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Impact of Working Capital Management to Firm Profitability and Firm Value in Different Business Cycle: Evidence from Indonesia

Theresia Mega Amelia, Mandra Lazuardi Kitri


Abstract . The business cycle is a natural phenomenon that occurs as long as the country's economy is still growing. A huge shock in 2008 brings a significant decline in Indonesia's economic growth. During this business, condition firm might have to change their corporate finance strategy. Nevertheless, during the recession, company might face financial constraint to the capital market thus change their external financing method to internal financing method which is working capital management. Working capital management has a strong relationship with profitability, the higher the profit, the firms have to bear higher risks. Following the previous research, the proxy of firms' profitability is ROA meanwhile firms' value is measured by Tobin’s Q. Using panel regression from 2008 until 2018 with quarterly data of 146 manufacturing firms listed in BEI, the result is obtained using fixed effect and generalized least square method. The result of this research shows that working capital management has more significant effect on firm profitability during the recession rather during the expansion. On the other hand, aggressive inventory management and cash reserves have a significant effect on firm value during recession. Thus, our research advice firms to take aggressive working capital management during the recession to boost up both profitability and firm value.

Keywords: Inventory Days, Receivable Days, Payable Days, Cash Conversion Cycle, Cash Reserves, Firm Profitability, Firm Value


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