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International Research Journal of Finance and Economics ISSN 1450-2887 Issue 85 (2012) © EuroJournals Publishing, Inc. 2012 http://www.internationalresearchjournaloffinanceandeconomics.com

The Impact of Capital Expenditure on Working Capital

Management: Empirical Evidences from Tehran Stock Exchange

Hashem Valipour Corresponding Author, Assistant Professor, Accounting Department

Firouzabad Branch, Islamic Azad University, Firouzabad, Iran E-mail: [email protected]

Tel: 00989173086986

Javad Moradi Assistant Professor, Accounting Department, Marvdasht Branch

Islamic Azad University, Marvdasht, Iran E-mail: [email protected]

Kobra Karimi

Master of Accounting, Marvdasht Branch, Islamic Azad University Marvdasht, Iran

E-mail: [email protected]

Abstract

The purpose of this research is to examine the impact of capital expenditures on working capital management in Stock Exchange of Tehran. The study used Shulman and Cox's (1985), Net Liquidity Balance (NLB) and Working Capital Requirement (WCR) as a proxy in working capital management. Then six hypotheses were conducted in two groups. In the first group, we investigate the impact of capital expenditure, operating expenditure and financial expenditure on Net Liquidity Balance and in the second group we investigate the impact of capital expenditures, operating expenditures and financial expenditures on Working Capital Requirement. Regarding previous literature, we use multiple regression models to analyze gathered Data. We tested all hypotheses for 92 listed firms during 2000-2009. In order to achieve better results, companies were divided in to two low and high categories base on their growth opportunity and all hypotheses were tested once more. Based on the study findings hypotheses were not confirmed, except two concerning the impact of capital expenditure on working capital requirement in companies with high and low growth opportunity. Keywords: Working Capital Management; Net Liquidity Balance; Working Capital

Requirement; Capital Expenditure; Operating Expenditure; Financial Expenditure.

International Research Journal of Finance and Economics - Issue 85 (2012) 15

1. Introduction In the present challenging economy, regarding environmental pressure and limited external sources, current assets and liabilities (working capital) are very important to different companies. And working capital management can be as a competitive advantage to them (Fathi and Tavakoli, 2009, p. 104). Working capital management is a basic component of financing. Since it affects profitability and liquidity of firms. Working capital management is recognized as a very significant issue to financial manager due to many reasons. To one extent, a typical manufacturing firms′ current assets accounts for over half of its total assets. For a distribution company, it accounts for even more (Appuhami, 2008, p. 8). The amount of working capital is a proxy for liquidity rate and the solvency of a firm. Specially, if it is considered with another financial rations. We should note that, while we are talking about volume amount of working capital, we consider amount of current assets in comparison with total assets that demonstrate how many percent of total assets is formed by current assets (Raymond et al., 2002, p. 97). Regarding all we mentioned above, by efficient working capital management, companies can reduce their dependency on outside funding, and they can use the released cash for future investments; this will then lead to more financial flexibility. Moreover, by managing working capital, a firm can lower its financing costs as less as funds that will be needed from outside. In addition, effective management of working capital contributes to the reduced riskiness of a company: consequently, a cheaper financing can be expected both from shareholders and lenders, resulting in lower weighted average cost of capital (Autukaite and Molay, 2011, p. 2). On the other hand, the determination of capital expenditure′s amount is very important for firms triumph. Because the extent and amount of this expenditure show future status of a firm and the quality of decisions about these kinds of investment indicate firms' situation. Hence correct decisions about capital expenditure can lead to success (Ahmadi, 2010, p. 2). Preparation of modern manufacturing machine is one of the main production factors. It is surprisingly able to set aside workforces and leads to increase the overhead and consequently raises the capital expenditure. Regarding the quality of funding in machines, in such a way that does not damage the working capital, is another obstacle that managers face (Rahnama Roodposhti and Kiaee, 2007, p. 3). Funds tied up in working capital can be seen as hidden reserves that can be used to fund growth strategies, such as capital expansion (Appuhami, 2008, p. 9). Then companies which use working capital management correctly can be profitable during different years. In this survey, regarding the significance of growth opportunity and increase in capital expenditure consequently (Opler et al. 1999) and necessity of funding to use these opportunities, we investigate the impact of capital expenditure on working capital management for companies adopted in Tehran Stock Exchange. Then base on the growth opportunity proxy (m/b) these companies will be divided in to two groups and all presented hypotheses will be studied for these two categories as well.

