This study examines the relationship between the efficiency of working capital management, capital expenditure, the Covid-19 pandemic, and firm performance within the consumer goods and
INTRODUCTION
Research motivation
The Covid-19 pandemic has significantly impacted the global economy, particularly affecting the consumer goods and services (CG&S) industry, which faced disruptions due to lockdowns, travel restrictions, and changing consumer behavior (Yan & Qian, 2020) In Vietnam, the CG&S sector experienced a sharp decline in revenues, labor shortages, and decreased consumer confidence, forcing businesses to quickly adapt to an uncertain landscape This industry's unique connection to daily life makes it especially vulnerable to shifts in consumer preferences Research, such as studies by Karia et al (2020) and Donthu & Gustafsson (2020), highlights the necessity for agile business strategies in response to rapid changes in consumer habits during the pandemic Additionally, the evolving literature on COVID-19 (Phan & Narayan, 2020; Sha & Sharma, 2020) indicates a gap in research focused on the consumer industry, making it a vital area for exploring the challenges and opportunities presented by the crisis.
Capital investment and working capital management became crucial for firms during the pandemic, as emphasized by Del Giudice et al (2020), who highlight the importance of investment decisions in this context Companies faced financial constraints and market uncertainties, echoing findings from Suyo et al (2021) that stress the need for businesses to adapt their investment strategies to changing consumer behaviors Additionally, Amadhila (2017) underscores the significance of efficient working capital management during crises, focusing on the management of accounts receivable, accounts payable, and inventory levels to maintain liquidity Furthermore, research by Akbar et al (2022) illustrates the complex relationship between capital investment and working capital, showing how investment decisions impact working capital levels and vice versa, reinforcing the importance of strategic resource allocation.
Studying the impact of capital investment and working capital management on company performance in Vietnam's CG&S industry is essential, particularly in light of the pandemic's challenges This research aims to uncover how these financial strategies have influenced firms' ability to adapt and thrive during such turbulent times By examining the interplay between capital investment and working capital management, valuable insights can be gained for future industry preparedness Ultimately, this study seeks to determine whether these financial practices served as crucial factors in enhancing firm performance amid the Covid-19 pandemic.
Research objectives and questions
This research aims to explore the impact of capital investment and working capital management on firm performance in Vietnam's CG&S industry during the Covid-19 pandemic It seeks to reveal how these two factors interact and influence company outcomes, while also contributing to the limited understanding of their relationship and collective effect on firm performance amid significant disruptions such as the pandemic.
Based on these research objectives, this paper answers the following questions:
1) Does efficient working capital management (WCM) improve the firm performance?
2) Does capital expenditure undertaken (CAPEX) improve the firm performance?
3) Does financial flexibility in capital (CAPEX - NWC) improve the firm performance?
4) Does the Covid-19 pandemic (COVID) affect the firms' capital management process and decline the performance of consumer goods and service businesses?
Research methodology
This study utilizes four regression methods, including the Generalized Method of Moments (GMM), to analyze panel data and empirically assess the effects of capital expenditure, working capital management, and financial flexibility on firm performance The analysis controls for latent endogenous variables and evaluates the stability of the model.
Object and scope of research
The research sample is built by collecting data from the post-audited financial statements of Vietnam firms of CG&S industry during a 10-year period from 2013 to 2022.
The research initially targeted 60 Vietnamese enterprises listed on HOSE, HNX, and Upcom exchanges, but data collection reduced the sample to 51 companies Ultimately, the final analysis included 40 businesses from the consumer goods industry, with 16 firms (40%) specifically in the food manufacturing sector, alongside 11 companies in consumer services.
Research novelty and contribution
The study on "Capital Investment and Working Capital Management as a Savior for Business Performance During the Covid-19 Pandemic" offers a fresh perspective by investigating an underexplored timeframe in prior research While earlier studies have analyzed the links between capital expenditure, working capital management, and firm performance, this research specifically addresses the unique challenges posed by the Covid-19 pandemic, making a vital contribution to the existing literature.
This research explores the impact of financial flexibility in capital, represented by the variable CAPEX-NWC, in the context of Covid-19 CAPEX-NWC, which measures the difference between capital expenditures and changes in net working capital, serves as a vital metric for assessing a firm's financial flexibility Previous studies have often overlooked the importance of this composite variable in evaluating strategic resource allocation during uncertain times By integrating CAPEX-NWC, this research seeks to determine its significant influence on the performance of firms in Vietnam's CG&S industry.
