Working Capital Management in Indonesia: An Analysis on Over-investment and Under-investment Firms

  • Rahmat Heru Setianto Universitas Airlangga
  • Adinda Pratiwi PT. Schneider Electric Indonesia
Keywords: working capital management, excess working capital, performance, risk

Abstract

This study aims to examine the existence of excess working capital in Indonesian firms and its effect on the firms’ performance and risk. The sample includes 425 firm-year observations of Indonesian manufacturing firms for the period 2010 – 2014. To account for the potential asymmetric relation between excess Net Working Capital (NWC) and firm performance, an asymmetric regression model is employed, allowing the slope coefficient of the excess NWC to be different for positive and negative excess NWC. The results indicate (i) the existence of an optimal level of working capital, (ii) higher excess working capital leads to lower performance and risk, (iii) additional investment in working capital reduces firms’ performance for those with positive excess working capital. It is also documented that (iv) additional investment in working capital reduces firms’ risk for those that have working capital deficiencies. The findings have important implications for corporate managers in determining the optimal level of working capital.

Author Biographies

Rahmat Heru Setianto, Universitas Airlangga

SETIANTO, Rahmat Heru (Scopus ID: 55490516000), is a Lecturer in the Department of Management, Faculty of Economics and Business, Universitas Airlangga, Indonesia. He earned his M.Sc. (2011) in Finance from International Islamic University of Malaysia. His reserach interest are corporate finance, Islamic banking and finance, financial economics, and applied time series analysis. He is actively writing papers, several of his works has been published in acadmics journal.
Author’s contact details: Department of Management, Faculty of Economics and Business, Universitas Airlangga. Kampus B, Jalan Airlangga No. 4 Surabaya , Indonesia. 60286; e-mail: rahmat.heru@feb.unair.ac.id.

Adinda Pratiwi, PT. Schneider Electric Indonesia

PRATIWI, Adinda, is a Financial Planning and Analysis in a French Leading Multinational Company in Energy Management, Schneider Electric. Prior to her current role, she was a finance management trainee who got multiple assignments to various finance functions across countries in East Asia and Japan region. She earned her Bachelor’s Degree in Management (2016), specializing in Finance, from Universitas Airlangga.
Author’s contact details: PT Schneider Electric, Ventura Building, 7th Floor. Jalan RA Kartini Kav. 26 Jakarta 12430, Indonesia; e-mail: adinda1612@gmail.com.

References

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Published
2019-04-22
How to Cite
Setianto, R. H., & Pratiwi, A. (2019). Working Capital Management in Indonesia: An Analysis on Over-investment and Under-investment Firms. Gadjah Mada International Journal of Business, 21(1), 1-18. Retrieved from https://jurnal.ugm.ac.id/v3/gamaijb/article/view/15684