The Impact of Business Cycle on the Relationship between Working Capital Management and Profitability: A Moderation Analysis

Abstract

The present study aims to examine the impact of the business cycle on the relationship between working capital management (WCM) and profitability in Jordanian manufacturing firms listed in the Amman Stock Exchange (ASE). The present research endeavors to analyze the effect of the business cycle on the association between WCM and the profitability of 38 manufacturing companies listed in the Amman Stock Exchange (ASE) during the period from 2009 to 2020. The dependent variable, return on Assets (ROA), is examined in conjunction with the independent variable, working capital management (WCM), while controlling for the variables of Firm Size and Leverage. Descriptive statistics, correlation analysis, and multiple regression are employed to test the hypotheses.

The findings indicate that the Cash Conversion Cycle (CCC) has a significant and negative impact on firm profitability, implying that reducing the cycle size can enhance profitability. Moreover, the results suggest that the business cycle has a slightly moderate, but statistically significant, relationship with the Cash Conversion Cycle and profitability. The results further reveal that Leverage has a detrimental effect on profitability, whereas Firm Size has a positive impact. This study provides valuable insights for stakeholders, such as creditors, investors, and managers, to make informed investment decisions and efficiently manage working capital.