Investigating the Relationship between Working Capital Management and Stock Price Crash Risk

  • Ebrahim Mansoori Department of Economics and Finance, Kurdistan Business School, University of Kurdistan Hewler, Kurdistan Region – F.R. Iraq http://orcid.org/0000-0001-9155-1235
  • Masood Elyasi Department of Economics and Finance, Kurdistan Business School, University of Kurdistan Hewler, Kurdistan Region – F.R. Iraq
  • Rahim Mohammadi Department of Economics and Finance, Kurdistan Business School, University of Kurdistan Hewler, Kurdistan Region – F.R. Iraq
Keywords: Stock Price Crash Risk, Tehran Stock Exchange, Working Capital

Abstract

The main purpose of this study is to investigate the effect of working capital management on stock price crash risk. The sample includes 103 Iranian firms listed on the Tehran Stock Exchange from 2013 to 2017. Panel data analysis with fixed effect estimation has been used to analyze the relationship between working capital management and stock price crash risk. Cash conversion cycle, working capital requirement, current, and quick ratios were applied as comprehensive measures for working capital management, and Hutton’s model was applied as a measure for stock price crash risk. The results indicate that there is a negative relationship between working capital indicators and stock price crash risk. Therefore, managers can use working capital strategies to decrease the risk of the stock price crash. Furthermore, asymmetry information may, in fact, increase a manager’s incentive to use working capital strategies to reduce the stock price crash risk.

Author Biographies

Ebrahim Mansoori, Department of Economics and Finance, Kurdistan Business School, University of Kurdistan Hewler, Kurdistan Region – F.R. Iraq

Ebrahim Mansoori is an Assistant Professor in Finance at the Kurdistan Business School (KBS), University of Kurdistan-Hawler (Kurdistan region, Iraq). Ebrahim holds a PhD degree in Corporate Finance from the University of Science Malaysia (USM), a Master-Degree in Accounting from Shiraz University, Shiraz (Iran), and a Bachelor of Accounting at Allame Tabatabayi University (Tehran-Iran). Before joining UKH, Ebrahim has worked as a lecturer at the School of Accounting, Mahabad Azad University, Iran, for 9 years from 2002 to 2010. Moreover, Ebrahim has one year experience as Financial Manager from 2006 to 2007 and two years’ experience as vice president of Financial and Administrative affairs from 2007 to 2009 at Mahabad Azad university.Then he joined USM as a PhD research student from 2010 to 2014. In addition, Ebrahim has worked as head of the Accounting department from 2014 to 2018 at Mahabad Azad University before joining UKH. 

Masood Elyasi, Department of Economics and Finance, Kurdistan Business School, University of Kurdistan Hewler, Kurdistan Region – F.R. Iraq

Masood Elyasi, Master student, Department of Accounting, Islamic Azad University, Mahabad branch, Mahabad, Iran.

Rahim Mohammadi, Department of Economics and Finance, Kurdistan Business School, University of Kurdistan Hewler, Kurdistan Region – F.R. Iraq

Rahim Mohammadi, Master student, Department of Accounting Islamic Azad University, Mahabad branch, Mahabad, Iran.

References

Andren, T. (2007). Econometrics. United Kingdom: Thomas Andren and Ventus Publishing Aps.

Arachchi, A., Perera, W., & Vijayakumaran, R. (2017). The impact of working capital management on firm value: Evidence from a frontier market. Asian Journal of Finance and Accounting, 9(2), 399-413.

Audrey, W. H., & Grace, H. W. (2019). The fair value of investment property and stock price crash risk. Asia-Pacific Journal of Accounting and Economics, 26(1-2), 38-63.

Baltagi, B. H. (2008). Econometric Analysis of Panel Data. Chichester: John Wiley and Sons Ltd.

Bandara, R. (2015). Impact of working capital management policy on market value addition. Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics, 1(2), 354-373.

Callen, J. L., & Fang, X. (2015). Religion and stock price crash risk. Journal of Financial and Quantitative Analysis, 50(1 and 2), 169-195.

Chiou, J. R., & Cheng, L. (2006). The determinants of working capital management. Journal of American Academy of Business, 10(1), 149-155.

Faulkender, M., & Wang, R. (2006). Corporate financial policy and the value of cash. Journal of Finance, (61), 1957-1997.

Filbeck, G., Krueger, T., & Preece, D. (2007). CFO magazine’s working capital survey: Do selected firms work for shareholders? Quarterly Journal of Business and Economics, 46(2), 3-22.

Habib, A., & Hasan, M. (2016). Auditor-provided tax services and stock price crash risk. Accounting and Business Research, 46(1), 51-82.

Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2010). Multivariate Data Analysis. 7th ed. Upper Saddle River, New Jersey: Prentice Hall.

Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R2, and crash risk. Journal of Financial Economics, 94, 67-86.

Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47, 241-276.

Mansoori, E., & Muhammad, J. (2012). Determinants of working capital management: Case of Singapore firms. Research Journal of Finance and Accounting, 3(11), 15-23.

Mansoori, E., & Muhammad, J. (2012). The effect of working capital management on firm’s profitability: Evidence from Singapore. Interdisciplinary Journal of Contemporary Research in Business, 4(5), 472-486.

Moghaddamnia, M., & Mansoori, E. (2016). Relationship between financial constraints, economic crises and working capital management of companies listed on Tehran stock exchange. International Business Management, 10(15), 3141-3145.

Myers, S. C., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 187-221.

Perera, W., & Priyashantha, P. (2018). The impact of working capital management on shareholders’ wealth and profitability: Evidence from Colombo stock exchange. Investment Management and Financial Innovations, 15(2), 104-115.

Pouraghajan, A., Taghipouryan, Y., & Bavandi, S. (2015). Effect of working capital strategies on stock price changes and cash value added of companies listed in Tehran stock exchange. Applied Mathematics in Engineering, Management and Technology, 15(1), 762-770.

Rostami, R., & Mansooi, E. (2017). Evaluate the relationship between risk management and working capital management in companies accepted in Tehran stock exchange. International Journal of Environmental and Science Education, 12(2), 291-301.

Stulz, R. (2005). The limits of financial globalization. The Journal of Finance, 60(4), 1595-1638.
Published
2019-05-23
How to Cite
Mansoori, E., Elyasi, M., & Mohammadi, R. (2019, May 23). Investigating the Relationship between Working Capital Management and Stock Price Crash Risk. UKH Journal of Social Sciences, 3(1), 28-35. https://doi.org/https://doi.org/10.25079/ukhjss.v3n1y2019.pp28-35
Section
Research Articles