This study fills a significant gap by analyzing the Covid-19 period, which has been largely overlooked in prior research By focusing on this unprecedented time, the research provides a thorough examination of how capital expenditure and working capital management impact firm performance in the CG&S industry during the pandemic The findings offer crucial insights for companies in this sector, guiding them in making strategic decisions to improve their resilience and overall performance amid extraordinary challenges.
This research introduces a novel approach by integrating the CAPEX - NWC variable and analyzing the Covid-19 period, offering new insights into capital expenditure, working capital management, and firm performance By filling a gap in existing literature, the study aims to provide valuable information that can enhance decision-making strategies for businesses in Vietnam's consumer goods and services sector.
Research structure
The structure of the study is divided into 5 chapters Which includes:
Chapter 1 Introduction This chapter introduces the research topic, research objective, methodology, research novelty and the contribution of the topic.
Chapter 2 Literature review In this chapter, the author briefly and critically reviews the theoretical basis and the related studies on the subject.
Chapter 3 Research methodology This chapter discusses in detail the research model, data, and econometric approaches.
Chapter 4 Research results Empirical results and discussions will be illustrated in this chapter.
Chapter 5 Conclusion and recommendation And the last chapter will conclude the paper with research implications followed by some limitations and future orientation.
LITERATURE REVIEW
Concept definition
Working capital is essential to a company's production and operational processes, representing the financial resources invested in current assets and circulating capital Throughout the production cycle, working capital evolves from cash into semi-finished or finished products Ultimately, when these products are sold, working capital is converted back into cash, completing the cycle This transformation is visually represented in Diagram 2.1.
Diagram 2.1: The circulation cycle of Working capital in the production and business process
Effective working capital management is a crucial challenge for financial executives in the 21st century, as highlighted by CFO magazine This aspect of corporate finance involves managing investment decisions and short-term financing activities Working Capital Management (WCM) encompasses a comprehensive system of policies aimed at regulating and managing cash, accounts receivable, and inventory The primary goal is to optimize the efficient use of working capital resources.
Effective working capital management (WCM) focuses on the strategic oversight of cash, inventory, and accounts receivable fluctuations, which are essential for maintaining a stable working capital position This stability is vital for the seamless operation of production processes, enabling business growth, investment in innovative technologies, and improving market competitiveness WCM encompasses four key components: cash, marketable securities, inventories, and accounts receivable (Brigham et al., 2004).
Effective cash management is a vital aspect of working capital management in a business, encompassing not just the physical cash on hand, but also funds in payment accounts at banks and short-term investment securities considered as cash equivalents These cash equivalents play a crucial role in implementing efficient cash management strategies, ultimately supporting the overall management of working capital.
Effective cash management in a business addresses three key motives: transaction, speculative, and precautionary Firstly, establishing a reserve fund plan is essential for managing daily operational needs, such as purchasing goods, paying wages, and covering taxes The speculative motive involves leveraging cash reserves to capitalize on investment opportunities, like buying raw materials at favorable prices or investing in financial instruments to boost profitability Lastly, the precautionary motive ensures that cash reserves are available to meet unexpected expenses, such as covering costs when receivables are delayed Overall, proficient cash management focuses on optimizing cash inflows, outflows, and temporary investments to support these objectives.
Determining the appropriate level of a reserve fund is crucial for businesses, as it involves balancing the opportunity cost of holding excessive cash against the transaction costs incurred from having insufficient cash Opportunity cost refers to the potential profits lost by not investing cash, while transaction costs arise from converting investment assets into cash for operational needs Holding too much cash results in low transaction costs but high opportunity costs, leading to an overall cash holding cost that combines both factors As illustrated by Nguyen (2010) in Diagram 2.3, understanding these costs is essential for effective financial management.
Diagram 2.3: Total cost of holding cash
Diagram 2.3 highlights the optimal cash balance at point c*, representing the minimum total cash holding cost and the target reserve fund a business must establish The key question is how to achieve this target reserve fund While various theoretical models exist, in practice, businesses often utilize a few common approaches One notable model is the "Baumol Model," proposed by William Baumol, which integrates opportunity cost and transaction cost to determine the ideal cash reserve fund.
T: Total cash needed for transactions in a given period (usually one year)
F: Transaction cost when selling short-term securities
K: Opportunity cost of holding cash
However, the Baumol model is based on several assumptions:
- Cash usage remains stable over lime.
- The business accurately predicts the cash needs for the period.
- The business holds a readily convertible amount of securities on the market to generate cash when needed.
- The opportunity cost of holding cash is constant over lime.
- Transaction costs (converting securities to cash) are constant, regardless of transaction size.
- The costs related to holding cash include only opportunity cost and transaction cost.
