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Journal of Accounting in Emerging Economies
An empirical analysis of the determinants of the cash conversion cycle in Kenyan listed
non-financial firms
David Mutua Mathuva
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David Mutua Mathuva , (2014),"An empirical analysis of the determinants of the cash conversion cycle in
Kenyan listed non-financial firms", Journal of Accounting in Emerging Economies, Vol. 4 Iss 2 pp. 175 - 196
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An empirical
An empirical analysis of the analysis of the
determinants of the cash determinants
of the CCC
conversion cycle in Kenyan listed
non-financial firms 175
David Mutua Mathuva
School of Management and Commerce, Strathmore University, Nairobi, Kenya
Abstract
Purpose – The purpose of this paper is to investigate whether non-financial firms listed on the Nairobi
Securities Exchange (NSE) exhibit a target cash conversion cycle (CCC). The study also examines the
speed of adjustment to the target CCC and the factors that influence corporate decisions on the optimum
length of the CCC.
Design/methodology/approach – Based on a sample of 33 publicly traded firms on the NSE for the
period between 1993 and 2008, cross-sectional and time series analyses were carried out on the data
comprising 468 firm-years. A target adjustment model was developed to examine the significant
determinants of the CCC. Various regression approaches including ordinary least squares, fixed effects
and two-stage least squares estimation models were used in data analysis.
Findings – The results, which are robust for endogeneity, show that non-financial firms listed on the
NSE maintain a target CCC. Further analysis reveals that these firms adjust to the target CCC at
a slower rate. The results show that the determinants of the CCC include both firm-specific and
economy-wide factors. Specifically, the study establishes that older firms and firms with more internal
resources maintain longer CCC. Moreover higher return on assets, investment in capital expenditure
and growth opportunities have a significant negative association with the CCC. The results also show
a significant positive relation between inflation and the CCC.
Practical implications – The study establishes that other than internal firm-specific factors,
the CCC is also influenced by inflation, which is an external, economy-wide factor.
Originality/value – To the best of the author’s knowledge, this is the first study to examine whether
listed non-financial firms in a frontier market maintain a target CCC.
Keywords Inflation, Cash conversion cycle, Capital expenditure, Internal resources,
Target adjustment
Paper type Research paper
1. Introduction and motivation

