IMPACT OF COVID-19 ON WORKING CAPITAL MANAGEMENT: A THEORETICAL APPROACH
DOI:
https://doi.org/10.46273/jobe.v10i1.224Keywords:
cash conversion cycle theory, COVID-19, market timing theory, risk-return trade-off theory, working capital managementAbstract
This study uses an archival technique to examine the impact of COVID-19 on working capital management. The study reviews previous research published in high-impact journals between 2000 and 2021. In addition, the study uses the risk trade-off theory, market timing theory, and cash conversion cycle theory as lenses to understand the relationship between COVID-19 and working capital management. Both theoretical and empirical reviews indicate that the impact of the COVID19 plague has weakened the finances of business organizations on a global scale. Thus, reviewed theories suggest that for the business organizations to come into the limelight of financial muscle amidst COVID-19, managers should review variable costs and work with their main partners, and access to funds that have been made available to corporate organizations as a result of the mitigation of the COVID-19 plague.
References
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Akgün, A. I. & Karataş, A. M. (2021). Investigating the relationship between working capital management and business performance: Evidence from the 2008 financial crisis of EU-28. International Journal of Managerial Finance, 17(4), 545-567.
Amankwah-Amoah, J., Khan, Z., & Wood, G. (2021). COVID-19 and business failures: The paradoxes of experience, scale, and scope for theory and practice. European Management Journal, 39(2), 179-184.
Amnim, O. E. L., Aipma, O. P. C., & Obiora C. F. (2021). Impact of Covid-19 Pandemic on Liquidity and Profitability of Firms in Nigeria. International Journal of Academic Research in Business and Social Sciences, 11(3), 1331-1344.
Baker, M. & R. Wurgler, (2002). Market Timing and Capital Structure, Journal of Finance 57, 1-32.
Baret, S., Celner, A., O’Reilly, M., & Shilling, M. (2020). COVID-19 potential implications for the banking and capital markets sector: Maintaining business and operational resilience. Deloitte Insights. https://www2.deloitte.com/content/dam/insights/us/articles/6693_covid-19-banking/DI_COVID-19-banking.pdf
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Belghitar, Y. & Khan, J. (2013). Governance mechanisms, investment opportunity set and SMEs cash holdings. Small Business Economics. 40(1), 59-72.
Bolaji, S. A. (2020). An Evaluation of the Impact of COVID-19 on the Working Capital of Small and Medium Enterprises (SMEs) in Nigeria. The International Journal of Business & Management, 8(9), 151-160.
Bolton, P, Chen, H., & Wang, N. (2013). Market timing, investment, and risk management. Journal of Financial Economics, 109, (1), 40-62.
Bloom, R. & Milkovich, T. (2012). Securities Offerings and Capital Structure Theory. Journal of Business Finance & Accounting, 21(1),77-91.
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Hope, O., Saidu, M., & Success, A. (2020). Coronavirus pandemic outbreak and firms performance in Nigeria. Management and Human Resource Research Journal, 9(4), 15-25.
Hu, J., Yan, Y. Y., & Deng, T. (2008). Market timing and capital structure: Evidence from China. Journal of Finance Theory and Practice, 3, 7-10.
Iwedi, M., Kocha, C. N., & Onakpono, A. E. (2020). Covid-19 pandemic, global trade wars and impact on the Nigeria Economy. Academic Journal of Current Research, 7(5), 71-82.
Jacob, O. N., Abigeal, I., & Lydia, A. E. (2020). Impact of COVID-19 on the Higher Institutions Development in Nigeria. Electronic Research Journal of Social Sciences and Humanities, 2, 126-135.
Kabuye, F., Kato, J. & Bugambiro, N. (2019). Internal Control Systems, Working Capital Management, and Financial Performance of Supermarkets. Cogent Business & Management, 6(1), 1573524.
Kasozi, J. (2017). The effect of working capital management on profitability: A case of listed manufacturing firms in South Africa. Investment Management and Financial Innovations, 14(2-2), 336-346.
