Erasmus capital and business performance reveals that

Erasmus finds a negative relationship between the various measures of working capital and profitability.A profitability study is not sufficient because “these accounting data may have little to do with what is good or bad for the company” and the goal of maximizing the value of the company concerns both security and benefits.There are no studies on the valuation of working capital, but there is a substantial and growing amount of work done in the management of liquidity and the value of the company.Chen finds a positive influence on liquid assets in the valuation of the company, which suggests that the market evaluates liquidity, although Faulkender and Wang show the possibility of a higher limit on the amount of money for which the market rewards companies.Unlike liquid assets, the ratio between working capital and the value of the company has not been exhaustively studied.Using the Rappaport model, the Strischek conceptual study shows that higher cash flows resulting from better working capital management imply lower capital cost and higher capital value.They are the first to empirically test the relationship between working capital management and the value of the company.The investment in NWC decreases when a company has more reserves against taking control, emphasizing the importance of considering agency costs when trying to understand the effect of working capital management on the value of the company.The study of the link between working capital and business performance reveals that the relationship between the investment of working capital and the company’s performance is not linear, which implies that there should be an optimal level of working capital capable of balancing the costs and benefits and maximize performance.It confirms the effect of managing working capital on the wealth of shareholders, but finds that cash will be valued more than working capital.So far, the studies on the valuation of working capital confirm two things.Firstly, working capital significantly influences the value of the company and, secondly, funding limits play an important role in this relationship.


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