Studies in corporate finance have predominantly examined long-term financial
decisions especially capital structure, dividend theory and firm valuation. A growing
strand of research has shifted focus to short-term financial decisions, particularly
working capital management. Various studies have examined factors that determine
the length of time each input dollar is tied up in working capital. The variable used to
measure working capital management efficiency has been the length of the cash
conversion cycle (CCC hereafter). While a longer CCC might increase profitability due
to higher sales (Deloof, 2003), maintaining a shorter CCC has been found to be more
beneficial (Shin and Soenen, 1998; Deloof, 2003; Lazaridis and Tryfonidis, 2006, Journal of Accounting in Emerging
Gill et al., 2010). Further examination of the determinants of CCC has produced mixed Economies
Vol. 4 No. 2, 2014
results. This raises interesting questions: does an optimal CCC exist for these firms? pp. 175-196
If it does, what is the speed of adjustment towards this target and what factors r Emerald Group Publishing Limited
2042-1168
determine the CCC? To address these questions, this paper incorporates the joint effects DOI 10.1108/JAEE-10-2011-0045
JAEE of the individual CCC components particularly with respect to accounts receivable,
4,2 inventories and accounts payable[1].
Banomyong (2005) holds that the CCC is a powerful metric in assessing the efficiency
with which a firm manages its working capital[2]. A longer-than or shorter-than
normal CCC could be an indicator of a firm’s (in) ability to convert inventories and
receivables into liquid cash. According to Shin and Soenen (1998), firms with a lower CCC
176 are considered to be more efficient because they turn their working capital over more
times per year. Lower CCCs also imply that the firm generates more sales per money
invested. To illustrate the importance of managing the CCC, Shin and Soenen (1998) use
two leading American supermarkets, Walmart and Kmart. They show that a firm
with a lower CCC is likely to outperform an industry peer with a relatively longer CCC.
With a CCC of 40 days in 1996, Walmart was able to outperform Kmart whose CCC was
61 days. While Walmart’s returns on assets (ROA) and equity (ROE) were 3.25 and 24.90
per cent, respectively, Kmart’s ROA and ROE were 0.87 and 4.91 per cent, respectively
(Shin and Soenen, 1998, p. 37)[3].
Maintaining an optimal CCC is important because the over- or under-investment in
the CCC affects firm performance. Moussawi et al. (2006) find that over-investing in the
CCC affects firm value negatively. Over-investment in the CCC implies that the firm is
not collecting cash required to finance its operations. Such a firm is likely to rely
heavily on trade credit or borrowings. Likewise, the REL 2005 Working Capital Survey
found that US firms had $460 billion unnecessarily tied up in working capital.
This hindered these firms from financing their operating activities.
Conversely, under-investing in the CCC inhibits firms from realizing maximum returns
on working capital. This limits the firm’s future growth opportunities and profitability.
Thus, firms may pursue a target length of the CCC which maximizes the benefits and
minimizes the costs of maintaining it. As firms strive to maintain an optimal CCC length,
they are usually constrained by both internal (for instance, operational capacity, cash flow
constraints, size and profitability) and external factors (for instance, interest rates, gross
domestic product (GDP) growth rates (Baños-Caballero et al., 2010; Ali and Khan, 2011),
inflation (Joshi, 1995) and sovereign risk). Whereas the internal constraints are controllable
by the entity, the external factors are usually difficult to deal with[4].
Baños-Caballero et al. (2010) find that Spanish small and medium-sized enterprises
(SMEs) have a target CCC to which they adjust quickly. The faster adjustment to target
CCC by Spanish SMEs is due to the financial constraints and difficulties they face
when seeking finance. On the contrary, listed firms have access to more sources of
finance. Thus, the study anticipates a slower speed of adjustment to the target CCC.
Consequently, this paper examines whether non-financial firms listed on the Nairobi
Securities Exchange (NSE) exhibit a target CCC. Ascertaining whether listed firms
exhibit a target CCC is useful in comprehending the extent to which they balance the
benefits and costs associated with CCC management. This helps in explaining
managerial behaviour in the management of the CCC. For example, how do firms react
when they are off their target CCC? Are managers concerned about the potential risks
(or benefits) associated with extremely long or short CCCs? The present study attempts
to address these questions by examining whether firms exhibit a target CCC and the
speed of adjustment to the target CCC.
In probing whether listed firms exhibit a target CCC, the study follows the approach
by Baños-Caballero et al. (2010) with the following differences. First, compared
to Baños-Caballero et al. (2010) whose focus was on SMEs, the study focuses on
non-financial firms listed on the NSE. Second, the study seeks to establish whether
listed non-financial firms exhibit a target CCC. The study by Baños-Caballero et al. An empirical
(2010) assumes that firms pursue a target CCC when making their working capital analysis of the
decisions. On the contrary, this paper empirically investigates whether listed
non-financial firms have a target CCC. It then proceeds to examine the speed of determinants
adjustment towards the target CCC length and the determinants of the CCC. of the CCC
Prior studies such as Chiou et al. (2006), Moussawi et al. (2006), Mongrut et al. (2010),
Palombini and Nakamura (2012) have examined the determinants of working capital 177
without first establishing whether an optimal CCC length exists and the adjustment
speed towards this target.
The choice of non-financial firms listed on the NSE is based on two reasons. First,
to the best of the author’s knowledge, no similar study has been performed in
non-financial firms listed on this market. Second, being a frontier market[5], sound
working capital management is important for the survival of the firms listed on the
NSE. The study draws upon evidence from a selected sample of 33 publicly listed
non-financial firms on the NSE across six selected industry sectors[6]. This study
finds that compared to Spanish SMEs (whose adjustment speed ¼ 0.87)[7], listed firms
exhibit a slower adjustment speed to the target CCC (adjustment speed ¼ 0.56)[8].
Moreover, the study establishes that the determinants of the CCC extend beyond
firm-specific to economy-wide factors. More specifically, the results reveal that older
firms and firms with more internal resources maintain a longer CCC. Moreover, ROA,
investment in capital expenditure (CAPEX) and growth opportunities lead to a shorter
CCC. These findings may be useful to finance managers when making working capital
decisions in comparable firms in other emerging economies.
The remainder of this paper is structured as follows. Section 2 presents a discussion
on prior literature and potential determinants of the CCC. Section 3 examines whether
firms in the sample exhibit a target CCC. Section 4 presents the empirical models used
in the study. Section 5 discusses the data used and also presents the multivariate
results. Finally, section 6 presents conclusions and suggestions for further research.
2. Prior literature
What is the importance of a target CCC length? Baños-Caballero et al. (2010) argue that
maintaining a target CCC is beneficial because it balances the benefits (e.g. improved cash
flows, happy customers or improved sales) and costs (e.g. opportunity costs of funds
tied up in working capital or strained relationships with suppliers) of maintaining it.
Baños-Caballero et al. (2010) find that SMEs adjust their current CCC to their target
immediately due to the nature of their operations and limited access to external finance.
In this regard, this study attempts to investigate whether publicly listed firms exhibit
a target CCC, and the speed of adjustment to the target CCC. Compared to SMEs,
we expect slightly different results with regard to the speed of adjustment to the target
CCC since listed firms face relatively lower financial constraints and have greater access to
external finance. The size of listed firms is also expected to affect the speed of adjustment
since, compared to SMEs, listed firms exhibit greater variability in profitability, survival
and growth (OECD, 1997).
Soenen (1993) observes that one of the primary reasons why firms go bankrupt
might be long CCCs. Shin and Soenen (1998) observe that Ceteris paribus, maintaining
a longer CCC affects corporate profitability negatively. High investment in working
capital implies more funds, which could have been invested in more productive projects,
are tied up (Brealey and Myers, 1996; Moussawi et al., 2006). Conversely, studies have
shown that a longer CCC is beneficial for the following reasons. First, a longer CCC may
JAEE increase sales through the maintenance of higher inventories which ensure continuous
4,2 production process even when there is scarcity (Blinder and Maccini, 1991). Second,
granting trade credit to customers generally stimulates sales (Deloof and Jegers, 1996),
and consequently, improves growth. Third, reducing the payables payment period helps
in strengthening firm-supplier relationships. Firms are also able to get discounts if they
reduce supplier financing (Ng et al., 1999).
178 On the other hand, a shorter CCC is associated with higher working capital
efficiency. A shorter CCC reduces the investment in working capital through strategies
such as aggressive collection policies, offering discounts and other incentives (Filbeck
and Krueger, 2005), minimizing stock outs and habitual late payment (Howorth and
Reber, 2003). On the contrary, these strategies have their associated costs. Aggressive
collection policies discourage customers and this may lead to a drop in sales. Minimizing
stock outs through holding more inventories implies that firms have to contend with
high holding costs in case the inventories do not sell fast (Blinder and Maccini, 1991).
The habitual late payment may result into strained relationships with suppliers (Howorth
and Reber, 2003). In addition to these costs, inadequate investment in working capital
may negatively affect firm growth and operating efficiency. It may also contribute
to under-utilization of fixed assets and inability to settle short-term obligations
(Ramamoorthy, 1976; Pandey, 2000). This reasoning motivates the first objective of this
paper which examines whether listed firms in Kenya exhibit an optimal CCC which
balances the costs and benefits of maintaining it.
A review of extant literature provides only one study by Baños-Caballero et al.
(2010) which attempts to examine whether firms exhibit a target CCC. To the best of the
author’s knowledge, no other similar studies have been carried out. The study, which
focused on Spanish SMEs, found that SMEs adjust their current CCC to their target
quickly with an adjustment coefficient of 0.87. The high adjustment speed could be
explained by the large costs incurred when SMEs are off their target CCC length.
This is due to the financial constraints and the difficulties in seeking external
financing. The adjustment speed to the target CCC explains the importance of sound
working capital management practices in SMEs. Consequently, efficient working capital
management is also important in larger firms (Deloof, 2003; Lazaridis and Tryfonidis,
2006). In particular, publicly listed firms which have wider access to external finance
are expected to behave differently in terms of their adjustment to target CCC. Thus, the
second aim of this paper is to examine the speed of adjustment to the target CCC for
publicly listed firms in Kenya.
With efficiency in CCC management becoming an increasingly important subject,
academic research into the determinants of the CCC is surprisingly sparse. Studies such
as Chiou et al. (2006), Moussawi et al. (2006), Mongrut et al. (2010), Baños-Caballero et al.
(2010), Ali and Khan (2011) and Palombini and Nakamura (2012) have examined the
determinants of working capital management in various economies. Ali and Khan (2011)
and Palombini and Nakamura (2012) posit that many internal as well as external factors
influence corporate decisions on the optimal level of current assets and current liabilities
to be maintained.
Chiou et al. (2006) investigate the determinants of working capital management for
Taiwanese listed firms for the quarters in the period 1996-2004. Using net liquid balance
and working capital requirements, the study finds that debt ratio and operating cash flow
affect the firm’s working capital. However, the study lacks consistent evidence for the
influence of the business cycle, industry effect, growth of the firm, performance of the firm
and firm size on working capital management. Based on a study of US firms for the
period 1990 through 2004, Moussawi et al. (2006) find that industry practices, firm size, An empirical
future sales growth, the proportion of outside directors, the current proportion of analysis of the
executive compensation and CEO share ownership significantly influence a firm’s
working capital management. Moussawi et al. (2006) posit that managers react positively determinants
to incentives in managing the firm’s working capital. of the CCC
A study by Mongrut et al. (2010) on firms listed in five Latin American capital
markets for the period 1996-2008 establishes that working capital management is 179
influenced by the industry CCC, firm’s market power, future sales and country risk.
Baños-Caballero et al. (2010) examine the determinants of CCC for Spanish SMEs for
the period 2001-2005. They establish key determinants of the CCC as the firm’s ability
to generate internal resources, leverage, sales growth, age, CAPEX and ROA.
Ali and Khan (2011) examine the determinants of working capital management for
manufacturing firms in Pakistan for the period 2000-2008. They establish the key
determinants of working capital management in manufacturing firms as business
cycles, firm growth, leverage, cash flows, ROA, firm size, real GDP and unemployment
rate. The study also holds that working capital requirements increase for firms during
poor economic conditions, a finding which the present study alludes to. Using a sample
of 2,976 firm-year observations for the period 2001 through 2008, Palombini and
Nakamura (2012) establish that debt level, size and growth rate have an effect on
working capital management. The study also establishes a negative relation between
free cash flow and working capital management.
An examination of prior literature reveals that the determinants of CCC can be split
into two: internal, firm-specific and external, economy-wide factors (Ali and Khan,
2011; Palombini and Nakamura, 2012). Firm-specific factors (e.g. sales growth, firm
size and performance) are within a firm’s control while economy-wide factors are
rather difficult to control. Macroeconomic factors such as the type of industry, level of
industry activity, inflation, interest rates and GDP growth rate may influence the
management of the CCC and this makes it imperative to examine the significance
and direction of their influence. Ali and Khan (2011) argue that there are some factors
which can be considered as hybrid, that is, they are influenced by both internal and
external factors (e.g. sales growth and market share). A further examination of prior
research also reveals that the determinants of working capital management vary
across countries largely due to economic, political and institutional differences.
The present study seeks to achieve its third objective by examining those factors that
influence the management of the CCC.
The knowledge of the potential effects of economy-wide variables on the CCC is so
important that they cannot be overlooked in the broad subject of working capital
management, especially in high inflation economies. Kenya is an example of an
emerging economy that is significantly affected by high inflation rates with the highest
being in 1993 (at 46 per cent) and the lowest in 1995 (at 1.7 per cent). Taking the
previous studies discussed above, a discussion on the comprehensive measure of
working capital efficiency (i.e. the CCC) and the potential firm characteristics that may
determine its length is presented.
2.1 The CCC

