Study approach

In order to investigate the effect of company characteristics on working capital management, the cash conversion cycle (CCC) is used as the dependent variables in our study. The cash conversion cycle is one of liquidity measures used to determine efficient working capital which takes a going concern perspective into account (Maness

& Zietlow, 2005, p. 36).

The formula for the cash conversion cycle is

Average number of days inventory +

Cash conversion cycle = Average number of days accounts receivable –

Company characteristics, which are mentioned in chapter 3 Theoretical framework and literature review, would be used as independent variables to examine their effect to

working capital management. In addition, two dummy variables have been included to percentage. The formula for the return on assets is:

assets

We extract the figure of cash flows from operating activities from companies’ cash flow statement. The figure is deflated by total assets for comparison. The formula for the

Current ratio and quick ratio have been considered as solvency measure of working capital at the given period of time which presents the proportion of current assets to

current liabilities. The formula for the current ratio and quick ratio are

Debt ratio presents the proportion of total liabilities to total assets. The formula is

assets dummy variable. We follow industry classification according to NASDAQ OMX Stockholm Exchange which has a total of ten sectors. Since we omit financials sectors and there is no Swedish company classified in utilities sector, our sample consists of companies in eight sectors as follows: 2 companies in energy, 5 companies in materials, 16 companies in industrials, 5 companies in consumer discretionary, 4 companies in consumer staples, 4 companies in health care, 1 company in information technology and 3 companies in telecommunication services.

Time effect

Time effect has been included as dummy variable in order to capture the differences between two-fiscal year financial data in our study.

4.2.3 Data analysis

The quantitative data analyses has been adopted by using SPSS statistic program in order to examine the relationship between company characteristics and the cash conversion cycle as a measure of working capital management. The statistics included in our study are as follows;

Descriptive statistics

Continuous variables allow us to analyze quantitative data by using descriptive statistics. Descriptive statistics show characteristics of sample which include mean value, minimum, maximum and standard deviation.

Correlation analysis

Correlation is used to measure the direction of the linear relationship between two variables as well as to measure the strength of association between variables (Tabachnick & Fidell, 2007, p. 56-57). In our study, the Pearson’s Correlation Coefficient is calculated to see the relationship between all variables. As for the direction of the relationship, the positive correlation indicates that when one variable increase another also increases while the negative correlation show inverse relationship (Pallant, 2007, p. 101).

Regression analysis

There are two types of hypothesis in quantitative research: null hypothesis and alternative hypothesis. Hypotheses, which are proposed earlier in chapter 3 Theoretical framework and literature review, are alternative hypotheses where the expected relationship between factors and the cash conversion cycle have been stated while the null hypotheses are the opposite. We use the significant level at 0.05 to decide whether or not to reject or accept null hypothesis which give us 95% confidence level. If the p-value is less than or equal to the 0.05 significant level, null hypothesis will be rejected and we will conclude the alternative hypothesis is true. If the p-value is greater than the 0.05 significant level, we fail to reject the null hypothesis and conclude that the null hypothesis is plausible.

In order to investigate the relationship between company characteristics and the cash conversion cycle, standard multiple regression is used to test hypotheses. The regression model is formulated to examine the relationship between factors and working capital management represented by the cash conversion cycle (CCC). Number of days inventory, number of days accounts receivable and number of days accounts payable have been substituted for the cash conversion cycle in the model to investigate the relation of the components of the cash conversion cycle and factors.

The following model is estimated:

CCC = β ⁰ + β¹PROFIT + β²CF + β³SIZE + β⁴GROWTH + β⁵CR + β⁶QR + β⁷DEBT

Where

CCC = Cash conversion cycle

INV = Average number of days inventory

AR = Average number of days accounts receivable

AP = Average number of days accounts payable

PROFIT = Profitability

IND_3 = 1 if company is in Industrials sector and zero otherwise

The reliability criterion evaluates how careful a study has been conducted regarding the selection of data and choices made of which methods to use when measuring the data. A high level of reliability is achieved when repeatedly measurements of the same data, using the same methods to measure, gives the same or almost the same results. A high reliability indicate that the choices and selections made are appropriate for the study in terms of fulfilling the purpose of the study (Jacobsen, 2007, p. 13)

The data for this study have been collected from companies’ annual reports from the year 2007 and 2008. Our data consist of figures taken from the financial statements. As