Working capital management and corporate performance: The role of financial constraints
Abstract
ABSTRACT This study analyzes the relationship between working capital management and the profitability of EU-based SMEs over the period 2012-2022. We find an inverted U-shaped relationship, indicating an optimal level of working capital investment that maximizes corporate profitability. Results show a positive effect of low levels of investment in working capital on profitability, which turns negative when such investment surpasses its optimum point. The optimal net trade cycle is lower for more financially constrained firms. Any deviation from the optimal investment point in working capital negatively impacts firms’ performance, particularly for more financially constrained firms. These findings remain robust to several additional tests.
Fields of Study & Subjects
Working Capital and Financial Performance
Intellectual Capital and Performance Analysis
Financial Reporting and Valuation Research
Publication details
- Journal / source
- International Review of Economics & Finance
- Publisher
- Elsevier BV
- Volume
- 106
- Pages
- 104926–104926
- Publication date
- 20 January 2026
- Language
- EN