Working Capital Management and Corporate Performance : Evidence from Sri Lankan Listed Manufacturing Firms

Working capital that represents a significant portion of firms' investment affects firm's profitability and liquidity. This study examines the performance effects of working capital management using a panel of listed manufacturing companies on the Colombo Stock Exchange (CSE) over the period 2011 to 2016. Controlling for unobservable firm specific heterogeneity and a set of observable firm characteristics, we document that working capital is non-linearly (inverted U-shaped) related to firm profitability. This indicates the existence of an optimal level of working capital for firms that balances the costs and benefits of maintaining working capital and maximizes their performance