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Kayhan, A. & Titman, S. (2007). Firms’ histories and their capital structure. Journal of Financial Economics, 83(1), 1-32.
Korajczyk, R. A. & Levy, A. (2003). Capital structure choice: Macroeconomic conditions and financial constraints. Journal of Financial Economics, 68(1), 75-109.
Kocha, C., Iwedi, M., & Barisua, S. (2020). COVID-19 outbreak, oil price shock and banking system liquidity: The Nigeria evidence. Greneer Journal of Economics and Accountancy, 8(1), 6-11.
Lew, S. H. (2019). Testing trade-off theory after U.S. housing bubble in 2008 [Paper presentation]. Dankook University Business School.
Lin, B. X. & Zhang, Y. Y. (2020). Impact of the COVID-19 pandemic on agricultural exports. Journal of Integrative Agriculture, 19(12), 2937-2945.
Mabandla, N. Z. (2018). The relationship between working capital management and the financial performance of listed food and beverage companies in South Africa [Doctoral Dissertation, University of South Africa, Department of Business Management].
McKee, M. & Stuckler, D. (2020). If the world fails to protect the economy, COVID-19 will damage health not just now but also in the future. Nature Medicine, 26, 640-642.
Mirza, N., Rahat, B., Naqvi, B., & Rizvi, S. K. A. (2020). Impact of Covid-19 on corporate solvency and possible policy responses in the EU. The Quarterly Review of Economics and Finance. Advance online publication. https://doi.org/10.1016/j.qref.2020.09.002
Mittoo, U. R., & Zhang, Z. (2006). Market timing, capital structure and cross listing: Canadian evidence [Working Paper, University of Manitoba].
Modi, S. (2012). A study on the adequacy and efficacy of working capital in automobile industry in India. IUP Journal of Accounting Research & Audit Practices,11(2), 69-90.
Modigliani, F. & Miller, M. H. (1958). The cost of capital, corporate finance and the theory of investment. The American Economic Review, 48(3), 261-297.
Moore, T. & Mirzaei, A. (2016). The impact of the Global Financial crisis on industry growth. The Manchester School, 84(2), 159-180.
Mshelia, H A (2016). Effects o Working Capital management on the Performance of Small and Medium Enterprises in Nigeria [Unpublished Phd Thesis, Jomo Kenyatta University of Agriculture and Technology].
Muhammad, M., Jan, W. U., & Ullah, K. (2010). Working capital management and profitability: An analysis of firms of textile industry of Pakistan. Journal of Managerial Science, VI(2), 155-165.
Nakat, Z., & Bou-Mitri, C. (2021). COVID-19 and the food industry: Readiness assessment. Food Control, 121, 107661.
Nguyen, H. H., Ho, C. M. & Vo, D. H. (2019). An Empirical Test of Capital Structure Theories for the Vietnamese Listed Firms. Journal of Risk and Financial Management, 12(3), 148.
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Omaliko, E. L., & Okpala, E. N. (2020). Effect of TSA on solvency of listed deposit money banks in Nigeria. World Journal of Finance and Investment Research, 5(1), 32-47.
Oyedele, O., Adeniran, O. J., & Oluwatosin, E. O. (2017). Working Capital Management and Financial Performance: Evidence from Nigerian Breweries PLC. International Journal of Innovative Finance and Economics Research, 5(3), 29-36.
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Richards, V. D. & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management, 9(1), 32-38.
Rus, A. I. D. & Monica-Violeta, A. (2020). Does the Capital Financing may Impact the Company’s Performance? A Study Case on Western Europe Companies [Paper presentation]. 19th RSEP International Economics, Finance & Business Conference, Prague, Czechia. – Virtual/Online 1-2 December 2020, Anglo-American University, 29-37.
Russel, P. & Hung, K. (2013). Does Market Timing Affect Capital Structure? Evidence for Chinese Firms. Chinese Business Review, 12(6), 395-400.