The assumptions of the Baumol model often fall short of reality, as accurately predicting the precise cash needed for a given period proves to be difficult Fluctuating interest rates further complicate the opportunity cost of holding cash Moreover, the model neglects to account for a minimum cash reserve, or buffer level, which businesses typically maintain to avoid depleting their cash balance to zero before restocking These limitations highlight the shortcomings of the Baumol model in practical applications.
The Miller-Orr model addresses limitations of previous cash management models by analyzing cash inflows and outflows under the assumption that net cash flow follows a normal distribution It recognizes that daily cash flows can vary, being at expected, high, or low levels, while maintaining a net cash flow of zero, indicating that inflows adequately cover outflows This model demonstrates that a company's cash balance will fluctuate daily but remain within established upper and lower limits, oscillating around a target cash balance When the cash balance hits the upper limit (Point B), the company invests excess cash in securities to return to the target level, while if it falls to the lower limit (Point A), it sells securities to replenish the cash balance to the desired target.
Effective accounts receivable management is crucial for optimizing a company's working capital, as it directly influences cash flow The sales policies and discount strategies a company implements during each accounting period play a significant role in balancing the costs associated with accounts receivable against the revenue generated from sales Many businesses face hidden costs and risks, such as bad debts, linked to their accounts receivable By adopting robust sales policies and maintaining strict management practices, companies can mitigate these risks and reduce associated costs, ultimately enhancing their financial health.
To sustain revenue growth while ensuring a high collection rate and minimizing bad debt, a company must implement a strategic sales policy By providing quality products and services, the company can foster customer loyalty and encourage timely payments Furthermore, establishing efficient accounts receivable collection procedures, categorizing customer types, and analyzing collection periods and turnover ratios are essential steps Developing tailored payment methods will also enhance accounts receivable management, with key performance indicators serving as crucial metrics for evaluation.
Effective inventory management is a critical component of working capital management, requiring businesses to determine an optimal level of inventory based on various criteria Inventory serves as a vital link between production and service supply, enhancing a company's proactivity in production and agility in sourcing raw materials Additionally, maintaining work-in-progress inventory contributes to a flexible and continuous production process, while finished goods inventory supports proactive planning and marketing efforts to meet market demand However, it is essential to consider the downsides of inventory management, which include costs related to warehousing, preservation, and opportunity costs from capital tied up in inventory.
Evaluating and analyzing the costs and benefits of inventory holding is essential for managers aiming to enhance efficiency A key factor in establishing optimal inventory levels is assessing inventory turnover rates.
Cost of Goods Sold (COGS)
Capital expenditure (Capex) refers to the funds allocated by a company for acquiring or enhancing fixed assets, which inevitably reduces cash reserves (Riyanto, 2012) This cash reduction can impact investor perceptions, as companies with ample cash reserves are often seen as more attractive investments; thus, significant Capex may cause investors to reconsider their decisions (Jensen, 2014) According to the pecking-order theory, companies prioritize internal funds, such as retained earnings, for Capex If these internal resources are inadequate, they may seek external financing options like debt or equity, which can notably alter the company's capital structure.
Measuring capital expenditure (CapEx) is crucial for financial analysis and planning One effective method is calculating total investment expenditure, which involves determining the total amount spent on fixed investment projects within a specific timeframe Another approach is to utilize financial statements, where companies typically disclose their CapEx under line items like "Investment in Property, Plant, and Equipment" or "Purchase of Intangible Assets." Additionally, comparing a company's capital expenditure with industry peers using benchmarking data can provide insights into whether its investment levels align with sector norms Lastly, CapEx can be estimated using the free cash flow formula, which assesses changes in fixed investments by subtracting current period depreciation from the previous period's Property, Plant, and Equipment (PP&E) value.
CAPEX = APP&E - Current Period's Depreciation Where:
CAPEX = Capital Expenditures APP&E = Chang in property, plant and equipment
Theoretical framework
The Pecking Order Theory, a key concept in corporate finance introduced by Donaldson in 1961 and expanded by Myers and Majluf in 1984, explains the preferred sequence of financing options for firms when raising capital This theory posits that companies prioritize their funding sources based on information asymmetry and signaling considerations, establishing a hierarchy in their financing choices.
- Companies prioritize using internal funding.
Companies adjust their target dividend payout ratios according to available investment opportunities, ensuring that dividends remain stable while gradually adapting payouts to reflect changes in these opportunities.
Sticky dividend policies combined with volatile profitability and investment opportunities can lead to inadequate internally generated cash flows In these situations, companies often rely on their cash reserves and marketable securities to meet financial needs.
