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Impact of business cycles on retail and wholesale firms' asset values leverage ratios and cash flows: evidence from U.S. listed firms.

Abstract

This study focuses on the impact of the 2001 recession as well as the subsequent expansion on U.S. trade (i.e., retail and wholesale) firms' short-term assets and liabilities. The paper also analyzes the differential effects on long-term debt and cash flow levels between retail and wholesale firms over the business cycle. We test for differences in inventory levels, trade credit extensions, and working capital financing between the retailers and wholesalers. Our results show that retailers tend to do worse in recessions when compared to the wholesalers. We find that net working capital and long-term debt levels of wholesalers are not significantly affected by the business cycle, whereas retailers have significantly less net working capital and more long- term debt in the recessionary period compared to the expansionary period. Interestingly, wholesalers are seen to increase their operating cash flows and have a larger cash outflow for financing during the recession. On the other hand, while retailers do not show any significant change in cash flows from operations or financing during the recession, their cash flows for investments dropped significantly, meaning that they had to cut their investments due to the recession.

Keywords: Business cycles, wholesalers, retailers, net working capital, debt, cash flows

JEL Classification : E32, G30, G31, G32, L81

Introduction

This study focuses on the impact of business cycles on retail and wholesale trade firms' assets, liabilities, and debt ratios. We also analyze trade firms' cashflows during recessionary versus expansionary periods. By definition, wholesalers are considered as those that are involved in storage, distribution and sale of goods (that they do not manufacture themselves) to retailers who then deal directly with the consumers. In this paper, we first investigate the effects of recessions on all trade firms' (i.e., wholesalers and retailers) assets and liabilities. Then, we examine the impact of recessions on these firms' operating, investing, and financing cashflows. Finally, we run separate analyses for wholesalers and retailers to see if there are any significant differences their financials across the business cycles.

The motivation behind our paper is to find out how retailers and wholesalers manage their short-term assets and liabilities as well their long-tetra debt and cash flows during recessionary and expansionary periods. Depending on their situation, managers of trade firms are expected to adopt asset-liability management strategies during the decline phase of the recession. Such strategies could position the firms better in the recovery stage of the business cycle. As discussed by Pearce and Robinson (1), these success tactics may include retrenchment, tightening credit, maintaining budgets, maintaining prices, increasing liquidity, reducing debt, deferring capital expenditures, and pursuing selective growth. Firms could also benefit from purging excess inventory and corporate overhead during the recession. Also, businesses need to prepare for the growth phase following the recession. Firms are expected to increase their capital spending towards the end of the recessionary period, and when the business cycle recovery starts and consumer demand rises, firms should have sufficient cashflows to finance growth in their investments. In our paper, we try to find out from the financial statement data of retail and wholesale firms in the U.S. if they actually adopted such asset-liability management and cashflow tactics during the 2001 recession and the subsequent expansion phase (2002-2005).

Prelude

The related literature on the effects of recession on trade firms focus mainly on retail firms. Little, et. al. (2), compare the financial performance of retail firms during two recession years and two nonrecession years. The performance variable that they use is return on net operating assets. Their paper utilizes the modified Du Pont model of financial ratio analysis to identify the drivers of financial success under alternative business strategies. They categorize firms in the retail industry according to their high/low relative net operating income to sales and operating asset turnover ratios.

Firms with high relative net operating income to sales and low relative operating asset turnover are assumed to be pursuing a differentiation strategy and those with high relative operating asset turnover and low relative net operating income to sajps are assumed to be pursuing a cost leadership strategy. Little, Little, and Coffee (3) suggest that retail firms pursuing a differentiation strategy are not more likely to achieve a higher return on net operating assets than those firms pursuing a cost leadership strategy in a recessionary period. However, these papers and the other previous papers do not provide any comparative financial ratio analysis for wholesale firms.

Dooley, et. al. (4), use monthly inventory and sales data to examine the impact of recessions on manufacturers, wholesalers, and retailers in the U.S. They find that wholesalers respond late and drastically to recessions, while retailers respond quickly and more conservatively. Smoothing of demand and inventory is demonstrated as an alternative response to a significant change in demand. In our paper, we empirically test for differences in inventory balances of wholesale and retail firms during both the recessionary and expansionary periods.

