industry level to explain changes in working capital management may have different results. In the continuation of the path and to clarify other aspects of the issue, it is possible to advise future researchers to carry out the current research in the time periods before and after the intensification of economic sanctions against Iran, to include another variable to measure the macroeconomic situation and also to use a variable at the industry level. Check to explain working capital management.