- If external financing becomes necessary, firms issue the safest security first, starling with debt, then considering hybrid options, and ultimately resorting to equity as a last resort.
According to Frank and Goyal (2007), the pecking order theory can be influenced by agency costs arising from conflicts between firm owners or managers and outside investors When outside investors perceive that they can achieve reasonable returns, they are often reluctant to invest in equity capital.
Working capital management is a crucial element of financial management that aligns with the Pecking Order Theory, emphasizing the importance of effectively managing current assets and liabilities to maintain liquidity and ensure smooth operations Research, including a study by Raheman and Nasr (2007), highlights that Pakistani firms predominantly rely on retained earnings for working capital, enabling them to meet their needs without external financing Similarly, Singhania & Mehta (2017) found that Asian firms with effective working capital management tend to reduce their dependence on external financing, particularly equity, reinforcing the idea that firms prioritize internal funds in accordance with the pecking order hierarchy for their working capital requirements.
Capital expenditures (CAPEX) are crucial for a firm's growth and development, significantly influenced by the Pecking Order Theory, which prioritizes financing methods A study by Baker & Martin (2011) on U.S manufacturing firms revealed that companies with higher internal funds are more likely to use these resources for CAPEX, supporting the theory's preference for internal financing Conversely, firms with limited internal funds tend to rely on debt financing, highlighting the hierarchy of financing sources where debt is favored over equity These insights underscore the Pecking Order Theory's relevance in real-world financial management, as firms with substantial retained earnings allocate these funds for CAPEX, while those with fewer internal resources seek external debt to maintain ownership and reduce signaling concerns.
Recent research highlights the importance of the Pecking Order Theory in influencing working capital management and capital expenditure (CAPEX) decisions The preference for internal financing, when possible, aligns with empirical evidence from diverse industries and regions This relationship between the theory's principles and practical financial applications demonstrates its continued relevance in modern corporate finance.
The Cash Conversion Cycle (CCC) theory is a vital framework for evaluating a company's working capital efficiency and its impact on financial performance This theory highlights key components such as Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO), which together reflect a firm's operational efficiency DIO indicates the average duration inventory is held before sale, DSO measures the time taken to collect receivables, and DPO assesses the time a firm takes to pay its suppliers The CCC formula (CCC = DIO + DSO - DPO) succinctly encapsulates a firm's cash flow cycle, making it an essential metric for effective working capital management.
Days Inventory Outstanding (DIO) measures the average number of days a company takes to sell its inventory A lower DIO is generally preferred, as it signifies quicker inventory turnover, reflecting efficient inventory management and stronger sales performance.
Days Sales Outstanding (DSO) is a key metric that indicates the average time a company takes to receive payments from its customers A lower DSO is advantageous, reflecting quicker cash collection and improved cash flow management.
Days Payable Outstanding (DPO) is a key financial metric that indicates the average number of days a company takes to settle its payments to suppliers A higher DPO is often considered favorable, as it enables the company to retain cash for an extended duration, improving liquidity and financial flexibility.
Research consistently shows a strong link between cash conversion cycle (CCC) and firm profitability A 2003 study by Deloof on Belgian firms revealed that a shorter CCC correlates with higher profitability, supporting the idea that effective working capital management reduces financing costs and enhances overall financial performance.
Research has consistently demonstrated a positive correlation between cash conversion cycle (CCC) and profitability A 2006 study on Greek firms highlighted that companies skilled in converting resources into cash achieve greater financial success Recent findings, such as Uyar and Kuzey's 2020 analysis of Turkish manufacturing firms, reaffirmed this relationship, indicating that a shorter CCC is linked to higher profitability due to reduced financing costs and improved financial performance Similarly, Raj et al.'s 2019 study of Indian firms further supported the notion that effective resource conversion leads to enhanced profitability.
The CCC theory offers a valuable framework for assessing a company's working capital efficiency and its influence on overall performance By strategically managing the cash conversion cycle (CCC) through effective working capital management (WCM) practices, businesses can improve their liquidity, profitability, and financial stability Previous research highlights the crucial role of the CCC in enhancing firm performance, underscoring its significance in financial management and strategic decision-making.
Efficiency Theory emphasizes the optimization of a company's short-term assets and liabilities to enhance operational efficiency and financial performance It highlights the need for firms to balance liquidity—ensuring they can meet obligations—against minimizing idle funds that do not yield returns Excess cash can be detrimental, while insufficient liquidity may cause financial distress Research indicates that effective management of working capital components, such as accounts receivable and inventory, is crucial for achieving this balance By efficiently managing these elements, companies can improve profitability while maintaining necessary liquidity for daily operations, ultimately minimizing holding costs associated with working capital.