Niskanen and Niskanen (5) examine the determinants of Finnish firms' accounts receivable and accounts payable numbers. According to their findings, accounts receivable is most likely to be affected by the firms' preference to use trade credit as a means of price discrimination. This paper finds that rise in the interest rate level also increases the amount of, ccounts receivable through increased demand for trade credit. Rimo and Panbunyuen (6) use Swedish listed companies to show the effects of companies' solvency and current ratios on their short-term working capital management. Niskanen and Niskanen show that the most important factors that determine the level of accounts payable are the supply of trade credit, firm size, interest rate level, the ratio of current assets to total assets, and insufficient internal financing. In our paper, we obtain comparative values of accounts receivable and accounts payable for all trade firms during the contractionary and the expansionary stages. The phases of the business cycle considered in our paper may be associated with different levels of interest rates and trade credit demand faced by retail and wholesale firms.

Garcia-Teruel and Martinez-Solano (7) demonstrate that managers can create value by reducing their inventories and the number of days for which their accounts are outstanding. Moreover, they show that shortening the cash conversion cycle also improves the firm's profitability. In our paper, we look at the effects on accounts receivable and accounts payable of trade firms during the different stages of the business cycle. Steven and Sung reiterate that minimal empirical research had been done on how to help retailing firms survive recessions. Using the natural experiment ofthe great depression and the theoretical lens of organizational ecology, they explored survival of retailers during 1929-1939. Their study offers recommendations for research and practice to retailers. According to their results, high-wage employees, presumably of higher quality, help retailers survive recessions better than low-wage employees. Higher wages paid to employees could have an effect on the operating cashflows during recessions. We look at the effects on operating cash flows of wholesale and retail firms during recessions.

Retail firms provide customers with a variety of distribution services. Betancourt and Gautschi (8) note that higher levels of these services cost the firms more to produce but reduce costs for their customers. In our paper, we may be able to relate the cost effects of such distribution services for retail firms on their inventory balances during recessionary and expansionary periods. The argument that inventory investment is important for the business cycle is often based on the close relationship betwen changes in inventory investmer and G.D.P. during recessions. For example, Blinder (9) (1981) and Blinder and Maccini (10) argue that, in atypical U.S. recession, declining inventory investment accounts for most of the decline in G.D.P.

According to Hornstein (11), inventory investment fluctuations are not important for output fluctuations over the business cycle, but they are important for short-term output fluctuations. Also, inventory investment is positively correlated with sales over the business cycle but tends to be uncorrelated or negatively correlated with sales for short-term fluctuations.

West (12) compared the cyclical and secular behavior of Japanese and U.S. inventories at the aggregate and sectoral level during the 1967-1987 period. While U.S. inventories were found to be sharply procyclical, Japanese inventories were only mildly procyclical. In our paper, we will re-examine the procyclical behavior of inventories for U S firms in a more recent period, the 2000-2005 period.

Using a time-series and cross-sectional analysis of U.S. firms, Zakrajek (13) finds that a large portion of the volatility of the retail inventories over business cycles is due to fluctuations in internal financing. Irvine (14) postulates that retail inventory levels depend on the cost of capital for firms. Variations in cost of capital could be related to business cycle. In our paper, we study the effects of changing inventory level, trade credit and working capital financing over a recessionary and a subsequent expansionary period.

In this current study, we access the financials of U.S. retail and wholesale firms through Compustat. For the business cycle dates, we use the National Bureau of Economic Research (i.e., N.B.E.R.) data. After establishing our sample, we proceed with our comparisons of trade firms' financials across the recessionary and the expansionary periods, We use the Wilcoxon two- sample test to achieve this.

Hypothesis and Methodology Used

In line with the previous literature, we expect our sample firms to suffer financially in the recessionary period when compared to the expansionary period. First, we expect our sample firms to have troubles in selling their products in the recessionary period; therefore we expec+ to see higher levels of inventory in the rece:,sionary period compared to the levels in the expansionary periods. Lower sales would also negatively affect these firms' cash balances in the recessionary period. Therefore, we expect the inventory levels to go up and the cash balances to go down for our sample firms. We also expect to see a more negative impact on the retailers when compared to the wholesalers.

With regard to the receivables, we expect to see no significant change in the recessionary period. In the recessionary period, there will be two opposing effects on receivables: These firms will cut some of the credit lines or at least will not allow big credit sales during the recessionary period (which would lower their receivables balance). But, on the other hand, they will have more problems when collecting the receivables (which would increase their receivables balance). Therefore, we expect these two forces to cancel each other, and we expect to see no significant change in these firms' receivables due to the recession. Our hypothesis regarding the impact of the macroeconomic conditions on trade firms' cash, receivables, and inventory balances is:

Hypothesis 1: All trade firms have higher inventory and lower cash balances in recessionary periods when compared to expansionary periods. However; their receivables balances do not significantly change in recessionary periods.

