Erasmus finds a negative relationship between the

Erasmus
finds a negative relationship between the various measures of working capital
and profitability. A profitability study is not sufficient because “these
accounting data may have little to do with what is good or bad for the
company” and the goal of maximizing the value of the company concerns both
security and benefits. There are no studies on the valuation of working
capital, but there is a substantial and growing amount of work done in the
management of liquidity and the value of the company. Chen finds a positive
influence on liquid assets in the valuation of the company, which suggests that
the market evaluates liquidity, although Faulkender and Wang show the
possibility of a higher limit on the amount of money for which the market
rewards companies. Unlike liquid assets, the ratio between working capital and
the value of the company has not been exhaustively studied. Using the Rappaport
model, the Strischek conceptual study shows that higher cash flows resulting
from better working capital management imply lower capital cost and higher
capital value. They are the first to empirically test the relationship between
working capital management and the value of the company.The investment in NWC
decreases when a company has more reserves against taking control, emphasizing
the importance of considering agency costs when trying to understand the effect
of working capital management on the value of the company. The study of the
link between working capital and business performance reveals that the
relationship between the investment of working capital and the company’s
performance is not linear, which implies that there should be an optimal level
of working capital capable of balancing the costs and benefits and maximize
performance. It confirms the effect of managing working capital on the wealth
of shareholders, but finds that cash will be valued more than working capital. So
far, the studies on the valuation of working capital confirm two things. Firstly,
working capital significantly influences the value of the company and,
secondly, funding limits play an important role in this relationship.

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