Empirical evidence and research hypothesis
2.3.1 The effect of working capital management on firm performance
Effective working capital management is crucial for a company's success, significantly influencing both performance and liquidity The primary goal is to achieve an optimal balance among working capital components, as the ability to manage receivables, inventory, and payables directly impacts profitability and liquidity (Filbeck and Krueger, 2005) A study by Rehman et al (2007) on 94 Pakistani firms from 1999 to 2004 revealed that various working capital management variables, such as average collection period, inventory turnover, average payment period, cash conversion cycle, and current ratio, affect net operating profitability Utilizing Pearson's correlation and regression analysis, the study found a strong negative relationship between working capital management variables and firm profitability, indicating that an increased cash conversion cycle can reduce profitability Therefore, managers can enhance shareholder value by minimizing the cash conversion cycle.
WCM efficiency is assessed through the cash-conversion-cycle (CCC), which serves as a proxy for working-capital efficiency, as supported by previous studies (Tong and Wei, 2011; Ding et al., 2013; Jalal and Khaksari, 2020; Wang, 2019) Unlike Rehman et al (2007), who focused solely on the CCC variable, this analysis explores the relationship between financial performance (FP) and WCM by dissecting the CCC into its three components: inventory period, receivables period, and payables period The findings reveal that overall WCM efficiency is derived from the effectiveness of each component, a result that has not been previously documented, particularly within the context of the CG&S industry and the pandemic.
A study by Bratland et al (2013) on the Swedish stock market from 2009 to 2012 revealed that the size of firms does not influence the connection between working capital management (WCM) and stock performance, indicating no significant relationship between WCM and firm performance for Swedish firms Conversely, Deloof (2003) examined 1,009 large Belgian nonfinancial firms from 1992 to 1996, finding a significant negative correlation between various turnover ratios—receivables, inventory, and payables—and profitability, using the cash conversion cycle as a WCM measure This finding aligns with Shin and Soenen (1998), who identified a strong negative relationship between the cash conversion cycle and corporate profits in a large sample of US-listed companies from 1975 to 1994.
A study from 2017 reveals that cash conversion cycle (CCC), inventory days, receivable days, and payable days negatively impact firm performance in Denmark, Norway, and Sweden Despite these findings, there is a notable lack of comprehensive literature addressing the dynamics of Scandinavian markets.
In Vietnam, various studies have explored the connection between working capital management and business performance across different sectors Notably, Dong and Su (2010) analyzed 130 enterprises from 2006 to 2008, revealing a significant negative correlation between profitability, gauged by operating gross profit, and the cash conversion cycle, indicating that longer cash conversion cycles diminish profitability This suggests that effective management of the cash conversion cycle can enhance shareholder value However, their research's limited timeframe and focus on internal factors, without considering external influences like industry conditions, may affect its generalizability Thoa and Uyen (2014) studied 208 companies from 2006 to 2012, finding a similar negative relationship between the receivables, inventory, and payables periods, as well as the cash conversion cycle, on gross operating profit ratios True and Thien (2015) examined 564 listed companies from 2006 to 2013, employing fixed and random effects models, and concluded that the fixed effects model more accurately represents the relationship between independent variables and company performance Their findings indicated an inverse relationship between return on assets (ROA) and working capital turnover days, while short-term asset turnover and the ratio of short-term assets to total assets positively correlated with ROA Based on these insights, the author proposes a hypothesis regarding the dynamics of working capital management and profitability in Vietnamese businesses.
Hypothesis I: Efficient working capital management (decreasing CCC) has a positive effect on consumer goods and services firm's performance
2.3.2 The effect of capital expenditure on firm performance
Capital expenditure (CAPEX) decisions are crucial for companies as they represent investments in long-term assets that can greatly affect performance and value creation CAPEX encompasses the costs associated with investments expected to yield profits and enhance asset value Moreover, capital expenditure serves as a key indicator of a company's growth trajectory and future financial health.
Failing to invest can lead to a decline in a company's value over time due to limited growth opportunities or depreciating assets (Uwah & Asuquo, 2016) Companies are encouraged to invest in assets with a positive net present value (NPV), as this indicates the potential for higher returns than the initial investment cost, thereby linking current capital expenditure to future profitability (Jiang et al., 2006) However, research by Salimah and Herliansyah (2019) found no significant correlation between capital costs and the performance of Indonesian stock market companies, suggesting that the dynamics between capital expenditure and future profits are more intricate than previously understood.