Sansa, N. A. (2020). The impact of the COVID-19 on the financial markets: Evidence from China and USA. Electronic Research Journal of Social Sciences and Humanities, 2(2), 29-39.
Sharma, P., Leung, T. Y., Kingshott, R. P. J., Davcik, N. S., & Cardinali, S. (2020). Managing uncertainty during a global pandemic: An international business perspective. Journal of Business Research, 116, 188-192.
Shockley, J. & Turner, T. (2014). Linking inventory efficiency, productivity and responsiveness to retail firm outperformance: empirical insights from U.S. retailing segments. Production Planning & Control, 26(5), 1213-1301.
Škare, M., Soriano, D. R., & Porada-Rochoń, M. (2021). Impact of COVID-19 on the travel and tourism industry. Technological Forecasting and Social Change, 163, 1-14.
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Wang, Z. W., Zhu, W. X., & Zhao, D. Q. (2007). Market timing in seasoned equity offerings with security issue regulation and its impact on capital structure. Journal of Nankai Management Review, 10, 40-46.
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Wuave, T., Yua, H., & Yua, P. M. (2020). Effect of liquidity management on the financial performance of banks in Nigeria. European Journal of Business and Innovation Research, 8(4), 30-44
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Abubakar, Y., Umaru, D., & Olumuyiwa, O. O. (2020). Working Capital Management and Financial Performance of Selected Quoted Firms in Nigeria. International Journal of Research and Scientific Innovation,VII(IV), 62-67.
Yarovaya, L., Mirza, N., Rizvi, S. K. A., & Naqvi, B. (2020). COVID-19 pandemic and stress testing the eurozone credit portfolios. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3705474
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Agrawal, A. (2020). Sustainability of airlines in India with Covid-19: Challenges ahead and possible way-outs. Journal of Revenue and Pricing Management, 20, 457-472.
Agyei, J., Sun, S., & Abrokwah, E. (2020). Trade-Off Theory Versus Pecking Order Theory: Ghanaian Evidence. SAGE Open, 10(3), 1-13.
Akindele, J. A. & Odusina, A. O. (2015). Working capital management and firm profitability: evidence from Nigerian quoted companies. Research Journal of Finance and Accounting, 6(7), 148-153.
Akgün, A. I. & Karataş, A. M. (2021). Investigating the relationship between working capital management and business performance: Evidence from the 2008 financial crisis of EU-28. International Journal of Managerial Finance, 17(4), 545-567.
Amankwah-Amoah, J., Khan, Z., & Wood, G. (2021). COVID-19 and business failures: The paradoxes of experience, scale, and scope for theory and practice. European Management Journal, 39(2), 179-184.
Amnim, O. E. L., Aipma, O. P. C., & Obiora C. F. (2021). Impact of Covid-19 Pandemic on Liquidity and Profitability of Firms in Nigeria. International Journal of Academic Research in Business and Social Sciences, 11(3), 1331-1344.
Baker, M. & R. Wurgler, (2002). Market Timing and Capital Structure, Journal of Finance 57, 1-32.
Baret, S., Celner, A., O’Reilly, M., & Shilling, M. (2020). COVID-19 potential implications for the banking and capital markets sector: Maintaining business and operational resilience. Deloitte Insights. https://www2.deloitte.com/content/dam/insights/us/articles/6693_covid-19-banking/DI_COVID-19-banking.pdf
Barine, M. N. (2012). Working capital management efficiency and corporate profitability: Evidence from quoted firms in Nigeria. Journal of Applied Finance and Banking, 2(2), 215-237.
Belghitar, Y. & Khan, J. (2013). Governance mechanisms, investment opportunity set and SMEs cash holdings. Small Business Economics. 40(1), 59-72.
Bolaji, S. A. (2020). An Evaluation of the Impact of COVID-19 on the Working Capital of Small and Medium Enterprises (SMEs) in Nigeria. The International Journal of Business & Management, 8(9), 151-160.
Bolton, P, Chen, H., & Wang, N. (2013). Market timing, investment, and risk management. Journal of Financial Economics, 109, (1), 40-62.