We expect firms to have more debt in the recessionary period. Therefore, our hypothesis regarding the liabilities of the trade firms is:

Hypothesis 2: All trade firms have higher accounts payable, current liabilities, and long-term debt balances in recessionary periods when compared to expansionary periods.

We expect our sample firms to suffer in terms of net working capital. We generally expect firms to have decreased levels of current assets and increased levels of current liabilities in recessionary periods; hence we expect them to have less net working capital in the recessionary period. Our hypothesis on net working capital is:

Hypothesis 3. All trade firms have less net working capital in recessionary periods when compared to expansionat3, periods.

With regard to the cash flows, we expect to see negative impacts for all types of cash flows. We expect to see smaller cash flows from operations, which would affect these firms' investments negatively (i.e., smaller cash flows for investments). Since we expect them to have more debt, we also expect to see them spending, more money for financing in recessionary periods. Therefore, our hypothesis regarding the cash flows is:

Hypothesis 4." All trade firms have smaller cash flows coming from operations, smaller cash outlays .[or investments, and larger cash outlays for financing activities in recessionary periods when compared to expansionary periods.

To download the financial data, we use the Compustat database. Compustat classifies the Wholesalers with an N.A.I.C.S. (i.e. North American Industry Classification System) code of "42" and the Retailers with an N.A.I.C.S. code of either "44" or "45". There are 9,668 annual firm observations in our whole sample, out of which 4,434 belong to the Wholesalers and the remaining (i.e., 5,234) belong to the Retailers. Our sample period is from January 1, 2000 through December 31, 2005.

We use the dates on the N.B.E.R. (i.e., National Bureau of Economic Research) website for the recession/expansion classification. N.B.E.R. states that the March 2001-November 2001 period is a recessionary period for the U.S., therefore since we use annual financial data, for our sample period, we take the year 2001 as a recessionary period and all the other years as expansionary years. Out of the total sample of 9,668 observations, 8,018 are measured in expansionary periods and 1,650 are measured in the recessionary period.

The variables that we use in this study are: Asset Measures:

Cash & ST investments = Cash & ST investments/

Total assets

(Shows the weight of cash and'short-term investments in total assets)

A/R = Accounts Receivable/Total assets

(Shows the weight of receivables in total assets)

Inventory = Inventories/Total assets

(Shows the weight of inventories in total assets) Total current assets = Total current assets/ Total assets

(Shows the weight of total current assets in total assets)

Liability Measures

A/P = Accounts Payable/Total assets

(Shows the weight of accounts payable in total assets)

Total current liabilities = Total current liabilities/ Total assets

(Shows the weight of total current liabilities in total assets)

Long-term debt = Long-term liabilities/Total assets

(Shows the weight of long-term debt in total assets)

Net Working Capital Measures

NWC = (Total current assets-Total current liabilities)/Total assets

(Measures the net working capital as a percentage of assets)

Cash Flow Measures

NCF - Operations - Net cash flow from operations/ Sales

(Measures the net cash flow from operations as a percentage of sales)

NCF- Investments = Net cash flow for investments/ Sales

(Measures the net cash flow for investments as a percentage of sales)

NCF - Financing = Net cash flow for financing/ Sales

(Measures the net cash flow for financing as a percentage of sales)

Net change in cash and equivalents - Net change in cash and cash equivalents/Sales

(Measures the net change in cash and equivalents as a percentage of sales)

In our empirical tests, we use the Wilcoxon 2-sample test to compare the group characteristics, which is a non-parametric test.

Research Findings

Table 1 shows the summary statistics for our overall sample. When we look at the median values, we can see that cash & S.T. investments is just 3.98 per cent of the assets, while Accounts receivable and Inventory are 13.88 per cent and 27.61 per cent, respectively. For our sample, the median value of current assets is 62 per cent of the total assets.

When we look at the liabilities, we call see that the median value of accounts payable is 15.90 per cent of total assets. The median value of current liabilities is 31.53 per cent of assets, while long-term debt is just 13.46 per cent of assets. For our overall sample, the median value of net working capital is $66.42 million.

When we look at the cash flows, we can see that the net change in cash flows for our sample firms is close to zero. The median value of cash flows from operations is positive but very small (i.e., $4.66 million). Likewise, the median value of cash flows from investments is also very small (i.e., $6.63 million meaning cash we.' used in investments). Interestingly, the meaian value of cash flows from financing is zero (i.e., just -$0.02 million). Therefore, we conclude that the median firm in our overall sample had a very small cash inflow from operations which was spent in investments.