Working capital is the amount invested in the current assets. Generally, working capital is defined as investing in current assets, current liabilities, cash, short-term securities, accounts receivable and inventories. And net working capital is defined as the current assets minus current liabilities. Working capital management determines amount and composition of sources and expenses of working capital so that it leads to the rise of stockholders′ wealth (Mohamadi, 2009, p.80). Most researches have attempted to understand the factors that determine the working capital of an organization. Horrigan (1965), Luo (1984), Liu (1985), Zhou (1995), and Su (2001), found that growth of the firm, size, leverage and etc. affect the working capital of a company. Broadly, industry characteristics, firm-specific characteristics and the financial environment are recognized as determining factors of working capital (Appuhami, 2008, p. 9). Standard number 2 states that cash statement must reflect cash flows during a term, as operating, return of investment & profit payable for financing, income tax, investment and finance activities. Operating activities are main and continuous activities that produce operating revenue. Investment activities encompass acquiring or transferring short and long term investments, tangible and intangible fixed assets and also pay and receive granted facilities to individuals who are independent. Financing activities include those activities which lead to change both the amount and composition of capital and rise up changes in capital for business entity. Hence we categorize all expenditures of an organization in operating, capital and finance expenditures. This

16 International Research Journal of Finance and Economics - Issue 85 (2012)

study, among many factors that are recognized as determiners of working capital, enquiries some determinants like capital expenditure, operating expenditure and finance expenditure as independent variables and leverage (D/E), performance (M/B), growth (Gth), and operating cash flow (OCF), as control variables. In order to investigating the impact of capital expenditure on working capital management, we utilize net liquidity balance (NLB) and working capital requirement (WCR) as proxies for working capital. 2. Literature Review Shulman and Cox (1985), through dividing net working capital into two main parts; working capital requirement (WCR) and net liquidity balance (NLB) presented a complete approach of working capital. These two researchers have shown absolute dollar and relative net liquid balance measures, concentrated on liquid financial assets and obligations. While other indicators of liquidity do not confirm to these features, therefore perhaps they could not reveal bankruptcy statues or solvency position of a firm. But NLB by concentrating on short-term financial assets and obligations is able to present clearer image of solvency position of a company.

Kim et al. (1998) modeled the firms' decisions to invest in liquid assets when external financing is costly. In this research the optimum amount of liquidity was determined by tradeoff between the low return earned on liquid assets and the benefit of minimizing the need for costly external financing. The model predicts that optimal investment in liquidity is increasing in the cost of external financing, the variance of future cash flows, and the return of future investment opportunities, while it is decreasing in the return differential between the firms’ physical assets and the liquid assets. They also showed that more growth opportunities and more fluctuations of future cash flows will increase the cash balance and short-term investments of a company.

Opler et al. (1999) examined the determinants and implications of holding cash and marketable securities by publicly traded U.S. firms in the 1971-1994 period. In time-series and cross-section tests, they found supportive evidence of a static tradeoff model of cash holdings. In particular, firms with strong growth opportunities and riskier cash flows, hold relatively high ratios of cash to total non-cash assets. Besides they categorized all companies to two high and low investment opportunity groups and investigated the impact of increasing excess cash on capital expenditure. They found that by increasing excess cash, companies paid more money on acquiring assets.

Chiou and Cheng (2006), investigated the determinants of working capital management. They used liquid balance and working capital requirements as the measures of a companies′ working capital management. Results indicated that debt ratio and operating cash flows affect the companies’ working capital management.

