Working Capital Behavior of Firms during an Economic Downturn: An Analysis of the Financial Crisis Era

Item Type Journal paper
Abstract In times of crisis, cash and liquidity play an essential role. This paper analyzes the working capital measures over the course of a business cycle. We examine (1) how companies behave in economic downturns regarding their working capital components and (2) whether firms with higher financial constraints behave differently in economic downturns regarding their working capital components. The analyses were conducted with descriptive statistics and generalized linear mixed-effects modeling. Our dataset consists of 2111 stock-listed firms and 10,555 observations spread over the period of five years during the financial crisis era. The findings indicate that days sales outstanding and shorter days inventory held are related to better financial performance while days payable outstanding had no observable effect. Furthermore, financially constrained firms have shorter days sales outstanding than average firms. In economic downturns, firms seem to reduce both working capital and fixed investments to asset ratios. The financially constrained firms pushed down their fixed investments ratio more aggressively than average firms while, in contrast, the financially strongest firms pushed down the working capital to asset ratio in comparison to average firms. Interestingly, neither the cash conversion cycle, days payable outstanding, nor company performance or fixed investments to asset ratios fully returned to the pre-shock level. The behavior of non-financially constrained firms, which also perform better, indicates a stronger supply chain orientation than that of average firms. This might indicate that the supply chain-oriented view of working capital management could provide a more favorable and resilient alternative to the prevailing self-orientation. Keywords: supply chain financing; financial constraints; economic downturn; trade credit; insolvency risk; generalized linear mixed-effects model
Authors Hofmann, Erik; Töyli, Juuso & Solakivi, Tomi
Journal or Publication Title International Journal of Financial Studies
Language English
Subjects business studies
HSG Classification contribution to scientific community
HSG Profile Area SoM - Business Innovation
Refereed Yes
Date 14 July 2022
Publisher MDPI
Volume 10
Number 3
Page Range 55
ISSN-Digital EISSN 2227-7072
Publisher DOI
Official URL
Depositing User Prof. Dr. Erik Hofmann
Date Deposited 14 Jul 2022 12:32
Last Modified 17 Aug 2022 10:02


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Hofmann, Erik; Töyli, Juuso & Solakivi, Tomi (2022) Working Capital Behavior of Firms during an Economic Downturn: An Analysis of the Financial Crisis Era. International Journal of Financial Studies, 10 (3). 55.

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