Inderscience Publishers

Causal relationship between working capital management and firm's profitability: empirical evidence from Indian FMCG firms

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This study delves to examine the effects of working capital management on profitability as well as the causality between them in the context of Indian fast moving consumer goods firms (FMCG) firms. Working capital management is considered to be an important issue in a firm's overall financial management decision and it has both liquidity and profitability implications. The sample size for this study is restricted to 18 Indian FMCG firms listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) and the secondary data for analysis is retrieved from CMIE (Centre for Monitoring Indian Economy) for the ten–year period from 2001–02 to 2010–11. Apart from using descriptive statistics and Pearson's correlation analysis, fixed effects regression model (FEM) and Granger causality test are employed in the study. The results suggest feedback causality between ROTA and AC, and also between ROTA and AD, whereas, unidirectional causality is running from AI, CCC, DER and ln sales to ROTA.

Keywords: working capital management, firm profitability, fixed effects regression modelling, FEM, Granger causality test, fast moving consumer goods, FMCG industry

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