Consistent with various studies, this study uses the CCC as a comprehensive measure
of working capital efficiency (Soenen, 1993; Deloof, 2003; Lazaridis and Tryfonidis,
2006; Padachi, 2006; Garcia-Teruel and Martinez-Solano, 2007; Baños-Caballero et al.,
2010; Gill et al., 2010). The cash conversion concept was first introduced by
JAEE Gitman (1974). While there are alternatives, such as Shin and Soenen’s (1998) net trade
4,2 cycle measure and the weighted cash conversion cycle (WCCC) developed by Gentry
et al. (1990), the CCC measure is standard in research and many corporate finance
textbooks (Deloof, 2003; REL Working Capital Surveys, 2005; Lazaridis and Tryfonidis,
2006; Padachi, 2006; Raheman and Nasr, 2007; Garcia-Teruel and Martinez-Solano,
2007 and Baños-Caballero et al., 2010). The CCC is a measure of liquidity risk that
180 captures the length of time it takes a firm to be deprived of cash if it increases
investment in resources (e.g. inventories) in order to increase its sales level. Johnson
and Soenen (2003) demonstrate the strength of using the CCC as a comprehensive
working capital measure in predicting the success (or failure) of a firm.
Previous research shows that the over- or under-investment in the CCC affects firm
value. Based on this premise, there seems to exist some firm (and potentially economy)
characteristics that determine the length of the CCC. More specifically, the CCC is
expected to be influenced by internal resources in a firm, the level of investment in
fixed resources, firm sustainability, the level of external borrowing and economic
conditions. Additionally, considerable industry influence is anticipated to affect the
management of the CCC through the bargaining power of customers and suppliers
(Baños-Caballero et al., 2010). In this regard, this paper utilizes the CCC as an overall
measure of working capital management as follows:
CCC ¼ ðAccounts receivable=Sales 365Þ þ ðInventories=Cost of sales 365Þ

ðAccounts payable=Cost of sales 365Þ
2.2 Possible determinants of CCC

Capacity to generate internal resources. The ability of a firm to generate internal
resources determines how much funds are invested in working capital. Fazzari and
Petersen (1993) find that firms with larger capacity to generate internal resources
invest more in current assets. Baños-Caballero et al. (2010) establish that firms with
larger cash flows have longer CCC. On the contrary, Chiou et al. (2006) find that firms
with greater cash flows manage their working capital more efficiently. This is because
of the lower cost of funds invested in working capital and the associated lower risk
premium for these funds. Moreover, where internal resources are available, a firm is
able to invest in viable projects through borrowings and be able to repay its debt.
Any excess funds after paying the relevant taxes are retained to fund future growth.
Following this argument, the CCC is expected to rise and fall with the firm’s ability
(or inability) to generate internal resources. Based on the propositions presented, it is
not possible to anticipate the direction of the relationship between the firm’s ability to
generate internal resources and the CCC. This study employs the variable CASHFLOW
to capture a firm’s ability to generate internal resources. The variable is calculated as:
(net profit after taxes plus depreciation) scaled by total assets.
Profitability. While Ricci and Vito (2000) posit that the purpose of efficient working
capital management is to strike a balance between profitability and risk, Vishnani and
Shah (2007) observe that excess investment in working capital reduces profitability.
Chiou et al. (2006), Wu (2001), Uyar (2009) and Baños-Caballero et al. (2010) find that
a firm’s return significantly affects working capital management. Interestingly, while
Wu (2001) holds that working capital management and ROA have mutual influence,
Chiou et al. (2006) establish a positive relation yet Uyar (2009) and Baños-Caballero
et al. (2010) find a negative relation between ROA and working capital management.
The positive relation can be explained by the fact that better performing firms tend An empirical
to adopt less stringent working capital policies, which lead to more accounts receivable analysis of the
and inventories. The negative relation could be due to greater bargaining power of
better performing firms (Shin and Soenen, 1998). Following Chiou et al. (2006), Padachi determinants
(2006), Garcia-Teruel and Martinez-Solano (2007) and Baños-Caballero et al. (2010) of the CCC
profitability has been measured using ROA. The ROA is seen as an asset utilization
ratio that indicates how effectively or efficiently a firm utilizes its assets (Johnson and 181
Soenen, 2003). Following previous studies, it is difficult to anticipate the direction of
influence between the ROA and the CCC. In this study, the ROA is calculated as: profit
before tax and extraordinary items scaled by total assets.
CAPEX. A firm’s investment in tangible fixed assets might influence its working
capital management efficiency (Moussawi et al., 2006; Baños-Caballero et al., 2010).
Baños-Caballero et al. (2010) also observe that firms with more tangible fixed assets
might incur lower costs when raising funds to invest in current assets thus realizing an
increase in the CCC. On the contrary, Fazzari and Petersen (1993) argue that fixed
assets compete for funds available to finance working capital and growth. In this
regard, Moussawi et al. (2006) find a negative relation between CAPEX and the CCC.
Owing to the mixed results from previous studies, the expected relationship between
CAPEX and the CCC is not clear. CAPEX in the study is calculated as: tangible fixed
assets scaled by total assets.
Firm size. The size of a firm might affect the management of working capital due to
the following reasons. First, firm size affects the ability of a firm to acquire more debt
(Deloof, 2003). Studies have shown that the cost of funds to invest in current assets
decrease with firm size, implying that working capital requirements increase with firm
size (Chiou et al., 2006; Baños-Caballero et al., 2010). Chiou et al. (2006) observe that
large companies with higher credit ratings can obtain external finance easily thus
reducing their cash levels. Chiou et al. (2006) further posit that working capital needs
increase with firm size. Second, large firms have greater bargaining power. Thus, they
can negotiate for more favourable credit terms with their suppliers.
Wu (2001) and Chiou et al. (2006) find a positive relation between firm size and the CCC
implying that an increase in firm size results to an increase in the operating activities of
the firm which give rise to more working capital needs. Conversely Uyar (2009) finds
a significant negative correlation between the CCC and the firm size, both in terms of sales
and assets. Owing to the sample selection, Baños-Caballero et al. (2010) find firm size as an
insignificant determinant of working capital management in SMEs. Due to the mixed
findings, the expected relationship between firm size and CCC is not clear. In this study,
firm size is measured by the natural logarithm of sales revenue.
Growth opportunities. The growth rate in sales is another possible determinant of
the CCC. Deloof (2003) argues that higher inventory levels accompanied by a relaxed
trade credit policy may lead to higher sales. Higher sales translate into reduced
inventories which lead to a shorter CCC and improved profitability. Deloof (2003) and
Moussawi et al. (2006) hold the same view that a positive relationship exists between
the CCC and growth. Growth opportunities might affect the firm’s trade credit and its
investment in inventories. Emery (1984) sees trade credit as a way of increasing sales
levels in low demand periods and also a more profitable short-term investment than
marketable securities. Thus as Cuñat (2007) notes, high growth firms experience
difficulties in accessing other forms of finance other than trade credit and this contributes
to a smaller CCC. The negative relation between a firm’s growth opportunities and the
CCC can also be explained by the fact that high growth firms tend to focus more on
JAEE working capital management-related activities such as aggressive selling and cost cutting
4,2 strategies. Owing to the inconclusiveness of the direction between CCC and growth, the
expected relationship is not clear. Following previous studies, growth opportunities are
measured by the change in sales (DSalesit) scaled by last year’s sales (Salesit).
Leverage. Chiou et al. (2006) find that a firm raises its debt level when its internal
and short-term funds are depleted. As the debt level rises, the firm will focus more on
182 working capital management to avoid over-investing in accounts receivables and
inventories. Baños-Caballero et al. (2010) and Palombini and Nakamura (2012) find
a negative relation between debt level and the CCC. This means that the lower the
leverage, the lower is the cost of funds used to finance working capital and the longer
the CCC. Following this line of reasoning, a negative relation between leverage and CCC
is anticipated. In this paper, leverage is measured using total debt (both short-term and
long-term) to assets ratio.