Appuhami (2008) investigated the impact of firms' capital expenditure on their working capital management. The author used the data collected from listed companies in Thailand. He used WCR and NLB as proxies for working capital measurement and developed multiple regression models. The empirical research found that firms′ operating cash flows which were recognized as control variables have a significant relationship with working capital management, which is consistent with findings of previous similar researches. The finding enhances the knowledge base on working capital management and will help companies to manage their working capital efficiently in growing situations associated with capital expenditure. 3. Hypotheses Development Working capital management is traditionally rated by current ratio, quick ratio and net working capital. According to Shulman and Cox (1985), these traditional ratios do not consider the going concern of the company. They classified net working capital into working capital requirement (WCR) and Net liquidity balance (NLB) in order to predict the financial crises of a company (Appuhami, 2008, p. 13). Hawawini et al. (1988), stated: current assets are essentially made up of cash and short-term


marketable securities (C), account receivable (AR), and inventories (INV). Current liabilities are short-term borrowings (STB), accounts payable (AP), and short-term net accruals (NA). Hence we can write:

NWC= [C+AR+INV]-[STB+AP+NA] But this traditional concept of working capital can be criticized on the grounds that some of the

components of NWC are not closely related to the firm′s operating cycle and should not, therefore, be considered as a part of the firm′s investment in working capital. Specifically, items such as cash and marketable securities (C), as well as over drafts and notes payable to banks (STB), should be viewed as decision variables which are purely financial in nature and, as such, not directly related to a firm′s investment in its current operations. If we rearrange equation in the following manner:

NWC= [(AR+INV)-(AP+NA) + [C-STB] Then the four items within the first set of brackets are directly related to the firm′s operating

cycle, where the two items within the second set of brackets are essentially the outcome of purely financial decisions. Therefore:

WCR= [(AR+INV)-(AP+NA)] NLB= [C-STB] WCR is measured in order to evaluate the management of working capital. And NLB is

considered with the capability of raising and allocating capital respectively. Kim, Maure and Sherman (1998), Opler (1999), and Wu (2001), demonstrated that more growth opportunities and more fluctuations of future cash flows will increase the cash balance and short-term investments of a company. Thus, expected cash flows and growth opportunities have positive correlation with NLB. When a company has growth opportunities, it needs to acquire fixed assets (pay capital expenditure) relevant to future growth plans. Thus, incurred or expected capital expenditure is positively correlated with NLB. With growth opportunity, a company can increase the holding cash, since it manages working capital efficiently. Under such circumstances, terms to pay operation-related liabilities are lengthened in collection, causing less demand on working capital. Expected capital expenditure is negatively related to WCR, and firms with a higher growth rate pay more attention on the management of capital expenditure (Appuhami, 2008, p. 14).

Decrease WCR Increase NLB Growth OPPORTUNITY

Capital expenditure

H1a H1b

4. Research Hypotheses A) First group: investigating relationship between capital, operating and finance expenditures with NLB.

aH1 - capital expenditure has a positive and meaningful relationship with NLB. aH2 - Operating expenditure has a positive and meaningful relationship with NLB. aH3 - Finance expenditure has a positive and meaningful relationship with NLB.

B) Second group: investigating relationship between capital, operating and finance expenditures with WCR.

bH1 - Capital expenditure has a negative and meaningful relationship with WCR. bH 2 - operating expenditure has a negative and meaningful relationship with WCR.


bH3 - Finance expenditure has a negative and meaningful relationship with WCR. It is necessary to mention all hypotheses for companies with high and low growth opportunities

to be investigated as well. For measuring growth opportunity we will apply market value to book value of assets (shares). 5. Research Methodology The purpose of this research is to contribute to a very important aspect of financial management known as working capital management with reference to the Stock Exchange of Tehran. This research is applicable and methodology is correlation. To test the studied relations between variables, we used multiple regressions. The general forms of our models are:

∑ ++= itiall

n

it XNLB εββ0

∑ ++= itiall

n

it XWCR εββ0 WCR: working capital requirement of firm I at time t; i=1, 2….92 firms NLB: net liquidity balance of firm I at time t; i=1, 2….92 firms

0β : The intersect of equation iβ :coefficients of X it variables itX :the different independent variables for working capital management of firm i at time t

ε : The error term The above general model base on the first group of hypotheses will change as follow:

OCFEDGth

BMFiexopexCapexNLB 7654321 ββββββββ +++++++=

The above general model base on the second group of hypotheses will change as follow:

OCFEDGth

BMFiexopexCapexWCR 7654321 ββββββββ +++++++=

6. Variables Measurement In addition to identify capital expenditure, the study undertakes the issue of identifying all the variables that affect the working capital management. Most of the variables identified in the investigation have been taken from the existing literature on working capital management. The study takes into account all the variables discussed below. Variables, which include dependent, independent, and control variables, have been used to investigate under the test hypotheses. 7. Independent variables Capital expenditure (CAPEX) is identified as one of the independent variables in the investigation and includes expenditures incurred by firms to acquire and upgrade physical assets, such as land, building, machinery, vehicles, and equipments. In this study base on Lewellen and Badrianth (1997), we calculate it as: net book value of assets at the end of a term minus book value of assets at the first of a term plus depreciation.

