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Role of the legal and financial environments in determining the efficiency of working capital management in European SMEs
Author(s) -
Mättö Markus,
Niskanen Mervi
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.2061
Subject(s) - working capital , financial capital , safer , economics , capital (architecture) , business , economic capital , capital market , cost of capital , capital formation , trade credit , finance , financial system , monetary economics , market economy , human capital , archaeology , history , computer security , computer science , incentive
Abstract This paper focuses on whether the rule of law or capital market development can explain observed differences in working capital levels and trade credit in SMEs from 13 EU countries. Our findings indicate that the working capital levels are lower and working capital management is thus more efficient in countries with safer legal systems and better investor protection. We also find that operating in a market‐based capital system has a negative effect on the cash conversion cycle (CCC). This implies that firms operating in countries with a market‐based system as opposed to a bank‐based system have better opportunities to manage their working capital. Our findings indicate that country‐level legal instruments explain much of the cross‐country differences observed in working capital. The results also suggest that working capital practices and the extent to which trade credit is used are a product of the legal system and the financial systems in place in each country. If the financial system changes, the trade credit practices can also be expected to change.