Skip to main content
SpringerLink
Log in

An analysis of working capital efficiency and shareholder return

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

Since 1997, CFO Magazine has published a ranking of 1000 companies in its “Working Capital Scorecard.” Our research explores the question as to whether working capital management practices based on the accounting metrics used by CFO Magazine serve as a basis for investor-based strategies for superior return generation. We examine the stock performance of top ranked companies from 1997 to 2012 against benchmark portfolios. Controlling for market, market capitalization, book to market, momentum factors, liquidity factors, and corporate governance; the higher ranked firms produce statistically higher excess returns than bottom ranked firms. In bull market periods, firms with superior working capital management outperformed their counterparts on a raw and risk-adjusted basis. These top ranked firms also provide statistically significant active returns regardless of market cycle. In sum, our results indicate that shareholders reward firms with superior working capital management strategies with higher raw and risk-adjusted performance over longer holding periods across the economic cycle especially in bear markets cycles.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Due to the data limitations and availability from Research Insight®, the measures that we calculate are slightly different from the results calculated from REL Research.

  2. We run both the t test and nonparametric tests on the working capital measures between top rank 25 sample and bottom rank 25 sample, and the results show that top rank 25 sample has statistically (at least 1 % level) better working capital measures in all cases. The results are omitted for brevity.

  3. According to CFO Magazine, the publication dates are the first day of the month in which the survey appears: June for 1997, 2009, 2010; July for 1998, 1999, 2001, 2007, 2011; August for 2000, 2002, 2012; and September for 2003, 2004, 2005, 2006, and 2008.

  4. For 2012, we hold the portfolio until December 31, 2012, due to the return data availability from CRSP.

  5. CFO Magazine has a different classification of the industry as the standard industry code (SIC). For example, Aerospace and Defense Industry includes companies from 20 different 4-digit SIC codes. We use the industry definition of CFO Magazine to select matched sample.

  6. We further test whether the top rank 25 sample has statistically superior raw returns compared with the bottom rank 25 sample. The results are reported in Table 5.

  7. Since the liquidity measures are highly skewed in our overall sample, we take log of these measures to calculate the correlations.

  8. Since the liquidity measures are highly skewed, we use cross-sectional medians instead of averages when reporting the descriptive statistics.

  9. The difference is statically significant at the 1 percent level.

  10. Due to data availability, we test the data for G-index for 1997–2006.

References

  • Ambachtsheer K (1977) Where are all of the customers’ alpha? J Portf Manag 4:52–55

    Article  Google Scholar 

  • Ambachtsheer K, Farrell J (1979) Can active management add value? Financ Anal J 35:39–47

    Article  Google Scholar 

  • Amihud Y (2002) Illiquidity and stock returns: cross-section and time-series effects. J Financ Mark 5:31–56

    Article  Google Scholar 

  • Amihud Y, Mendelson H (1986) Asset pricing and the bid-ask spread. J Financ Econ 17:223–249

    Article  Google Scholar 

  • Anagnostopoulou S (2013) Cash holdings: determining factors and impact on future operating performance for listed versus unlisted firms. Rev Pac Basin Financ Mark Polic 16:1–47

    Google Scholar 

  • Anderson J, Smith G (2006) A great company can be a great investment. Financ Anal J 62:86–93

    Article  Google Scholar 

  • Anginer D, Statman M (2010) Stocks of admired and spurned companies. J Portf Manag 36:71–78

    Article  Google Scholar 

  • Banos-Caballero S, Garcia-Teruel P, Martinez-Solano P (2010) Working capital management in SMEs. Account Finance 50:511–527

    Article  Google Scholar 

  • Barber B, Lyon J (1997) Detecting long-run abnormal stock returns: the empirical power and specification of test statistics. J Financ Econ 43:341–372

    Article  Google Scholar 

  • Barberis N, Shleifer A, Vishny R (1998) A model for investor sentiment. J Financ Econ 49:307–343

    Article  Google Scholar 

  • Basu S (1977) Investment performance of common stocks in relation to their price-earnings ratios: a test of the efficient market hypothesis. J Finance 32:663–682

    Article  Google Scholar 

  • Bauman W, Conover C, Cox D (2002) Are the best small companies the best investments? J Financ Res 25:169–186

    Article  Google Scholar 

  • Beauchamp C, Hardin W, Hill M, Lawrey C (2014) Frictions and the contribution of inventory to shareholder wealth. J Financ Res 37:385–403

    Article  Google Scholar 

  • Bhardwaj R, Brooks L (1993) portfolio minus the risk-free rate over. J Financ Res 16:269–283

    Article  Google Scholar 

  • Bilinski P, Liu W, Strong N (2012) Does liquidity risk explain low firm performance following seasoned equity offerings? J Bank Finance 36:2770–2785

