Working Capital Management and Corporate Profitability of Japanese Firms

Abstract: This study examines the relationship between working capital management, profitability, firm size and industry type for firms in Japan. The study sample consists of 2123 Japanese non-financial firms listed at the Tokyo Stock Exchange for the period 1990-2004. We observe that the cash conversion cycle and return on investment relationships are commonly significant and negative, suggesting that the shortening of the cash conversion cycle enhances the profitability of Japanese firms. We also observe that all types of Japanese firms included in this study can increase their profitability by shortening the receivable collection period and shortening the inventory conversion periods. However, the slowing of payment to suppliers improves the profitability for service firms only. Keywords: Working Capital Management; Cash Conversion Cycle; Receivable Collection Period; Inventory Conversion Period; Payable Deferral Period; Return on Investment