Age. Baños-Caballero et al. (2010) found that the age of a firm has an association with
a firm’s ability to obtain external finance for its working capital needs. The same
proposition is held by Niskanen and Niskanen (2006) who hold that the age of a firm
determines its creditworthiness with the suppliers of both debt and equity. Age has been
used to control for the length of a firm’s existence in the industry (Howorth and Westhead,
2003). Age can also be used to explain the time the firm has known its customers. It also
tells about the firm’s sustained reputation owing to the quality of its products as explained
by Petersen and Rajan (1997). Chiou et al. (2006) explained that more established firms
(in terms of age) are able to acquire external financing more easily and under less
stringent conditions. This translates into a lower cost of funds for these firms hence more
profitability. Therefore, it is anticipated that a significant positive relationship exists
between the age of the firm and the CCC. In this study, age has been calculated as the
natural logarithm of the number of years since incorporation.
Economic conditions. According to Smith (1987), Walker (1991) and Merville and
Tavis (1973), the uncertainty in the macro-economic environment affects working
capital management. Ali and Khan (2011) posit that poor economic conditions exert
pressure on working capital policies of firms. Models on the determinants of the CCC
(e.g. Baños-Caballero et al., 2010) suggest that the state of economy affects the length
of the CCC. Carpenter et al. (1994) and Kashyap et al. (1994) confirm that the rate of
growth in GDP has an effect on the CCC. Kim et al. (1998) find a significant positive
relation between liquidity and the growth rate in the index of leading economic
indicators. Since prior research find different directions of relationship between the
GDP growth rate and the CCC, a positive or a negative relationship is anticipated
between the two variables.
During times of rising inflation and interest rates, working capital levels fluctuate
and as a result firms find it difficult to strike a balance as explained by Smith (1980).
Sundar (1980) explains that the plough back of profits to finance working capital
becomes almost impossible during times of inflation. The global economic downturn
characterized by plunging sales (a symptom of long CCC; Deloof, 2003), has reduced
corporate revenues and narrowed profit margins (Enqvist et al., 2011). These strands of
research depict that during inflationary periods firms experience longer CCCs due to
inventories being tied up and receivables not materializing. Thus, a positive relationship
between inflation rate and the CCC is anticipated.
Industry controls. Hawawini et al. (1986) suggest that industry practices are
significant determinants of a firm’s CCC. The CCCs of say, software firms are quite
different from those of either a manufacturing or a retailing firm. Consequently, it is
important to control for the influence of industry practices on a firm’s working capital An empirical
practices (Storey, 1994; Filbeck and Krueger, 2005; Lazaridis and Tryfonidis, 2006; analysis of the
Moussawi et al., 2006). Storey (1994) holds that the main industrial activity of a firm has
an impact on business performance. Industry influence may influence the CCC because determinants
firms in an industry may copy other firms’ strategies aimed at shortening the CCC. of the CCC
For instance, in the Walmart’s example provided by Shin and Soenen (1998), assuming
Walmart and Kmart are the two players under consideration, Kmart would want to adopt 183
some (if not all) strategies being pursued by Walmart to improve its CCC. If Walmart is
keeping its CCC short through re-engineering its retailing by enterprise integration with
supplies, the managers of Kmart would consider pursuing such a strategy of none
existed. If all executives in the industry did so, the entire industry may realize overall
efficiency through a reduction in the CCC. In this paper, six industry dummies (1,0) are
included in the estimation models to examine whether industry influence is significant in

determining the length of the CCC.
Firm-year controls. Firm year controls are also introduced in some of the regression
models to control for the time effects that may exist in the panel data used. This is
consistent with previous studies such as Deloof (2003), Lazaridis and Tryfonidis (2006),
Garcia-Teruel and Martinez-Solano (2007) and Baños-Caballero et al. (2010).
3. Determining the optimal CCC

In this section, a mean reversion test on whether firms exhibit a target CCC is carried
out. Consequently, linear estimation models are used where the CCC is modelled as
a function of the potential variables that extant literature identifies as determinants
of the CCC. The assumption of linearity is consistent with prior studies such as Chiou
et al. (2006), Moussawi et al. (2006) and Baños-Caballero et al. (2010).
For the initial analysis, data for the 33 non-financial firms listed on the NSE in the
sample were hand collected from the Kenya Capital Market Authority and company
web sites. Data on the macroeconomic variables were obtained from the Kenya Central
Bureau of Statistics. To examine whether firms maintain a target CCC, firms with at
least five continuous time series observations during the period 1993-2008 are chosen,
resulting to 468 firm-year observations. The CCC and the lagged CCC variables are
calculated for each firm in the sample. The change in both variables (i.e. DCCC and
DCCCi,t1) is also calculated and used in the mean reversion tests.
The first step in investigating whether non-financial firms listed on the NSE have
a target CCC is to examine whether their CCCs revert to the mean. If they do not, then the
hypothesis that NSE listed non-financial firms have a target CCC can be rejected.
To investigate whether firms exhibit a target CCC, we follow Baños-Caballero et al. (2010)
who explain that the target adjustment model should explain a firm’s CCC in terms of its
CCC in the previous period and its target CCC. Thus, it is assumed that firms have
a target CCC when they make their working capital decisions (Baños-Caballero et al.,
2010). Baños-Caballero et al. (2010) observe that the firm’s current CCC depends on its
CCC length in the previous period. This necessitates a calculation in the change in
the CCC for each firm-year in the sample. Using the calculated changes in the CCCit
and CCCi,t1, for each firm over the 1993-2008 period, the following vector
autoregressive model is used to examine whether the CCCs of the firms in the sample
are mean reverting:
DCCC it ¼ b0 þ b1 DCCC i;t1 þ eit ð1Þ