Bloom, R. & Milkovich, T. (2012). Securities Offerings and Capital Structure Theory. Journal of Business Finance & Accounting, 21(1),77-91.
Campello, M., Giambona, E, Graham J. R., & Harvey C. R. (2011) Liquidity management and corporate investment during a financial crisis. Review of Financial Studies, 24(6), 1944-1979.
CNN (2021). Around 20% of Nigerian workers lost jobs due to COVID-19, official fgures show. CNN. https://edition.cnn.com/2021/09/22/africa/nigerians-lost-jobs-covid-intl/index.html
De Bie, T. & De Haan, L. (2007). Market timing and capital structure: Evidence for Dutch firms. De Economist, 155, 183-206.
Demirguc-Kunt, A., Pedraza, A., & Ruiz-Ortega, C. (2020). Banking Sector Performance During the COVID-19 Crisis (Working Paper No. 9363). World Bank Group. https://openknowledge.worldbank.org/bitstream/handle/10986/34369/Banking-Sector-Performance-During-the-COVID-19-Crisis.pdf?sequence=5&isAllowed=y
Emmerson, C. & Johnson, P. (2020, Mar 20). How Should Fiscal Policy Respond to the Coronavirus (COVID-19)? Institute for Fiscal Studies. https://www.ifs.org.uk /publications/14746
Fasesin, O. O, Ayo-Oyebiyi, G. T. & Folajin, O. O. (2017). Working Capital Management and its Influence on the Performance of Small Scale Enterprises in Osun State, Nigeria. International Journal of Business & Law Research, 5(3), 16-24.
Fasesin, O. O., Babalola, O. A. & Togun, O. R. (2021). An Empirical Review Of The Impact Of The Covid-19 Plague On Company Working Capital Management: Through A Lens Of Rational Choice Theory. International Conference on Management, Business and Entrepreneurship.
Gill, A., Biger, N. & Mathur, N. (2010). The relationship between working capital management and profitability: Evidence from the United States. Business and Economics Journal, 10(1), 1-9.
Halkos, G. & Zisiadou, A. (2020). An overview of the technological environmental hazards over the last century. Economics of Disasters Climate Change, 4(1), 411-428.
Hassan, L. & Samour, S. (2015). Capital Structure and Firm Performance: Did the Financial Crisis Matter? A cross-industry study. Uppsala: Uppsala University.
Hope, O., Saidu, M., & Success, A. (2020). Coronavirus pandemic outbreak and firms performance in Nigeria. Management and Human Resource Research Journal, 9(4), 15-25.
Hu, J., Yan, Y. Y., & Deng, T. (2008). Market timing and capital structure: Evidence from China. Journal of Finance Theory and Practice, 3, 7-10.
Iwedi, M., Kocha, C. N., & Onakpono, A. E. (2020). Covid-19 pandemic, global trade wars and impact on the Nigeria Economy. Academic Journal of Current Research, 7(5), 71-82.
Jacob, O. N., Abigeal, I., & Lydia, A. E. (2020). Impact of COVID-19 on the Higher Institutions Development in Nigeria. Electronic Research Journal of Social Sciences and Humanities, 2, 126-135.
Kabuye, F., Kato, J. & Bugambiro, N. (2019). Internal Control Systems, Working Capital Management, and Financial Performance of Supermarkets. Cogent Business & Management, 6(1), 1573524.
Kasozi, J. (2017). The effect of working capital management on profitability: A case of listed manufacturing firms in South Africa. Investment Management and Financial Innovations, 14(2-2), 336-346.
Kalemli- Özcan, Ṣ., Gourinchas, P.-O., Penciakova, V., & Sander, N. (2020). COVID-19 and SME Failures (Working Paper No. WPIEA2020). National Bureau of Economic Research. https://www.nber.org/system/files/working_papers/w27877/w27877.pdf
Kayhan, A. & Titman, S. (2007). Firms’ histories and their capital structure. Journal of Financial Economics, 83(1), 1-32.
