Risk management in working capital policies and the cash conversion cycle anomaly

Abstract

This study aims to explore whether risk-taking in working capital management can explain the cash conversion cycle (CCC) anomaly documented in recent literature. By examining a dataset comprising non-financial US firms spanning from 1986 to 2022, this study finds that firms with lower CCC not only exhibit a higher level of operational risk, but they also allocate more resources towards capital expenditures during the CCC anomaly period. These findings suggest that the significantly positive abnormal returns of firms with low CCC in the CCC anomaly can be attributed to the undertaking of higher operational risk. Further analysis on the components of CCC is consistent with firms managing their inventory and accounts payable day policies to expose them to higher operational risk.

JEL Classification: G10, G14