JAEE where CCCit represents the current CCC of firm i in time t; CCCi,t1 is the prior year
4,2 CCC of firm i in time t and eit is an independent and identically distributed disturbance
with a mean of zero.
Figure 1 shows the distribution of the results from the coefficients of (b1) from the
regression Equation (1) above for firms with at least five years of data in the period
1993-2008[9].
184 In Figure 1, the mean (median) coefficient value is 0.226 (0.205). The negative
mean (median) regression coefficient implies that the CCCs for firms on the NSE follow
a mean reversion process. This means that if the CCC length is too long, the resultant
costs associated with maintaining a long CCC will force firms to shorten it. This could
be through strategies such as aggressive collection of debts or delaying payments
to suppliers. On the other hand, if the CCC length is too short, this could lead the firm
into difficulties such as loss of customers or strained supplier relations. In both cases,
the firm’s sustainability position is adversely affected in the long run.
The bell-shaped graph in Figure 1 demonstrates that firms tend to converge
towards a target CCC length which balances the benefits and the costs of maintaining
it. However, as firms strive to maintain a target CCC, inefficiencies are inherent which
shorten or lengthen the CCC. Therefore, it appears as if firms are constantly managing
their CCCs to ensure that firm value is maximized as much as possible. From this
observation, it emerges that there are systematic factors that cause firms to maintain
the CCC at a certain length, which is neither too long nor too short. This finding
confirms propositions by Deloof (2003) and Baños-Caballero et al. (2010) that firms
strive to maintain a target CCC which is value maximizing. Following the confirmation
1.5
Percentage
0.5
0
–1 –0.5 0 0.5
Regression Model Coefficients ()
Notes: The coefficients have been obtained from the firm-wise

regression: ΔCCCit=0+1ΔCCCi,t–1+eit where Δ is a first
difference operator and time steps are annual. All the coefficients
Figure 1. are significant at the 1 per cent level. The CCC is defined as
Distribution of the receivables collection period plus inventory-processing period net
regression model of payables payment period. The figure captures results from each
coefficients on the lagged
change in the CCC of the 33 non-financial firms quoted on the NSE with at least five
years of data on the CCC components in the 1993-2008 period
that NSE firms exhibit a target CCC, the study proceeds to examine the speed of An empirical
adjustment to the target CCC and those firm-specific and economy-wide factors that analysis of the
influence the length of the CCC.
determinants
4. The empirical models of the CCC
In Section 3, the results show that non-financial firms listed on the NSE exhibit a target
CCC to which they converge. Subsequently, a target adjustment model is developed to 185
examine the speed of adjustment to the target CCC. The speed of adjustment helps
in explaining firm behaviour in terms of how firms manage deviations from the
target CCC in the case of over- or under-investment in working capital. The speed of
adjustment to target CCC also explains the differences that exist between SMEs and
large firms in managing their CCC. Large firms, which have wider access to capital,
have been found to over-invest in working capital (Moussawi et al., 2006), which
negatively affects their returns. In general, the target CCC is expected to maximize
corporate profitability. Therefore, further examination of those factors that influence
the CCC is performed. Consistent with Baños-Caballero et al. (2010), a target
adjustment model is used by incorporating the likely determinants of the target CCC
into the following specification[10]:
CCC it ¼ a0 þ OCCC i;t1 þ rk CFLOW it þ rk ROAit þ rk CAPEX it þ rk SIZE it

ð2Þ
þ rk GROWTH it þ rk DEBT it þ rk AGE it þ rk mt þ rk gt þ lt þ Zi þ wit
where a0 ¼ lb0, O ¼ (1l), rk ¼ lbk and wit ¼ leit and 0olo1.

O allows for lags in both the dependent and explanatory regressors. The variables
mt and gt capture the macroeconomic variables (GDP and inflation rates, respectively)
which are beyond a firm’s control. Variable lt represents the unobservable heterogeneity
that captures firm-invariant time-specific effects. These effects vary across firms but are
assumed to be constant for each firm. Examples of such effects include managerial
efficiency such as its commitment to reducing the investment in the CCC, motivation and
attitudes towards risk. The variable also captures time-invariant industry-specific effects
that are specific to the industry in which the firm operates. Examples include factor
market conditions and entry or exit barriers. Variable Zi is a time dummy. Finally wit
captures the random disturbances.
5. Data
Data used in the study were hand-collected from non-financial firms listed on the NSE.
The sample data was constructed as follows. First, 20 firms classified under commercial
banks, investment firms, insurance firms and service-based firms were excluded. This is
because the definition of the CCC for the excluded firms differs from what is being
investigated in the present study. Next, four firms suspended from trading were also
excluded. Firms were chosen with at least five continuous time series observations
during the period 1993-2008, resulting in a final sample of 33 firms and 468 firm-years.
Table I presents sample breakdown and sectoral univariate comparisons of key
descriptive variables (current assets to total assets and current liabilities to total assets)
are given in Table II.
Wernerfelt (1984) argues that in line with resource-based view of the firm, some firm
effects exist on strategies and performance levels by firms in the same industry.
Table I reports the industry sector breakdown of the mean and median CCC. The table
JAEE No. of No. of Mean Median
4,2 firmsa % firms observations CCC CCC
Sector breakdown
Agricultural 5 15 73 67.393 49.589
Automobiles and
186 accessories 4 12 59 66.464 52.724
Commercial and services 6 18 87 65.922 75.866
Construction and allied 5 15 60 76.125 48.997
Energy and petroleum 4 12 59 98.747 93.403
Manufacturing and allied 9 27 130 78.217 61.821
Total 33b 100 468
Notes: aFor the purpose of this study, firms listed under banking, insurance, investment and
Table I. telecommunications and technology sectors were omitted because their definition of working capital is
Descriptive statistics: different from what is under the present study. CCC represents the cash conversion cycle. bThe total
sample breakdown firms listed on the Nairobi Securities Exchange as at 31 December 2011 were 57
CA/CL CA/TA CL/TA WCR

Mean Median Mean Median Mean Median Mean Median
Sectoral univariate comparisons of key descriptive variables

