FINANCING STRATEGIES OF WORKING CAPITAL REQUERIMENT AND FIRM PROFITABILITY

Abstract

This paper investigates the relation between financing of working capital requirement (WCR) and firm's return on equity. A large proportion of WCR financed with short-term funds have lower costs. However, it also has higher refinancing and interest rate risks. Results show that a suitable WCR financing strategy can help firms to increase their performance. In particular, we find that both firms with high and low percentages of WCR financed with short-term bank debt have lower return on equity, while firms with intermediate policies present better performance.