Cash conversion cycle and firm's performance of Japanese firms

Purpose The purpose of this paper is to investigate the relation between a firm's cash conversion cycle and its profitability. Design/methodology/approach The relation between the firm's cash conversion cycle and its profitability is examined using dynamic panel data analysis for a sample of Japanese firms for the period from 1990 to 2004. The analysis is applied at the levels of the full sample and divisions of the sample by industry and by size. Findings A strong negative relation between the length of the firm's cash conversion cycle and its profitability is found in all of the authors’ study samples except for consumer goods companies and services companies. Originality/value Traditional focus in corporate finance was on the long‐term financial decisions, particularly capital structure, dividends, and company valuation decisions. However, the recent trend in corporate finance is the focus on working capital management. Most of working capital management literature is based on the US experience. This study investigates the relation between the firm's cash conversion cycle and its profitability of Japanese firms where the organizational structure is totally different from that of the US firms; most of the Japanese firms are interconnected and related through corporate groups ( keiretsu ).