Agricultural 1.373 1.231 0.967 0.292 0.275 0.232 0.343 0.096
Automobiles and accessories 0.299 0.220 0.286 0.222 0.254 0.196 0.108 0.072
Commercial and services 1.748 1.431 0.404 0.408 0.296 0.296 0.181 0.150
Construction and allied 2.169 1.745 0.514 0.533 0.268 0.243 0.224 0.145
Energy and petroleum 1.831 1.809 0.616 0.628 0.408 0.321 0.189 0.138
Manufacturing and allied 3.256 1.952 0.511 0.423 0.234 0.145 0.771 0.118
Notes: The table shows the univariate comparison of means and medians of key working capital
ratios for 468 firm years from the 1993-2008 sample of non-financial firms listed on the NSE. The
means and medians of the selected working capital ratios show the importance of current assets and
Table II. liabilities and working capital management for the selected sample by sector of activity. CA represents
Descriptive statistics: current assets, CL represents current liabilities, TA represents total assets and WCR represents the
univariate comparisons working capital ratio derived as ((Current assetsCurrent iabilities)/Current liabilities)
reveals sectoral differences in the CCC. This confirms the findings by Filbeck and Krueger
(2005) and Hawawini et al. (1986) who hold that the type of industry in which a firm
operates in has an effect on its working capital management. The energy and petroleum
sector has the longest mean CCC (98.747 days). The long CCCs can be explained by price
level changes inherent in the industry which pushes firms to invest heavily in the CCC. In
contrast, the commercial and services sector has the shortest mean CCC (65.922 days).
This can be explained by the nature of business conducted by the firms in this sector.
Table II shows the importance of current assets and current liabilities in the
management of the CCC. Interestingly, the manufacturing sector reports the highest
mean current ratio of 3.256 and working capital ratio of 0.771. This implies that
manufacturing firms invest a lot in working capital compared to firms in other sectors.
Firms listed under automobiles and accessories report the lowest mean current ratio
(0.299) and working capital ratio (0.108). Collectively, these findings reveal that
working capital requirements and investment vary across industry sectors.
5.1 Univariate analysis An empirical
Table III presents summary statistics on variables included in the regression models. analysis of the
Overall the mean (median) CCC is 75.08 days (68.12 days). The mean CCC is lower than
that of Finnish firms (108.8 days), Spanish SMEs (76.3 days) and firms listed on the determinants
Athens Stock Exchange (189 days), but higher than that of Belgian firms (44.5 days) of the CCC
(refer to studies by Deloof, 2003; Lazaridis and Tryfonidis, 2006; Garcia-Teruel and
Martinez-Solano, 2007; Enqvist et al., 2011). The descriptive statistics on the other 187
variables are also presented.
5.2 Empirical results

To exploit the panel aspects of the data used, dynamic effects are incorporated as well
as controlling for unobservable firm-specific and firm-invariant time-specific effects.
Hsiao (1985) observes that in panel data, examining both cross-sectional and time
series properties improve the efficiency of the econometric estimates and excludes bias
arising from the existence of individual effects. Thus, this approach provides a more
appropriate basis to analyze corporate decisions on CCC management. The approach
also helps in controlling for unobservable heterogeneity. Six estimation models are
employed to examine the determinants of the CCC. The use of six models helps in
providing robust results for the present study. Robustness is provided by varying the
Variable Mean SD First quartile Median Third quartile
A: test variables
CCC (CCCit) 75.080 88.610 20.720 68.120 122.700
CCC (CCCi, t1) 74.850 88.670 20.250 66.700 122.700
B: determinant variables: firm-specific variables
Cash flow (CFLOW) 0.382 0.576 0.162 0.275 0.442
Return on assets (ROA) 0.177 0.461 0.078 0.128 0.214
Capital expenditure (CAPEX) 4.510 4.140 0.627 0.980 1.930
Firm size (SIZE) 7.637 1.906 6.548 7.608 8.858
Sales growth (GROWTH) 7.496 1.734 6.391 7.459 8.760
Leverage (DEBT) 0.127 0.166 0.000 0.073 0.213
Firm age (AGE) 1.779 1.404 1.750 2.278 2.479
C: determinant variables: economy-wide control variables
Inflation (INF) 0.131 0.119 0.067 0.097 0.119
GDP growth (GDP) 0.053 0.026 0.038 0.047 0.068
Notes: The table reports key summary statistics for the full sample of 468 firm-year observations for
the period 1993-2008. The CCC is calculated as receivables collection period plus inventory-processing
period net of payables payment period. The receivables collection period has been computed as
accounts receivable scaled by net sales multiplied by 365 days. The inventory-processing period is
derived as inventory scaled by cost of sales multiplied by 365 days. The payable payment period is
derived as accounts payable scaled by cost of sales multiplied by 365 days. Cash flow (CFLOW) is net
profit after tax plus depreciation to total assets. ROA is net profit before tax scaled by total assets.
CAPEX is derived as tangible fixed (non-current) assets divided by total assets. Firm size (SIZE) is the
natural logarithm of sales revenue. Sales growth (GROWTH) is derived as: (this year’s sales less prior
year’s sales) scaled by prior year’s sales. Leverage (DEBT) is obtained as total debt scaled by total
assets. Firm age (AGE) is the natural logarithm of number of years since incorporation. Inflation rate
(INF) is the annual inflation rate. The growth in GDP is the annualized gross domestic growth rate
expressed as a percentage. All the variables share a common sample size with 468 firm-year Table III.
observations. standard deviation represents the standard deviation Summary statistics
JAEE variables used in the regression models as well as reporting the results using pooled
4,2 ordinary least squares (OLS), fixed effects and two-stage least squares (2SLS)
estimations. The use of various estimation models provides the opportunity to examine
the differential influence of industry and the economy-wide variables on the CCC.
The 2SLS estimations are used to address possible endogeneity that may exist
amongst the variables under estimation.
188 The results from the 2SLS are not statistically different from those of the pooled
OLS and fixed effects estimations. Both the pooled OLS and fixed effects regressions
were performed in order to confirm the consistency and efficiency of the results from
the panel data. This is consistent with Deloof (2003), Padachi (2006), Garcia-Teruel and
Martinez-Solano (2007) and Baños-Caballero et al. (2010). The strength of the overall
model was tested using the significance of adjusted R2 and all models were found to be
highly significant at po0.01. The Durbin-Watson (d) coefficient (results are not
reported) is also used to test for independence of observations (possible autocorrelation
of residuals). In all regressions, the values for (d) ranges between 1.3 and 2.4.
This means that there is independence of observations.
Finally, variance inflation factors (VIFs) are computed in order to check whether
multicollinearity amongst the variables in the models is a problem. The VIFs factors
(not disclosed) are used to detect whether one predictor has a strong linear association
with the remaining predictors (the presence of multicollinearity among the predictors)
(Lazaridis and Tryfonidis, 2006). AVIF measures how much the variance of an estimated
regression coefficient increases if the predictors are correlated (multicollinear). The largest
VIF among all predictors is often used as an indicator of severe multicollinearity.
Montgomery and Peck (1982) suggest that when the VIF is greater than 5-10, then the
regression coefficients are poorly estimated (see also Chartlergee and Price, 1977). In all
regression models, the VIFs range between 1 – 4, implying absence of multicollinearity
amongst the observed variables.
Table IV presents panel regression results for the determinants of the CCC in the
1993-2008 period for all independent variables discussed under literature review.
The CCC is used as the dependent variable in all estimation models. The first and
second columns of Table IV report estimates for a static model using OLS estimation
and fixed effects models, respectively. Column 3 shows the results using the OLS
model whilst incorporating the lagged dependent variable as an independent
variable in addition to two economy-wide variables (the GDP growth rates and
inflation rate) and industry controls. The results show that the CCC increases
significantly with increases in the firm’s age and its ability to generate internal
resources. The results also show that the CCC decreases significantly with increase
in profitability, CAPEX and growth of the firm. In model 3, the lagged dependent
variable introduced as a dependent variable is significant and positively related with
the CCC. This finding suggests that this year’s CCC is also determined by the
previous CCC. The coefficient on this variable is 0.438. This implies that using static
models, firms adjust to the target length of the CCC at a slower rate compared to
SMEs (the adjustment factor ¼ 0.562).
However, the OLS approach is insufficient in explaining fully the determinants of
the CCC. The OLS estimation produces inconsistent results even if there is no serial
autocorrelation between the random disturbances, given that CCCit is correlated with
the time dummy, Zi. This is because the variables CCCi,t1 and wi,t1 are correlated.
Consequently, the OLS estimation produces inconsistent results due to the correlation
existing between DCCCi,t1 and Dwi,t1. Likewise, the OLS does not address possible
Model (1) (2) (3) (4) (5) (6)
An empirical
analysis of the
Variables Dependent variable: cash conversion cycle (CCC) determinants
Intercept 99.204*** 45.678*** 106.643*** (dropped) (dropped) (dropped)
(3.66) (2.47) (3.87) of the CCC
CCC i,t1 0.438*** 0.440*** 0.440*** 0.439***
(10.61) (10.49) (10.51) (10.63) 189
CFLOWit 17.270* 16.660* 26.380** 23.133* 23.129** 26.071***
(1.43) (1.36) (2.32) (2.09) (2.09) (2.38)
ROAit 27.880** 28.107** 32.630*** 30.018*** 30.003*** 31.898***
(1.90) (1.89) (2.58) (2.36) (2.34) (2.52)
CAPEX 0.6116*** 0.6480*** 0.388*** 0.359*** 0.355** 0.398***
(3.60) (3.38) (2.58) (2.36) (2.34) (2.66)
SIZEit 5.194 2.884 0.595 2.330 2.229 0.381

