The Impact of Company Characteristics on the relationship between working capital financing and financial performance

Objective: The main purpose of this study is to investigate the relationship between working capital financing and financial performance with emphasis on the role of company characteristics in companies listed on the Tehran Stock Exchange.

Methods: This research is practical in terms of purpose and causal in nature of correlation. In this research, the library method has been used to collect information related to theoretical foundations. In order to achieve the research objectives, data from 1034 year – firm has been used during the period from 2012 to 2022. This study has examined this relationship under the conditions of company size, financial leverage and financial constraints. Also, to control heterogeneity and possible endogeneity problems, the generalized torque method has been used. Also, we estimated all models using the two-step generalized method of moments (GMM) estimator proposed by Arellano and Bond to avoid the problem of endogeneity.

Results: The results show that there is a U-shaped nonlinear relationship between working capital financing and financial performance and firm size, financial leverage, and financial constraints affect the relationship between working capital financing and financial performance. In other words, by changing of Firm Size, financial leverage and financial constraints, the level of the break-even point changes. Also, the relationship between working capital financing and financial performance in small companies, high leverage and high financial constraints is inverted U-shaped. However, this relationship is U-shaped for large companies, low leverage and low financial constraints

Conclusion: The results showed that working capital financing is one of the factors affecting the financial performance of companies and company managers do not use the same strategy in their decision to finance working capital. Managers of small companies, low leverage and low financial constraints by following an aggressive strategy in financing working capital, and managers of large companies, high leverage and high financial constraints by following a defensive strategy strategy in financing working capital can increase the company's performance.
The research results show that there is a non-linear relationship between working capital financing and financial performance, and this non-linear relationship is U-shaped. That is, when companies meet a large part of their working capital needs through short-term loans, the performance of the company improves, but when a small part of working capital needs are met through short-term loans. The performance of the company will decrease. In other words, using an aggressive working capital strategy can increase the company's performance without having a negative impact on the company's performance. But, the defensive strategy may not increase the performance of the companies appropriately. Also, the results show that company size, financial leverage, and financial constraints have an effect on the relationship between working capital financing and financial performance. In other words, with the change of company size,, financial leverage and financial constraint, the level of the break-even point changes. Especially, the results showed that the relationship between working capital financing and performance in small companies, low leverage and low constraint is U-shaped. However, this relationship is inverted U-shaped in large companies, high leverage and high financial constraints. This means that companies with low leverage, low financial constraints and small size can meet more of their working capital needs through short-term sources without harming their performance. But companies with high leverage, high financial constraints and large size can increase their performance by providing a smaller amount of working capital needs through short-term sources. As a result, small companies, low leverage and low financial constraint by following an offensive strategy and large companies, high leverage and high financial constraint by following a defensive strategy can increase their performance.