Operating expenditure (OPEX) is the cost of ongoing operations, or system. They are written off against profit for the period. Finance expenditure (FIEX) is cost incurred on debt capital. Interest incurred on debentures, bank loan and other long term liabilities are recognized as finance expenditures.


7.1. Dependent Variables

NLB= [(Cash + Short-term investments)- Short borrowings] WCR= [(Receivables + Inventories)-(payables + Sort-term net accruals)]

7.2. Control Variables

Operating cash flows (OCF), is extracted from cash flow statement, Growth (GTH), is measured by sale growth, Leverage measured by total long-term debt by equity (D/E).

To reduce size effects and variables like NLB, WCR, CAPEX, and OCF were deflated by total assets and FIEX, OPEX were deflated by total sale. 8. Data Collection and Sample Selection Since the study is based on financial data, the main source of data was financial statements, such as income statement, balance sheets, and cash flow statements of listed companies, issued by stock exchange of Tehran for the period from 2000 to 2009. The reason for restricting the time period to these spans was that the latest data for the study was available in these years. In addition we considered some other conditions like: a) their financial term should be ended up by nineteen of March (this is coincident with the end of year in Iran). b) They should not be investment companies. c) They should be adopted in stock exchange of Tehran before 2000. d) their financial activities should not be stopped during mentioned area. 9. Empirical Results We investigate the impact of capital expenditure on working capital management via regression analysis using 920 firm-year observations. At the first stage we examined hypotheses for all companies, later on we examined hypotheses for both low and high investment opportunities organizations. In this section descriptive statistic charts will be presented: Table 1: Descriptive Statistic for all firms

Number Minimum Maximum Average Standard Deviation NLB 920 -0.72 0.16 -0.2806 0.15835 WCR 920 -0.19 0.78 0.3512 0.18568 CAPEX 920 -0.62 24.55 0.2098 1.63028 OPEX 920 -0.01 0.35 0.051 0.04221 FIEX 920 0.000 0.14 0.0323 0.02546 M/B 920 -8.29 61.62 3.7731 5.12502 Gth 920 -0.69 8.62 0.2007 0.4799 D/E 920 -38.87 46.31 3.0117 4.30897 OCF 920 -0.79 1.83 0.1361 0.16657 N 920

In the table (1), the most main central proxy, is the average that shows equilibrium point and it

is a good proxy to indicate centrality of data. For instance the average of NLB and WCR are -0.2806, 0.3512 respectively. Also these figures for CAPEX, OPEX, and FIEX are 0.2098, 0.0510, and 0.0323 in order. Table 2: Descriptive statistic for high (M/B)

Number Minimum Maximum Average Standard deviation NLB 330 -0.61 0.16 -0.259 0.16111 WCR 330 -0.19 0.71 0.2891 0.18231


Table 2: Descriptive statistic for high (M/B) - continued

CAPEX 330 -0.6 0.87 0.0745 0.10891 OPEX 330 0.000 0.17 0.0405 0.02946 FIEX 330 0.000 0.1 0.0205 0.01801 Gth 330 -0.69 8.62 0.2697 0.69045 D/E 330 0.39 45.79 2.9155 3.49255 OCF 330 -0.22 0.77 0.192 0.15273 N 330


is a good proxy to indicate centrality of data. For instance the average of NLB and WCR are -0.2590, 0.2891. Also these figures for CAPEX, OPEX, and FIEX are 0.1745, 0.0405, and 0.0205 respectively. Table 3: Descriptive statistic for low (M/B) Number Minimum Maximum Average Standard Deviation NLB 300 -0.7 0.05 -0.3052 0.14262 WCR 300 -0.12 0.78 0.3704 0.17516 CAPEX 300 -0.48 0.36 0.044 0.06799 OPEX 300 0.000 0.35 0.556 0.04868 FIEX 300 0.000 0.13 0.0442 0.02678 Gth 300 -0.68 1.15 0.1329 0.24829 D/E 300 -38.87 46.31 3.2458 5.89292 OCF 300 -0.33 0.38 0.0799 0.09326 N 300