Korajczyk, R. A. & Levy, A. (2003). Capital structure choice: Macroeconomic conditions and financial constraints. Journal of Financial Economics, 68(1), 75-109.
Kocha, C., Iwedi, M., & Barisua, S. (2020). COVID-19 outbreak, oil price shock and banking system liquidity: The Nigeria evidence. Greneer Journal of Economics and Accountancy, 8(1), 6-11.
Lew, S. H. (2019). Testing trade-off theory after U.S. housing bubble in 2008 [Paper presentation]. Dankook University Business School.
Lin, B. X. & Zhang, Y. Y. (2020). Impact of the COVID-19 pandemic on agricultural exports. Journal of Integrative Agriculture, 19(12), 2937-2945.
Mabandla, N. Z. (2018). The relationship between working capital management and the financial performance of listed food and beverage companies in South Africa [Doctoral Dissertation, University of South Africa, Department of Business Management].
McKee, M. & Stuckler, D. (2020). If the world fails to protect the economy, COVID-19 will damage health not just now but also in the future. Nature Medicine, 26, 640-642.
Mirza, N., Rahat, B., Naqvi, B., & Rizvi, S. K. A. (2020). Impact of Covid-19 on corporate solvency and possible policy responses in the EU. The Quarterly Review of Economics and Finance. Advance online publication. https://doi.org/10.1016/j.qref.2020.09.002
Mittoo, U. R., & Zhang, Z. (2006). Market timing, capital structure and cross listing: Canadian evidence [Working Paper, University of Manitoba].
Modi, S. (2012). A study on the adequacy and efficacy of working capital in automobile industry in India. IUP Journal of Accounting Research & Audit Practices,11(2), 69-90.
Modigliani, F. & Miller, M. H. (1958). The cost of capital, corporate finance and the theory of investment. The American Economic Review, 48(3), 261-297.
Moore, T. & Mirzaei, A. (2016). The impact of the Global Financial crisis on industry growth. The Manchester School, 84(2), 159-180.
Mshelia, H A (2016). Effects o Working Capital management on the Performance of Small and Medium Enterprises in Nigeria [Unpublished Phd Thesis, Jomo Kenyatta University of Agriculture and Technology].
Muhammad, M., Jan, W. U., & Ullah, K. (2010). Working capital management and profitability: An analysis of firms of textile industry of Pakistan. Journal of Managerial Science, VI(2), 155-165.
Nakat, Z., & Bou-Mitri, C. (2021). COVID-19 and the food industry: Readiness assessment. Food Control, 121, 107661.
Nguyen, H. H., Ho, C. M. & Vo, D. H. (2019). An Empirical Test of Capital Structure Theories for the Vietnamese Listed Firms. Journal of Risk and Financial Management, 12(3), 148.
OECD (2020). Statistical Insights: Small, Medium and Vulnerable. Organisation for Economic Co-operation and Development. http://www.oecd.org/sdd/business-stats/statistical-insights-small-medium-and-vulnerable.htm
Oladimeji, J.A., & Aladejebi, O. A. (2020). The Impact of Working Capital Management on Profitability: Evidence from Selected Small Businesses in Nigeria. Journal of Small Business and Entrepreneurship Development, 8(1), 27-40.
Omaliko, E. L., & Okpala, E. N. (2020). Effect of TSA on solvency of listed deposit money banks in Nigeria. World Journal of Finance and Investment Research, 5(1), 32-47.
Oyedele, O., Adeniran, O. J., & Oluwatosin, E. O. (2017). Working Capital Management and Financial Performance: Evidence from Nigerian Breweries PLC. International Journal of Innovative Finance and Economics Research, 5(3), 29-36.
Rababah, A., Al-Haddad, L., Sial, M. S., Chunmei, Z., & Cherian, J. (2020). Analyzing the effects of COVID-19 pandemic on the financial performance of Chinese listed companies. Journal of Public Affairs, 20(4), e2440.
Richards, V. D. & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial Management, 9(1), 32-38.
