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Baños-Caballero, Sonia; García-Teruel, Pedro J.; Martínez-Solano, Pedro
Small business economics, 09/2012, Letnik: 39, Številka: 2Journal Article
This paper analyzes the relation between working capital management and profitability for small and medium-sized enterprises (SMEs) by controlling for unobservable heterogeneity and possible endogeneity. Unlike previous studies, we examine a non-linear relation between these two variables. Our results show that there is a nonmonotonic (concave) relationship between working capital level and firm profitability, which indicates that SMEs have an optimal working capital level that maximizes their profitability. In addition, a robustness check of our results confirms that firms' profitability decreases as they move away from their optimal level.