Numerous studies indicate a positive relationship between capital expenditures (CAPEX) and firm performance, suggesting that strategic investments in assets can significantly enhance firm value and profitability (McConnell and Muscarella, 1985; Trueman, 1986; Habib and Hasan, 2017; Gan, 2019) However, this relationship is complex and influenced by various factors and challenges As companies navigate CAPEX decisions in a dynamic business environment, further investigation is essential to understand the nuances of this critical relationship and its implications for corporate finance and strategy Based on these findings, the author proposes the following hypothesis.
Hypothesis 2: Capital Expenditure is positively associated with the consumer goods and services firm rs performance
2.3.3 The effect of financial flexibility in capital on firm performance
Investment decisions in the corporate sector are guided by a theoretical framework that highlights the irreversible nature of capital expenditures (CAPEX), as noted by Bernanke (1983) and Dixit et al (1994) Once a firm invests significantly in CAPEX, reversing that decision is often difficult, making this irreversibility a key factor in investment strategy In contrast, short-term working capital management (WCM) offers greater flexibility, as emphasized by Fazzari and Petersen (1993) and Appuhami (2008), allowing firms to adjust and adapt quickly to changing conditions This flexibility in working capital operations stands in stark contrast to the permanent commitment associated with CAPEX investments.
As managers navigate the intricate terrain of investment decisions, the concept of 'financial flexibility' emerges as a pivotal guiding principle Graham and Harvey
Financial flexibility is a vital factor for managers in investment decision-making, as highlighted by research from 2001 It acts as a strategic asset that helps companies reduce dependence on external financing during unexpected external shocks, a point elaborated by Gamba and Triantis in 2008 Furthermore, financial flexibility is not limited to investment choices; it also significantly impacts capital structure decisions, as noted by DeAngelo and others.
De Angelo (2007) asserts that financial flexibility significantly influences a firm's capital structure strategy This relationship highlights the complex dynamics between investment choices and capital structure decisions in corporate financial management.
In financial research, a significant gap exists regarding the relationship between working capital management (WCM) and capital expenditures (CAPEX), which remains largely unexplored While many studies focus on various aspects of corporate finance, the interaction between WCM and CAPEX has received limited attention Notable researchers like Appuhami (2008) and Ding et al (2013) have investigated this area, revealing a negative relationship where investment in working capital competes with CAPEX for a limited pool of financial resources.
Theoretical constructs like the frictionless perfect capital market proposed by Adair & Adaskou (1958) suggest an ideal where firms have unlimited access to external financing, making external funds a perfect substitute for internal ones However, the reality is that securing external financing is often challenging, leading to a competitive environment where working capital funds vie with tangible fixed investments This competition forces firms to make strategic decisions regarding resource allocation, significantly impacting their financial performance Ek and Guerin (2011) highlight that there are considerable opportunities for firms to improve their working capital management (WCM) practices Poor management of working capital can increase reliance on costly external financing, limit investment opportunities, and raise the firm's credit risk, as shown by Aktas et al (2015).
A key principle highlighted in this discussion is that the reversible nature of working capital allows companies to balance short-term and long-term investment choices Firms aim to sustain a consistent path in fixed investments, as altering these irreversible investments can be costly However, achieving this goal can be challenging, particularly when faced with external funding limitations.
The theoretical foundation of CAPEX irreversibility and the flexibility in working capital operations is crucial for understanding investment choices Financial flexibility emerges as a key factor, influencing not only tactical investment decisions but also a firm's overall capital structure Therefore, it is essential to explore the hypothesis that financial flexibility, represented by CAPEX minus Net Working Capital, positively impacts the performance of consumer goods and services (CG&S) firms This investigation can yield valuable insights into the relationship between financial flexibility and firm performance, enhancing our understanding of corporate finance in the CG&S sector.
Hypothesis 3: Financial Flexibility within Capital (CAPEX - NWC) has a positive relationship with the consumer goods and services firm 's performance
2.3.4 The effect of Covid-19 pandemic on firm performance
RESEARCH METHODOLOGY AND DATA
Data and sample selection
The study analyzes a final sample of 51 Vietnamese firms within the consumer goods and services industry, utilizing audited financial statements from 2013 to 2022 Economic Policy Uncertainty (EPU) data is sourced from the World Uncertainty Index, while Gross Domestic Product (GDP) figures are obtained from the World Bank.
Model specification
The study employs two models with distinct dependent variables to assess firm performance, focusing on the effects of working capital management (WCM), capital expenditure (CAPEX), and financial flexibility (CAPEX-NWC), alongside the impact of the COVID-19 pandemic The analysis measures firm performance using Tobin's Q and return on assets (ROA).
