Exploring the Link between Optimal Working Capital Thresholds and Enhanced Profitability: Insights from an Emerging Capital Market
DOI:
https://doi.org/10.26439/ddee2026.n009.8819Keywords:
working capital management, cash conversion cycle, return on assets, nonlinear regression, emerging markets, Lima Stock ExchangeAbstract
Working capital management (WCM) serves as a crucial lever of corporate profitability; however, its sectoral heterogeneity and nonlinear dynamics remain inadequately explored in Latin American emerging markets. This study investigates the existence of optimal working capital thresholds for firms listed on Peru’s Lima Stock Exchange (BVL) and examines whether these thresholds systematically differ across economically distinct sectors. Utilizing quarterly time-series data from 24 BVL-listed firms spanning from Q1 2011 to Q2 2023 — representing 66.1% of total market capitalization — we employ market-capitalization-weighted aggregation across four sectors (mining, food and beverage, electric energy, and commerce) and estimate linear and quadratic ordinary least squares (OLS) regression models, applying Newey-West HAC standard errors to correct for serial autocorrelation. The results reveal statistically significant concave (inverted U-shaped) relationships between components of the cash conversion cycle (CCC) and return on assets (ROA) in the mining and energy sectors, with optimal thresholds at approximately 65 inventory days and 53 receivables days, respectively, and outcomes remain robust after correcting for autocorrelation. In the food and beverage sector, extending supplier payment terms emerges as the dominant profitability lever; a linear payables model accounts for 85.1% of the variability in ROA (adjusted R² = 0.851), aligning with a market-power-driven negative CCC averaging −32 days and the highest mean ROA in the sample (20.89%). The commerce sector shows a positive relationship between inventory and ROA, indicating that stockout costs outweigh holding costs in retail operations. These findings challenge the notion of a universal WCM prescription and illustrate that optimal strategies depend on sectoral operating cycles, competitive structures, and supplier bargaining power. The study contributes original evidence regarding nonlinear WCM dynamics in Latin American emerging markets, offering direct implications for corporate financial policy and capital market regulation.
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