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Moderating Effects of Firm Size and Leverage on the Working Capital Finance–Profitability Relationship: Evidence from China

Author

Listed:
  • Faisal Mahmood

    (School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China)

  • Dongping Han

    (School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China)

  • Nazakat Ali

    (School of Management, Iqra University, Islamabad 44000, Pakistan)

  • Riaqa Mubeen

    (School of Economy & Management, Harbin Institute of Technology, Harbin 150001, China)

  • Umeair Shahzad

    (School of Management, Ocean University, Qingdao 266100, China)

Abstract
We evaluated the moderating effects of firm size and leverage on the working capital finance (WCF)–profitability relationship among Chinese companies during 2000–2017. Applying the generalized method of moments (GMM) technique on panel data, we observed that firm size and leverage have strong moderating roles in the WCF–profitability relationship. We observed that small or low-leverage firms have an inverted U-shaped WCF–profitability relationship. However, this relationship is U-shaped for large or high-leverage firms. We report break-even points in these relationships that show the portion of short-term debt in working capital financing. The results reveal that the break-even point for all subgroups (small, large, low-leverage, and high-leverage firms) decreases compared to the break-even point of the full sample. This study shows how the break-even point of the WCF–profitability relationship shifts when a company expands or its leverage level changes. Managers can use this information for profit maximization.

Suggested Citation

  • Faisal Mahmood & Dongping Han & Nazakat Ali & Riaqa Mubeen & Umeair Shahzad, 2019. "Moderating Effects of Firm Size and Leverage on the Working Capital Finance–Profitability Relationship: Evidence from China," Sustainability, MDPI, vol. 11(7), pages 1-14, April.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:7:p:2029-:d:220251
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    References listed on IDEAS

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    5. Ahmed Mohamed Habib & Nahia Mourad, 2022. "Analyzing the Efficiency of Working Capital Management: a New Approach Based on DEA-Malmquist Technology," SN Operations Research Forum, Springer, vol. 3(3), pages 1-20, September.
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    7. Umeair Shahzad & Fukai Luo & Jing Liu, 2023. "Debt financing and technology investment Kuznets curve: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 751-765, January.
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