Model I: Testing the impact of working capital management, capital expenditure, financial flexibility in capital and covid-19 pandemic on firm performance (Tobin’s Ọ)
Tobin's Qix = Po + ^Tobin's Qi't^ + PiWCMix + ^APEXift + ^CAPEX - NWC)iit
Model 2: Testing the impact of working capital management, capital expenditure, financial flexibility in capital and covid-19 pandemic on firm performance (ROA)
R0Aift = p0+ pỵROAi^ + p2WCMit + p3CAPEXiit + P^CAPEX - NWQiit
To lest the hypothesis Hl, H2, H3, H4 mentioned in chapter 2, whether working capital management, capital expenditure, financial flexibility in capital and covid-19 pandemic affect firm performance or not.
Table 3.1: Summarizing the expected of the effects of variables
Data analysis and research process
Getzmann et al (2010) identified a significant limitation of the Pooled OLS, Fixed Effects Model (FEM), and Random Effects Model (REM), noting their inability to address the endogeneity of unobserved variables, particularly concerning the dependent variables involved.
TobinQi't and R0Ait can be affected by its own past value (TobinQi t_1 and ROAit-^
Endogeneity and dynamism can lead to skewed regression outcomes, prompting the development of various estimation methods, with instrumental variables playing a crucial role The Generalized Method of Moments (GMM) model is a widely used estimator that effectively addresses the challenges of selecting instrumental variables and resolving endogenous issues To assess the effectiveness of GMM, the author employs the AR(1) and AR(2) correlation tests, as well as the Sargan and Hansen tests, which evaluate the appropriateness of the instrumental variables within the research model.
In 1991, the AR(1) test was utilized to examine first-order autocorrelation, while the AR(2) test assessed second-order series correlation within the model Furthermore, the author highlighted the existence of significant measurement errors and employed a two-step system GMM to effectively estimate dynamically unbalanced panel data (Lee, 2007).
The research will be performed regression testing using Stata 17.0 and is performed in turn according to the following steps:
The author conducts descriptive statistics on the research variables to offer a comprehensive overview of their characteristics, including key metrics such as mean, standard deviation, minimum, and maximum values.
To assess the relationships between variables, apply Pearson correlation analysis to examine the correlation matrix This step is crucial for identifying multicollinearity, which can skew research findings Additionally, utilize the variance inflation factor (VIF) to conduct further testing, ensuring more reliable insights into the presence of multicollinearity.
Thirdly, perform the regression according to the Pooled OLS method Then, the author continue to test the model defects with White's test to consider the phenomenon of variance.
Fourthly, use the two-step GMM system estimation method According to Arellano & Bond (1991), this is a necessary method to overcome the phenomenon of endogeneity, variable variance, and autocorrelation.
Variable measurement
Measuring firm performance is essential in empirical research, with Tobin's Q and Return on Assets (ROA) serving as widely utilized dependent variables This research article emphasizes the reliability of these metrics and draws on prior studies to assess the performance of companies in the CG&S industry.
Tobin's Q is a key metric in empirical research that evaluates a firm's market value in relation to the replacement cost of its assets, providing crucial insights into market perceptions of a firm's worth compared to its tangible assets.
In this study, the author employs a simple formula to calculate Tobin's Q by dividing the firm's market capitalization by its equity book value This approach adheres to established conventions in previous research, promoting consistency and enabling comparisons with other studies (Bai et al., 2019; Su and Hsu, 2020; Ghazouani et al.).
2021) Tobin's Q provides valuable insights into the market’s perception of a firm's long term growth prospects and is an essential component of the analysis.
Return on Assets (ROA) is a crucial measure of a company's profitability and efficiency in utilizing its assets to generate returns By calculating ROA as the firm's net income divided by its total assets, businesses can assess their resource utilization effectively This standard formula aligns with previous research findings (Li and Han, 2020; Goyal et al., 2021; Alipour et al., 2022) and highlights ROA as a vital performance metric, providing insights into a firm's capacity to generate earnings from its asset base.
Ensuring consistency in measuring Tobin's Q and ROA is vital for meaningful comparisons with previous studies, enhancing understanding of their relevance to existing research By utilizing established measurement methods, the study contributes to the robustness of empirical findings and aligns with industry standards, thereby increasing credibility The consistent application of these fundamental metrics allows for valuable insights into firm performance, benefiting both academia and business practice.
Efficiency in working capital management (WCM) is measured by the cash conversion cycle (CCC) Following previous studies by Jalal and Khaksari (2020) and Wang (2019), the author calculated the CCC for each firm to assess the effectiveness of their working capital management strategies.