    Article  Google Scholar 

  • Boisjoly R (2009) The cash flow implications of managing working capital and capital investment. J Bus Econ Stud 15:98–109

    Google Scholar 

  • CFO Magazine (2014) CFO Media Kit 2014. http://cdn.cfo.com/content/uploads/2013/12/CFO_Media_Kit2014_V10.pdf

  • Chan W (2003) Stock price reaction to news and no-news: drift and reversal after headlines. J Financ Econ 70:223–260

    Article  Google Scholar 

  • Chan L, Lakonishok J (2004) Value and growth investing: review and update. Financ Anal J 60:71–86

    Article  Google Scholar 

  • Chan L, Jegadeesh N, Lakonishok J (1996) Momentum strategies. J Finance 51:1681–1713

    Article  Google Scholar 

  • Cheema M, Nartea G (2014) Momentum returns and information uncertainty: evidence from China. Pac Basin Finance J 30:173–188

    Article  Google Scholar 

  • Chordia T, Shivakumar L (2002) Momentum, business cycle, and time-varying expected returns. J Finance 57:985–1019

    Article  Google Scholar 

  • Conrad J, Kaul G (1993) Long-term market overreaction or biases in computed returns? J Finance 48:39–63

    Article  Google Scholar 

  • Core J, Guay W, Rusticus T (2006) Does weak governance cause weak stock returns? An examination of firm operating performance and investors’ expectations. J Finance 61:655–687

    Article  Google Scholar 

  • Estep T, Hanson N, Johnson C (1983) Sources of value and risk in common stocks. J Portf Manag 9:5–13

    Article  Google Scholar 

  • Fama E (1998) Market efficiency, long-term returns, and behavioral finance. J Financ Econ 49:283–306

    Article  Google Scholar 

  • Fama E, French K (1992) The cross-section of expected stock returns. J Finance 47:427–465

    Article  Google Scholar 

  • Fama E, French K (1993) Common risk factors in the returns on stocks and bonds. J Financ Econ 33:3–53

    Article  Google Scholar 

  • Fama E, French K (1996) Multifactor explanations of asset pricing anomalies. J Finance 51:55–84

    Article  Google Scholar 

  • Fang L, Peress J (2009) Media coverage and the cross-section of stock returns. J Finance 64:2023–2052

    Article  Google Scholar 

  • Faulkender M, Wang R (2006) Corporate financial policy and the value of cash. J Finance 41:1957–1990

    Article  Google Scholar 

  • Filbeck G, Krueger T (2005) An analysis of working capital management results across industries. Mid Am J Bus 20:11–18

    Article  Google Scholar 

  • Filbeck G, Gorman R, Preece D (1997) Fortune’s most admired firms: an investor’s perspective. Stud Econ Finance 18:74–93

    Article  Google Scholar 

  • Filbeck G, Krueger T, Preece D (2007) CFO Magazine’s ‘working capital survey:’ Do selected firms work for shareholders? Q J Bus Econ 46:3–22

    Google Scholar 

  • Filbeck G, Gorman R, Zhao X (2013) Barron’s most respected companies. Account Finance 53:623–641

    Article  Google Scholar 

  • Fuller R, Huberts L, Levinson M (1993) Return to E/P strategies, higgledy-piggledy growth, analysts’ forecast errors, and omitted risk factors. J Portf Manag 19:13–24

    Article  Google Scholar 

  • Gervais S, Odean T (2001) Learning to be overconfident. Rev Financ Stud 14:1–27

    Article  Google Scholar 

  • Glaser M, Weber M (2009) Which past returns affect trading volume? J Financ Mark 12:1–31

    Article  Google Scholar 

  • Gompers P, Ishii J, Metrick A (2003) Corporate governance and equity prices. Q J Econ 118:107–155

    Article  Google Scholar 

  • Graham B (1949) The intelligent investor. Harper & Brothers, New York

    Google Scholar 

  • Graham B, Dodd D (1934) Security analysis. McGraw-Hill, New York

    Google Scholar 

  • Gu Z, Xue J (2007) Do analysts overreact to extreme good news in earnings? Rev Quant Financ Account 29:415–431

    Article  Google Scholar 

  • Harris R, Marston F (1994) Value versus growth stocks: book-to-market, growth, and beta. Financ Anal J 50:18–24

    Article  Google Scholar 

  • Haugen R (1997) The race between value and growth. J Invest 6:23–31

    Article  Google Scholar 

  • Hill M, Kelly G, Highfield M (2010) Net operating working capital behavior: a first look. Financ Manag 39:783–805

    Article  Google Scholar 

  • Hong H, Lim T, Stein J (2000) Bad news travels slowly: size, analyst coverage, and the profitability of momentum strategies. J Finance 55:263–295