is a good proxy to indicate centrality of data. For instance the average of NLB and WCR are 0.305, 0.370. Also these figures for CAPEX, OPEX, and FIEX are 0.0440, 0.0556, and 0.0442 respectively. Table 4: Pierson correlation for all firms NLB WCR CAPEX OPEX FIEX M/B Gth D/E OCF

NLB Pierson correlation 1 -0.524 -0.024 0.061 -0.522 0.005 0.099 -0.225 0.01 sig 0.000 0.473 0.065 0.000 0.878 0.003 0.000 0.001

WCR Pierson correlation 0.524 1 -0.018 0.053 0.209 -0.178 -0.092 -0.03 0.081 sig 0.000 0.59 0.111 0.000 0.000 0.005 0.371 -0.013

According to table (4): a) NLB has high significant and negative relationship with FIEX and D/E, and it has high

significant and positive relationship with GTH and OCF. b) WCR has high significant and positive relationship with FIEX, and it has high significant

and negative relationship with M/B, GTH, and OCF. Table 5: Pierson correlation for firms with high and low opportunity growth NLB WCR CAPEX OPEX FIEX Gth D/E OCF

high growth opportunity NLB

Pierson correlation 1 -0.53 0.044 -0.03 -0.447 0.1 -0.277 0.111 sig 0 0.425 0.575 0 0.07 0 0.044 N 330 330 330 330 330 330 330 330

low growth opportunity WCR

Pierson correlation 1 -0.4 0.037 0.039 -0.594 0.14 -0.207 0.097 sig 0 0.521 0.506 0 0.02 0 0.093 N 300 300 300 300 300 300 300 300


Results shown in the table 5, for firms with high growth opportunities indicate: a) NLB has high significant and negative relationship with FIEX and D/E, also it has high

significant and positive relationship with OCF. b) WCR has high significant and positive relationship with FIEX and OPEX, also it has high

significant and negative relationship with CAPEX and OCF. c) And for firms with low growth opportunities results show: d) NLB has high significant and negative relationship with FIEX and D/E, also it has high

significant and positive relationship with Gth. e) WCR has high significant and negative relationship with CAPEX.

Table 6: Coefficients (NLB)

All Firms High Growth Opportunity Low Growth Opportunity Constant coefficient -0.177 independent variables CAPEX ⎯ ⎯ ⎯OPEX ⎯ ⎯ ⎯FIEX -3.056(0.000) -3.722(0.000) 3.164(0.000) control variables M/B ⎯ ∗∗∗ ∗∗∗Gth 0.026(0.005) ⎯ 0.059(0.213) D/E -0.003(0.001) -0.010(0.000) -0.034(0.486) OCF -0.003(0.930) 0.004(0.940) ⎯R 0.535 0.496 0.594 R square 0.286 0.246 0.353 Adjusted square 0.284 0.241 0.351 F 122.227 82.043 162.452 Sig 0.000 0.000 0.000 Durbin-Watson 1.717 1.806 1.577

In the table (6), we can see coefficients regarding the results extracted from t-test at the

significance level of 0.01 and 0.05. The upper part of this table shows variables which get necessary condition to arrive model, at

the level of all firms and firms with low and high growth opportunity. Also it shows removable variables as well. As it is seen, at level of all firms FIEX, D/E, and Gth are arrival variables with the p-value of smaller than 0.05, the coefficient for FIEX is -3.056 with a p-value of (0.000). This means, NLB is decreased by 3.056 for each one bath of FIEX. The p-value for OCF is more than 0.05 (0.930), it means this variable is removed from the model. As we see in table (4), capital expenditure and operating expenditure had the p-value more than 0.05. They were 0.473 and 0.065 respectively. At the level of high growth opportunity, FIEX and D/E are arrivals and OCF is removed. The coefficient for FIEX is -3.722 with a p-value of (0.000). This means, NLB is decreased by 3.722 for each one bath of FIEX. At the level of low growth opportunity, FIEX is arrival and GTH, D/E are removed. The coefficient for FIEX is 3.164 with a p-value of (0.000). This means, NLB is increased by 3.164 for each one bath of FIEX. In the lower part of table (6), the value of R square for all firms is 0.286; it means 0.286% of the variation in NLB can be explained or accounted for independent variables recognized in the regression model. These amounts are 0.246 and 0.353 respectively for firms with high and low growth opportunity. Table 7: Coefficients (WCR)