The Cash Conversion Cycle (CCC) is a crucial metric that measures the number of days a company takes to convert its investments in inventory and receivables into cash It reflects the efficiency of a firm's working capital management (WCM), with a lower CCC indicating better optimization of capital The CCC encompasses the duration of selling inventory, collecting cash from receivables, and paying suppliers for inputs, making it an essential indicator of a company's financial health.
/Accounts Receivable Inventories Accounts Payable\ ccc = 365 X -— - 4 - - \ Sales COGS COGS J ri L -
This standardized approach ensures consistency in measuring WCM efficiency across firms and facilitates meaningful comparisons for the purpose of this study.
Accurate measurement of Capital Expenditure (CAPEX) is vital for understanding its influence on firm performance, as it includes investments in long-term assets essential for maintaining, expanding, or enhancing operations CAPEX covers a wide range of expenditures, such as investments in property, plant, and equipment (PPE), as well as research and development (R&D) For effective empirical analysis in financial research, CAPEX is typically viewed as the total of expenditures related to acquiring and improving physical assets that are anticipated to provide benefits over several accounting periods.
To effectively measure Capital Expenditures (CAPEX), researchers primarily utilize financial statements, focusing on the cash flow statement, income statement, and balance sheet The cash flow statement is particularly valuable as it directly reports CAPEX data in the "investing activities" section, detailing investments in property, plant, and equipment (PPE) and other long-term assets Furthermore, additional CAPEX information can be gathered from the notes accompanying financial statements.
PP&Ef - PP&E + Depreciation CAPEXt = Capital Expendituret = - TtlA\~t -
- CAPEXt represents the CAPEX for the current period.
- PP&Et denotes the ending balance of property, plant, and equipment for the current period.
- PP&Et_r represents the ending balance of property, plant, and equipment for the previous period.
- Depreciation signifies the depreciation expense for the current period.
The difference between the ending balances of PP&E for the current and previous periods, adjusted for depreciation, provides a clear measure of the net investment in long-term assets.
This study measures the independent variable CAPEX by utilizing established financial research practices, specifically drawing on data from financial statements, particularly the cash flow statement CAPEX is calculated as the net investment in long-term assets, adjusted for depreciation, ensuring alignment with previous studies This method enables a thorough empirical analysis of CAPEX's impact on firm performance.
3.3.2.3 Financial Flexibility in Capital (CAPEX - NWC)
In the realm of financial analysis, "Financial flexibility in capital" stands for
CAPEX minus NWC (Net Working Capital) is a crucial financial metric that evaluates the relationship between the Cash Conversion Cycle (CCC) and Capital Expenditures (CAPEX) This metric highlights the difference between a company's capital investments and changes in its working capital, emphasizing the importance of financial flexibility in investment decision-making As noted by Graham and Harvey (2001), financial flexibility allows companies to adjust their capital allocation and resources in response to evolving business conditions.
This innovative method, influenced by prior studies like Banerjee and Dutta
The challenge of directly comparing capital expenditures (CAPEX) expressed in absolute VND values with cash conversion cycle (CCC) measured in days is addressed by substituting CCC with net working capital (NWC) According to established literature (Aktas et al., 2015; Kieschnick et al., 2013; Shah & Sana, 2005), NWC is defined as current assets minus current liabilities This adjustment facilitates a more straightforward comparison with CAPEX, as both are now represented in VND terms, maintaining similar principles despite differing constructs The formula for calculating Financial Flexibility in Capital can be derived from this comparison.
Financial Flexibility in Capital = Capital Expenditure - Net Working Capital
Subtracting net working capital (NWC) from capital expenditures (CAPEX) highlights the influence of both factors on a company's financial health This metric reveals the extent to which capital expenditures are supported by changes in working capital, indicating reliance on external financing A positive CAPEX - NWC value suggests that capital expenditures are partially financed by changes in working capital, while a negative value signals the need for additional external funding As noted by Gamba and Triantis (2008), maintaining financial flexibility is crucial for minimizing dependence on external financing, especially during unexpected challenges This flexibility significantly influences capital structure decisions (DeAngelo and DeAngelo, 2007).
The COVID-19 pandemic serves as the independent variable to assess its effects on various financial indicators In this study, the variable is defined as 1 for countries experiencing the pandemic and 0 for those that are not Data for this analysis was sourced from the World Health Organization (WHO).
Previous studies have utilized the COVID-19 variable as an independent factor to evaluate its impact on various financial indicators This variable is generally represented as a binary indicator, with a value of 1 denoting the presence of the pandemic in a specific country.