    Google Scholar 

  • Jegadeesh N, Titman S (1993) Returns to buying winners and selling losers: implications for stock market efficiency. J Finance 48:65–91

    Article  Google Scholar 

  • Jegadeesh N, Titman S (2001) Profitability of momentum strategy: an evaluation of alternative explanations. J Finance 56:699–721

    Article  Google Scholar 

  • Jensen M (1968) The performance of mutual funds in the period 1945–1964. J Finance 23:389–416

    Article  Google Scholar 

  • Jiang G, Li D, Li G (2012) Capital investment and momentum strategies. Rev Quant Financ Account 39:165–188

    Article  Google Scholar 

  • Keene M, Peterson D (2007) The importance of liquidity as a factor in asset pricing. J Financ Res 30:91–109

    Article  Google Scholar 

  • Kieschnick R, Laplante M, Moussawi R (2013) Working capital management and shareholders wealth. Rev Finance 17:1827–1852

    Article  Google Scholar 

  • Kim M, Burnie D (2002) The firm size effect and the economic cycle. J Financ Res 25:111–124

    Article  Google Scholar 

  • Kim J, Lipka R, Heibatollah S (2012) Portfolio performance and accounting measures of earnings: an alternative look at usefulness. Rev Quant Financ Account 38:87–107

    Article  Google Scholar 

  • Kusnadi Y (2011) Do corporate governance mechanisms matter for cash holdings and firm value? Pac Basin Finance J 19:554–570

    Article  Google Scholar 

  • Lakonishok J, Shleifer A, Vishny R (1994) Contrarian investment, extrapolation and risk. J Finance 49:1541–1578

    Article  Google Scholar 

  • Lee E, Powell R (2011) Excess cash holdings and shareholder value. Account Finance 51:549–574

    Article  Google Scholar 

  • Liu W (2006) A liquidity-augmented capital asset pricing model. J Financ Econ 82:631–671

    Article  Google Scholar 

  • Loughran T, Ritter J (2000) Uniformly least powerful tests of market efficiency. J Financ Econ 55:361–389

    Article  Google Scholar 

  • McGuire J, Schneeweis T, Branch B (1990) Perceptions of firm quality: a cause or result of firm performance. J Manag 16:167–180

    Google Scholar 

  • Mueller F (1953) Corporate working capital and liquidity. J Bus Univ Chic 26:157–172

    Article  Google Scholar 

  • Nazir M, Afza T (2009) Impact of aggressive working capital management policy on firms’ profitability. IUP J Appl Finance 15:19–30

    Google Scholar 

  • Nicholson S (1960) Price/earnings ratio. Financ Anal J 16:43–45

    Article  Google Scholar 

  • Qin Y, Bai M (2014) Foreign ownership restriction and momentum—evidence from emerging markets. Int Rev Finance 14:237–261

    Article  Google Scholar 

  • Sagi J, Seasholes M (2007) Firm-specific attributes and the cross-section of momentum. J Financ Econ 84:389–434

    Article  Google Scholar 

  • Sharpe W (1966) Mutual fund performance. J Bus 39:119–138

    Article  Google Scholar 

  • Sharpe W (1994) The Sharpe ratio, 1994. J Portf Manag 21:49–58

    Article  Google Scholar 

  • Shin H, Soenen L (1998) Efficiency of working capital and corporate profitability. Financ Pract Educ 8:37–45

    Google Scholar 

  • Siganos A, Chelley-Steeley P (2006) Momentum profits following bull and bear markets. J Asset Manag 6:381–388

    Article  Google Scholar 

  • Sorensen E, Williamson D (1985) Some evidence of the value of dividend discount models. Financ Anal J 41:60–69

    Article  Google Scholar 

  • Statman M, Fisher K, Anginer D (2008) Affect in behavioral asset-pricing model. Financ Anal J 64:20–29

    Article  Google Scholar 

  • Treynor J (1965) How to rate management of investment funds. Harvard Bus Rev 43:63–75

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Penn State Erie, the Behrend College, 286 Burke, Erie, PA, 16563, USA

    Greg Filbeck, Xin Zhao & Ryan Knoll

  2. BNY Mellon, 101 Barclay Street, 4th Floor West, New York City, NY, 10286, USA

    Ryan Knoll

Authors
  1. Greg Filbeck
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Xin Zhao
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ryan Knoll
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Greg Filbeck.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Filbeck, G., Zhao, X. & Knoll, R. An analysis of working capital efficiency and shareholder return. Rev Quant Finan Acc 48, 265–288 (2017). https://doi.org/10.1007/s11156-015-0550-0

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-015-0550-0

Keywords

JEL Classification

Search

Navigation