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Investigating the existence of the optimal level of working capital management and the critical point of inflation and its effect on the level of cash holding

    Authors

    1 Assistant professor of Accounting, Kahnouj branch, Islamic Azad University, Kahnouj, Iran

    2 Ph.D student Of accounting, Shiraz University, Shiraz , Iran

,

Document Type : Research Paper

Abstract

Purpose: Deciding to determine the amount of cash reserves of companies is one of the main issues in the financing literature. The main advantage of maintaining an optimal level of cash is to increase the company's ability to take advantage of valuable investment opportunities and avoid the high costs of out-of-company financing; Therefore, the main purpose of this study is to investigate the existence of the critical point of inflation and the optimal level of working capital management and its effect on the level of cash holdings of enterprises.
Method: To achieve the purpose of the research, samples consisting of 100 companies listed on the Tehran Stock Exchange during the period 2008-2019 have been studied using the combined data method. In order to quantify the variable of working capital management of net working capital and to measure the variable of cash holding level, the ratio of changes in cash balance to total assets has been used. The inflation variable is measured by the consumer price index.
Results: The results showed that with increasing inflation, the amount of cash held by business units increases and when inflation reaches a certain level, the amount of cash held by companies decreases with increasing inflation. The results showed that the critical point of inflation for Iranian companies is 16%; But companies with positive working capital have a higher tolerance threshold for inflation, and the critical point for inflation for them is about 19 percent. The results also showed that when working capital increases, the amount of cash held by business units increases, and when working capital reaches a certain level, the amount of cash held by companies decreases with increasing working capital. In other words, the relationship between working capital and the level of cash holdings is nonlinear and inverted U-shaped.
Conclusion: In general, the results showed that efficient working capital management can be a useful tool for managers that if well managed can play an important role in inflationary conditions for the level of cash holdings of business units and many benefits to business units.
Contribution: This study shows that the relationship between working capital with inflation and the level of cash holding is nonlinear.

Keywords

References
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Financial Accounting Knowledge
Volume 8, Issue 28 - Serial Number 28
April 2021
Pages 145-173
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