Rus, A. I. D. & Monica-Violeta, A. (2020). Does the Capital Financing may Impact the Company’s Performance? A Study Case on Western Europe Companies [Paper presentation]. 19th RSEP International Economics, Finance & Business Conference, Prague, Czechia. – Virtual/Online 1-2 December 2020, Anglo-American University, 29-37.
Russel, P. & Hung, K. (2013). Does Market Timing Affect Capital Structure? Evidence for Chinese Firms. Chinese Business Review, 12(6), 395-400.
Sansa, N. A. (2020). The impact of the COVID-19 on the financial markets: Evidence from China and USA. Electronic Research Journal of Social Sciences and Humanities, 2(2), 29-39.
Sharma, P., Leung, T. Y., Kingshott, R. P. J., Davcik, N. S., & Cardinali, S. (2020). Managing uncertainty during a global pandemic: An international business perspective. Journal of Business Research, 116, 188-192.
Shockley, J. & Turner, T. (2014). Linking inventory efficiency, productivity and responsiveness to retail firm outperformance: empirical insights from U.S. retailing segments. Production Planning & Control, 26(5), 1213-1301.
Škare, M., Soriano, D. R., & Porada-Rochoń, M. (2021). Impact of COVID-19 on the travel and tourism industry. Technological Forecasting and Social Change, 163, 1-14.
Tesfaye, B. L. (2020). The impact of COVID-19 on the Ethiopian private banking system [Doctoral dissertation, University of South Africa].
Theeuwen, R. (2018). The effect of the Financial Crisis on Firms Capital Structure: A Cross Industry Study [Thesis, University Nijmegen].
Topcu, M. & Gulal, O. S. (2020). The impact of COVID-19 on emerging stock markets, Finance Research Letter, 36, 1-6.
Trinh, T. H. & Phuong, N. T. (2016). Effects of Financial Crisis on Capital Structure of Listed Firms in Vietnam. International Journal of Financial Research, 7(1), 66-74.
UNCTAD (2021). Global economy could lose over $4 trillion due to COVID-19 impact. United Nations Conference on Trade and Development. https://unctad.org/news/global-economy-could-lose-over-4-trillion-due-covid-19-impact-tourism
Wakode, S. (2020). Efficacious scrutinizing of COVID-19 impact on banking using credit risk metrics, International Journal of finance and Banking Research, 6(3), 51-56.
Wang, Z. W., Zhu, W. X., & Zhao, D. Q. (2007). Market timing in seasoned equity offerings with security issue regulation and its impact on capital structure. Journal of Nankai Management Review, 10, 40-46.
Wolters, F. (2017). Capital structure of (non-) public listed firms in the last financial crisis: A cross country and cross industry study [Master’s thesis, Radboud University, Nijmegen].
WHO (2020). Coronavirus disease (COVID-19) pandemic. World Health Organization. https://www.who.int/
Wuave, T., Yua, H., & Yua, P. M. (2020). Effect of liquidity management on the financial performance of banks in Nigeria. European Journal of Business and Innovation Research, 8(4), 30-44
Xinhua (2020). China Financial market remains stable amid COVID-19 impact. China Daily Hong Kong. https://www.chinadailyhk.com/article/125145
Abubakar, Y., Umaru, D., & Olumuyiwa, O. O. (2020). Working Capital Management and Financial Performance of Selected Quoted Firms in Nigeria. International Journal of Research and Scientific Innovation,VII(IV), 62-67.
Yarovaya, L., Mirza, N., Rizvi, S. K. A., & Naqvi, B. (2020). COVID-19 pandemic and stress testing the eurozone credit portfolios. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3705474
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2021-11-21
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IMPACT OF COVID-19 ON WORKING CAPITAL MANAGEMENT: A THEORETICAL APPROACH (J. K. Olowookere, T. A. Odetayo, A. Z. Adeyemi, & O. Oyedele , Trans.). (2021). Journal of Business And Entrepreneurship, 10(1), 38-47. https://doi.org/10.46273/jobe.v10i1.224