(1.47) (1.05) (0.19) (0.77) (0.74) (0.13)
GROWTHit 10.012*** 10.224*** 8.745** 11.333*** 11.173*** 8.855**
(2.54) (3.12) (2.19) (2.85) (2.82) (2.26)
DEBTit 6.13 2.918 18.770 21.318 21.387 19.529
(0.24) (0.09) (0.88) (1.00) (1.00) (0.92)
AGEit 12.396*** 12.037** 4.688* 7.258* 7.332* 4.833**
(2.62) (2.44) (1.79) (1.78) (1.80) (1.95)
GDPit – – 78.9 – – 0.089
(0.56) (0.06)
INFit – – 94.240*** – – 89.116***
(3.04) (3.00)
Hausman 0.000 0.000 0.001
Industry controls? No No Yes No Yes Yes
Observations 468 468 468 468 468 468
Adjusted R2 0.046 0.060 0.347 0.296 0.385 0.369
Notes: The table presents regression estimates on the determinants of the CCC as identified in extant
literature. The dependent variable is the CCC. CCCi,t1 is the lagged dependent variable introduced as
an independent variable; CFLOW is a measure of the firm’s ability to generate internal resources; ROA
is the return on assets; CAPEX is a measure of capital expenditure; SIZE is the size of the firm;
GROWTH is a variable measuring the growth rate of the firm; DEBT is the firm’s leverage position;
AGE is the age of the firm since incorporation; GDP is the annualized growth in gross domestic
product and INF is the annualized average rate of inflation. Model (1) has been estimated using the
OLS; Model (2) has been estimated using the fixed effects estimation; Model (3) has been estimated
using the OLS incorporating the lagged dependent variable as an independent variable in addition to
the two economy-specific variables (GDP growth rates and inflation rate) and industry controls; Model
(4) has been estimated using the two-stage least squares estimation without the industry controls;
Model (5) has been estimated using the two-stage least squares estimation whilst incorporating
industry controls and Model (6) has been estimated using the two-stage least squares estimation with
the inclusion of both the industry dummies and two other exogenous independent variables, the
growth in GDP and the inflation rate. Hausman is the p-value of Hausman (1978) test. We reject
the null hypothesis of no endogeneity and conclude that the within-group estimations are consistent at
the 1 per cent level for models 4-6. Heteroskedastic-consistent standard errors are used to compute Table IV.
t-values, which are shown in parentheses. ***,** and * represent significance levels at the 1, 5 and The determinants of the
10 per cent, respectively cash conversion cycle
endogeneity that exists between the CCC and other variables. Therefore, to address the
weaknesses of the OLS estimation, the results are also reported using 2SLS estimations.
Studies have used the CCC as a dependent (Baños-Caballero et al., 2010) as well as an
independent variable (Deloof, 2003). This implies that the CCC is influenced by the
JAEE identified independent variables as well as influencing the independent variables.
4,2 To address inconsistency in estimation and endogeneity, 2SLS estimation models are
used to model the endogeneity of the determinants of corporate CCC. Arellano and
Bond (1991) explain that using 2SLS estimation models reduce inconsistency, increase
efficiency and addresses heteroskedasticity of the disturbances.
Thus, models 4, 5 and 6 are estimated using the 2SLS approach. Model 4 is estimated
190 using the 2SLS estimation without the industry controls. Model 5 is estimated using the
2SLS estimation whilst incorporating industry controls. Finally, model 6 is estimated
using the 2SLS estimation with the inclusion of industry dummies and two other
exogenous independent variables, the growth in GDP and the inflation rate. To formally
test for endogeneity, the Hausman’s test for contemporaneous correlation between the
disturbances and the CCC is carried out (Hausman, 1978). We reject the null hypothesis of
no endogeneity at the 1 per cent level for models 4 – 6. A discussion is presented based on
the results from the last three models.
The inferences in Table IV are based on the results from estimation models 4, 5 and
6. The table shows that the lagged dependent variable introduced as an independent
variable is highly significant ( po0.000) and positively related with the CCC. This is
consistent with the findings by Baños-Caballero et al. (2010). The results show that
the coefficient on the lagged dependent variable (CCCi,t1) is 0.44, implying that the
adjustment coefficient (l) is 0.56. This adjustment coefficient is lower than that of
Spanish SMEs (l ¼ 0.87) as found out by Baños-Caballero et al. (2010). This implies that
compared to SMEs, large firms adjust to their target CCC at a slower rate. The positive
relation can be explained by the fact that large firms have a target CCC, and this target
increases as the CCC increases but at a slower rate than SMEs. The slower rate of
adjustment to the target CCC can be explained by the wider access to finance and
economies of scale by non-financial firms listed on the NSE.
Consistent with Baños-Caballero et al. (2010), the results indicate that the variable
CFLOW is significant and positively related to the CCC. This result indicates that as
the ability of a firm to generate internal resources improves, it experiences increased
CCC requirements. The finding confirms the proposition by Fazzari and Petersen
(1993) who posit that as the firm’s capacity to generate internal resources increases, it
tends to invest more in current assets. Increased investment in current assets translates
to a longer CCC. On the other hand, a firm with more internal resources can afford to
maintain a long CCC since it is capable of financing it using its internal resources.
This leads to lower costs of financing and consequently, the firm pays a lower financing
premium even for a long CCC.
The results show that ROA is another significant determinant of the CCC.
Consistent with the findings of other studies such as Padachi (2006), Garcia-Teruel and
Martinez-Solano (2007), Uyar (2009) and Baños-Caballero et al. (2010), ROA has an inverse
relation with the CCC. This further confirms the proposition by Vishnani and Shah (2007)
that the lower the investment in the CCC, the higher the returns. Firms with higher
returns are also associated with higher bargaining power (Shin and Soenen, 1998).
Therefore, they are capable of demanding trade credit which shortens their CCC.
The negative relation also implies that firms which utilize their assets effectively and
efficiently are able to experience a reduction in their CCC.
Likewise, the findings show a significant inverse relationship between the CCC and
tangible fixed assets. This finding is consistent with Baños-Caballero et al. (2010) but
contrary to the findings by Moussawi et al. (2006). As held by Fazzari and Petersen
(1993), fixed investments compete for funds available when the firm is financially
constrained. This means that as firms invest in tangible fixed (non-current) assets, An empirical
their working capital diminishes due to competition for available funds. analysis of the
Consistent with Baños-Caballero et al. (2010), the results show that firm’s growth
opportunities are significant and inversely related to the CCC. This finding suggests determinants
that as a firm grows, it becomes easier to access trade credit (Howorth and Reber, 2003; of the CCC
Cuñat, 2007) and grant more trade credit to customers (Emery, 1984). The resultant
effect is a reduction in the CCC. The finding is also in support of the view that high 191
growth firms tend to focus more on CCC management through aggressive selling and
cost cutting strategies which reduce the CCC.
The results provide limited evidence that older firms have longer CCCs ( po0.100).
This is consistent with the view that older firms are able to maintain longer CCCs because
of their access to various sources of finance. Older firms can manage longer CCCs owing
to sustained relationships with the providers of finance and their knowledge of the
market. They can readily obtain external finance for their working capital needs and
maintain their customer base (Chiou et al., 2006). This finding implies that older firms
are able to pursue conservative working capital management strategies without
compromising their profitability.
The findings show that one macroeconomic variable, inflation, is highly significant
and positively related to the CCC. This implies that in times of rising inflation, working
capital needs increase. Rising inflation makes it difficult for a firm to plough back its
profits (Sundar, 1980). With plunging sales being experienced during periods of rising
inflation, firms experience increased inefficiencies resulting to longer CCC. An interesting
observation in the six estimation models is the improvement in the adjusted R2 from 0.046
in model (1) to 0.369 in model (6). This improvement could be attributed to the inclusion of
industry controls among other factors[11].
Contrary to the findings by Chiou et al. (2006) and Moussawi et al. (2006) firm
size was not found to be a key determinant of the CCC. This finding supports
Baños-Caballero et al. (2010) who found firm size insignificant. The finding may seem
to imply that even though large firms have formalized working capital management
procedures, this does not necessarily imply efficiency in CCC management. Finally,
compared to SMEs, large firms have more alternative sources of external finance.
This confirms the finding that debt may not be a significant determinant of CCC for
large firms which have multiple sources of external finance.
6. Conclusion
This paper examines whether non-financial firms listed on the NSE maintain a target
CCC and the speed of adjustment towards this target. The study further presents the
determinants of the CCC. To analyze these propositions, the study utilizes various
multiple regression analyses with the CCC as the dependent variable. The findings
indicate that listed non-financial firms in Kenya maintain a target CCC. The study also
finds that firms adjust to their target CCC at a relatively slower speed compared to
SMEs. The results show that the determinants of the CCC include both firm-specific
and economy-wide factors. More specifically, the study establishes that older firms and
firms with more internal resources maintain longer CCCs. Moreover, firms with higher
ROA, investment in CAPEX and growth opportunities have a shorter CCC. Interestingly,
one exogenous factor, inflation, appears to be a key determinant on the corporate decision
to maintain the CCC. The study establishes that working capital needs rise with inflation.
Collectively, this study provides important implications to corporate managers in efficient
and effective management of the CCC.
JAEE Notes
4,2 1. As noted by Moussawi et al. (2006), the individual aspects of working capital management
include: cash and marketable securities, trade credit and inventories. The cash conversion
cycle (CCC) is defined as the receivables collection period plus inventory-processing period
net of payables payment period. While prior research has found a consistent negative
relation between accounts receivable and corporate profitability, there has been mixed
findings on the relation between corporate profitability and the other two CCC components
192 (i.e. inventory conversion period and accounts payable payment period). Nevertheless, Kim
and Chung (1990) emphasize the need to consider the joint effects of the CCC components.
2. Other studies that have employed the CCC as a measure of working capital management
efficiency include: Shin and Soenen (1998), Deloof (2003), Lazaridis and Tryfonidis (2006),
Padachi (2006), Garcia-Teruel and Martinez-Solano (2007), Gill et al. (2010) and Mathuva (2010).
These studies have consistently found that a lower CCC improves corporate profitability.
Gentry et al. (1990) posit that proper management of the CCC is important because it has
a direct impact on firm value.
3. The example by Shin and Soenen (1998) was based on an article that had appeared in the
Business Week on 10 June 1996 (pp. 110-112) attributing Wal-Mart’s success to its short CCC.
4. The external factors that influence the CCC tend to have more adverse effects especially in
high inflation environments and require careful consideration. In developing countries, these
external factors become very important in managing the CCC.
5. Kenya has been classified as a frontier market according to Standard & Poor, FTSE and MSCI
lists as of 2011, 2010 and 2009 respectively. A Frontier Market is an economic term which was
coined by the IFC in 1992. It describes a subset of emerging markets with investable but lower
market capitalization and liquidity compared to more developed economies.
6. The NSE has ten industry sectors namely, agricultural, automobiles and accessories, banking,
commercial and services, construction and allied, energy and petroleum, insurance, investment,
manufacturing and allied and telecommunications and technology. For the purpose of this
study, firms listed under banking, insurance, investment and telecommunications and
technology sectors were omitted because their definition of working capital is different from
what is examined in the present study.
7. This is based on the study by Baños-Caballero et al. (2010).
8. Owing to the uniqueness of the data set used in the study and country-specific factors, more
studies from other economies and other data sets are recommended to provide further evidence.
9. This is consistent with the approach used by Opler et al. (1999) who performs a first-order
autoregressive model for all US Compustat firms with more than five-years of data in the
1950-1994 period.
10. This model is consistent with the models derived by Baños-Caballero et al. (2010). For more
information on the development of the model, refer to the study by Baños-Caballero et al. (2010).
11. In the two SLS estimation models, industry controls were found to be highly significant.
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About the author

