Working capital management and the impact of fluctuating exchange rates

Working capital refers to the short term accounts of a company and the management of both the working capital as a whole and its single components are of vital importance through their impacts on the corporate liquidity, risk and profitability which will then directly affect firm value. Thus, not surprisingly there is a vast array of research investigating the profitability effects of working capital issues. Fluctuating exchange rates provides another highly important factor which maintains direct and indirect effects on firm profitability and value. However, although the long term effects of exchange rate changes have been researched considerably since the last few decades, the short term effects are underexplored. In an attempt to fulfill this gap, this research thesis is mainly aimed at investigating the impact of foreign exchange rate fluctuations on the major components of working capital, on the working capital management efficiency as well as on the main operational activities of companies. Besides, the profitability effects of working capital management as well as the impact of fluctuating exchange rates on stock prices, and hence on the value of firms will also be analyzed. For this purpose, panel analysis with pooled annual data is used for a sample of 166 firms listed in Borsa İstanbul and the research is undertaken for the period of 2002-2010. The findings indicate that an increase in cash conversion cycle and a depreciation of Turkish Lira significantly enhances firm profitability and value. Besides, a depreciation of Turkish Lira is also found to significantly improve sales, increase accounts receivables and accounts payables with no significant impact on terms of purchase and sales, and shorten days in inventory. Overall the findings signal significant effects of exchange rate changes on working capital. Keywords: Working Capital, Working Capital Magement, Cash Conversion Cycle, Foreign Exchange Rate, Profitibility