All Firms High Growth Opportunity Low Growth Opportunity constant coefficient 0.333(0.000) 0.215(0.000) 0.385(0.000) independent variables CAPEX ⎯ -0.244(0.006) -0.329(0.027)


Table 7: Coefficients (WCR) - continued

OPEX ⎯ 1.076(0.001) ⎯FIEX 1.234(0.000) 2.396(0.000) ⎯ control variables M/B -0.004(0.000) ∗∗∗ ∗∗∗Gth -0.027(0.000) ⎯ ⎯ D/E ⎯ ⎯ ⎯ OCF 0.0008(0.811) 0.075(0.154) ⎯R 0.251 0.349 0.128 R square 0.063 0.122 0.016 Adjusted square 0.060 0.114 0.013 F 20.570 15.111 82.043 Sig 0.000 0.000 0.000 Durbin-Watson 1.790 1.684 1.733

In the table (7), we can see coefficients regarding the results extracted from t-test at the

significance level of 0.01 and 0.05. The upper part of this table shows variables which get necessary condition to arrive the model,

at the level of all firms and firms with low and high growth opportunity. Also it shows removable variables as well. As it is seen, at level of all firms FIEX, M/B, and GTH are arrival variables with the p-value of smaller than 0.05, the coefficient for FIEX is 1.234 with a p-value of (0.000). This means, WCR is increased by 1.234 for each one bath of FIEX. The p-value for OCF is more than 0.05 (0.811), it means this variable is removed from the model. As we saw in table (4), capital expenditure and operating expenditure had the p-value more than 0.05. They were 0.590 and 0.111 respectively. At the level of high growth opportunity, FIEX, CAPEX, and OPEX are arrivals and OCF is removed. The coefficient for CAPEX is -0.244 with a p-value of (0.006). This means, WCR is decreased by 0.244 for each one bath of CAPEX, the coefficient for OPEX is 1.076 with a p-value of (0.001), and the coefficient for FIEX is 2.396 with a p-value of (0.000). At the level of low growth opportunity, just CAPEX is the arrival variable and the other ones are removed. The coefficient for CAPEX is -0.329 with a p-value of (0.027). This means, WCR is decreased by 0.329 for each one bath of CAPEX. In the lower part of table (7), the value of R square for all firms is 0.063; it means 0.063% of the variation in WCR can be explained or accounted for independent variables recognized in the regression model. These amounts are 0.122 and 0.016 respectively for firms with high and low growth opportunities. 10. Conclusions 10.1. Results from Testing the First Group of Hypotheses

1H a - capital expenditure has positive and significant relation with NLB. At the level of all companies, the outcome of examining this hypothesis shows, there is no

significant relationship between NLB and the capital expenditure. It means the capital expenditure dose not play any important role in determining the amount of liquidity in firms adopted in stock exchange of Tehran. This finding rejects 1H a . This conclusion is not consistent with Appuhami′s research (2008). It seems inflationary condition that prevail upon Iranians′economy encourages managers not to hold liquidity, instead to prevent bankruptcy; they prefer to contribute in some other activities to use this inflationary condition and to make profit. Probably they try to use short-term liabilities in order to financing capital expenditure. At the level of high and low growth opportunity, there is not any significant relationship between NLB and capital expenditure. It is to say that, for Iranian firms opportunity growth cannot have any impacts on these relations. These results are not consistent with previous researches.

2H a - operating expenditure has positive and significant relation with NLB.