David Mutua Mathuva has been an Assistant Lecturer at the Strathmore University where he
has been involved in teaching Accounting and Finance. He has also published several articles on
JAEE working capital management and financial reporting. He is currently a consultant in Risk
Consulting – Forensic Services at KPMG East Africa where has been involved in providing both
4,2 proactive and reactive forensic services in terms of fraud investigations, forensic accounting and
audit, fraud risk management and anti-bribery and corruption surveys. David holds a BCom
(Finance) and MCom (Forensic Accounting) both from the Strathmore University, Kenya. He is
currently a PhD Student in Accounting where he intends to research on financial reporting for
196 Savings and Credit Cooperative Societies in Kenya. David Mutua Mathuva can be contacted at:
dmathuva@gmail.com
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1. Introduction and motivation

2.1 The CCC

CCC ¼ ðAccounts receivable=Sales 365Þ þ ðInventories=Cost of sales 365Þ

2.2 Possible determinants of CCC

long-term) to assets ratio.

included in the estimation models to examine whether industry influence is significant in

3. Determining the optimal CCC

DCCC it ¼ b0 þ b1 DCCC i;t1 þ eit ð1Þ

Notes: The coefficients have been obtained from the firm-wise

CCC it ¼ a0 þ OCCC i;t1 þ rk CFLOW it þ rk ROAit þ rk CAPEX it þ rk SIZE it

where a0 ¼ lb0, O ¼ (1l), rk ¼ lbk and wit ¼ leit and 0olo1.

CA/CL CA/TA CL/TA WCR

Sectoral univariate comparisons of key descriptive variables

5.2 Empirical results

Variable Mean SD First quartile Median Third quartile

SIZEit 5.194 2.884 0.595 2.330 2.229 0.381

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