At the level of all companies, the outcome of examining this hypothesis shows, there is no significant relation between NLB and operating expenditure. It means, operating expenditure dose not play any role in determining the amount of liquidity in firms adopted in stock exchange of Tehran. This finding rejects 2H a . This conclusion is not consistent with Appuhami (2008). At the level of high and low growth opportunity, there is not any significant relationship between NLB and operating expenditure as well. It is to say that, for Iranian firms growth opportunity cannot have any impacts on these relations. These results are not consistent with previous researches.

aH3 - Finance expenditure has positive and significant relationship with NLB. The result shows there is a significant and negative relationship between NLB and finance

expenditure. Then this hypothesis is rejected. It means, while financial expenditure occurs, managers have no tendency to hold liquidity. Hence they have preference for using other financial sources to pay interest commitments. This conclusion does not coincide with Appuhami (2008). Besides for companies with low and high growth opportunities we get the same conclusion, then growth opportunity is not able to alter these directions. 10.2. Results from Testing the Second Group of Hypotheses

bH1 - Capital expenditure has negative and significant relationship with WCR. At the level of all companies, the outcome of examining this hypothesis indicates there is no

significant relationship between WCR and capital expenditure. It means, capital expenditure dose not play any remarkable role in determining the amount of working capital requirements in firms adopted in stock exchange of Tehran. This finding rejects 1H b . This conclusion is not matched to Appuhami (2008). Because he states, efficient management of working capital to use growth opportunities means increase in net liquidity balance and decrease in working capital requirement. Such a management leads to the availability of liquid assets to use profitability projects. But in Iran due to inflationary condition, firms do not incline to hold liquidity and prefer to carry out their transaction trough increase in receivables and inventories, this leads to increase in WCR. At the level of high opportunity firms, outcome indicates the hypothesis 1H b is confirmed. This represents, in the face of growth opportunities, capital expenditure has an influenced effect on predicting WCR. Although the severity of this relation is weak, this result proves when companies intend to invest in opportunity growth, they try to manage working capital requirement efficiently and make liquidity to use such opportunities in spite of inflationary condition. For firms with low investment opportunities, the hypothesis 1H b is confirmed. Since, typically, such companies have less access to external financial resources (Opler, 1999), when they encounter investment opportunities, they attempt to manage working capital efficiently and to decrease WCR.

2H b - operating expenditure has negative and significant relation with WCR. At the level of all companies, the outcome of testing this hypothesis shows, there is no

significant relationship between WCR and operating expenditure. It means, operating expenditure dose not play any important role in determining the amount of WCR in firms adopted in stock exchange of Tehran. This finding rejects 2H b . This conclusion is not consistent with Appuhami (2008). For firms with high growth opportunity, outcome indicates there is significant and positive relation between WCR and operating expenditure. This finding rejects 2H b . There is not any significant relationship between WCR and OPEX for low opportunity growth firms too.

3H b - Finance expenditure has negative and significant relation with WCR. For all firms, result shows there is significant and positive relationship between finance

expenditure and WCR. Then 3H b is rejected. This result is not accorded to Appuhami (2008). It represents that firms are liable to augment WCR, while FIEX is increasing. It seems when companies


have commitments to pay interest, prefer to hold more liquid assets. Then 3H b is rejected. For high growth opportunity firms, the same result is observed. Probably, special economy condition of Iran forces firms to hold more current assets. They have a preference to use conservative policy to get better level of profitability. Research done by Valipour and Hossaeni (2009), confirm this idea. And finally results for low investment opportunity companies show, there is no significant relationship between WCR and FIEX.

Since working capital management concerns to find short-term financing resources and invest in short-term assets, and it has very important relationship with risk and profitability of firms, it is recommended that managers through increase in NLB and decrease in WCR should attempt to Manage Working Capital efficiently, since they need liquidity to enjoy these chances in the face of growth opportunity. 11. Suggestion for Future Researchers

1. This study has been conducted on whole industries, irrespective of the business differences. By conducting the same study on each business sector separately, managers can understand specific behavior of a company′s working capital in relationship with capital expenditure.

2. Further research can be conducted on the same topic in different countries so that working capital management policies can be compared between developing and developed countries in order to determine the correct management policies.

3. In this study age and size of the firms have not been considered. Regarding these two features, might lead to different conclusion.

4. In this study in order to investigating the impact of independent variables on working capital management, we used NLB and WCR. But using NWCR may lead to different results.

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