Table 2 compares the characteristics of the wholesalers and the retailers over the whole sample period. For the whole period, we can see that the wholesalers tend to have more current (i.e., short-term) assets compared to the retailers (68.92 per cent versus 56.85 per cent of total assets and the difference is significant at one per cent level. But, as we can see, this is due to the huge difference in the two groups' receivables. While the wholesalers have a median A/R of 26.5 per cent of assets, the retailers' corresponding percentage is only 5.34 per cent of assets (the difference is significant at one per cent level). On the other hand, the retailers tend to hold more cash and more inventories. While the cash and inventories percentages are 4.98 per cent and 29.93 per cent of assets for the retailers, the corresponding numbers are 3.01 per cent and 25.5 per cent for the wholesalers. The differences are significant at one per cent level. These results indicate that the wholesalers extend significantly more credit to the customers and they tend to manage their cash and inventories more efficiently compared to the retailers. We will next see the effects of these policy differences on the two groups' debt levels and cash flows.

Table 2 also compares the liabilities of the two groups. The results show that the wholesalers tend to rely more on leverage. They tend to have higher debt levels compared to the retailers. While the wholesalers' A/P, current liabilities, and long-term debt are 17.79 per cent, 34.91 per cent, and 15.41 per cent of their assets, the retailers' corresponding values are 14.56 per cent, 29.37 per cent, and 12.14 per cent of assets. The differences are significant at one per cent level. Since the wholesalers tend to extend too much credit to their customers, we would expect to see higher net working capital numbers for them.

Table 2 shows that the wholesalers tend to have significantly more net working capital compared retailers (27.02 per cent versus 21.83 per cent and the difference is significant at one per cent level).

When we examine the cash flows, we can see that both groups create a positive net cash flow from operations and both groups spend that cash flow in investments. While they have similar policies in cash flows, we can see that the retailers tend to create larger cash flows from operations and spend more in investments. While the N C F-operations is 5.48 per cent for the retailers, it is 3.52 per cent for the wholesalers; and while the N C F-Investments is -6.02 per cent for the retailers, it is -2.20 per cent for the wholesalers. The differences are significant at one per cent level. When we look at the financing cash flows, we see that the wholesalers are actually spending cash flows for financing (as we have seen, they have more debt compared to the retailers), while the retailers are creating some cash flows from financing. The median value for N C F -financing is -0.22 per cent of sales for the wholesalers and 0.03 per cent of sales for the retailers. This difference is significant at one per cent level.

To summarize, Table 2 shows that the wholesalers tend to extend more credit to their customers; they tend to manage cash and inventory better; and they rely more on leverage. However, in terms of cash flows, the retailers are creating bigger cash flows from their operations and they tend to make bigger investments.

Table 3 compares the assets, the liabilities, the net working capital, and the cash flows of all trade firms in expansionary periods versus the recessionary period (i.e., year 2001). Here, we are trying to see if the macroeconomic conditions have a significant impact on trade firms' financials. The results show that when the economy is doing well, the trade firms tend to have better asset and liability values. In expansionary periods, they have more cash (4.24 per cent vs. 3.09 per cent, the difference is significant at one per cent level) and fewer inventories (27.20 per cent vs. 29.13 per cent, the difference is significant at one per cent level), meaning that they can sell their products faster. These results confirm Hypothesis 1. In expansionary periods, they also have less long-term debt (13.15 per cent vs. 15.24 per cent, the difference is significant at one per cent level). So, Hypothesis 2 partially holds (i.e., only for long-term debt). They also tend to have more net working capital in expansionary periods versus in recessionary periods (24.36 per cent vs. 238 per cent, p-value = 0.0675). Therefore, Hypothesis 3 also holds.

So, we can say that they do better in good times. When we look at their cash flows, we see that they spend less money for financing, which is good (-0.01 per cent versus -0.24 per cent, the difference is significant at one per cent level). The interesting result here is the cash flows operations. Our results show that the trade firms tend to create less cash from operations in expansionary periods compared to the recessionary period (4.44 per cent vs. 5.85 per cent of sales). So, this is the only surprising finding here. So, Hypothesis 4 holds for only N C F -Financing (i.e., they spend more for financing in the recession). Interestingly, there is no negative impact on Investment cash flows, and there is actually a positive impact on cash flows from operations.

Our main objective in this study is to examine the impact of the macroeconomic conditions (i.e., business cycles) on trade firms' assets, liabilities, and cash flows and examine the impact of the macroeconomic conditions on the two groups of firms (i.e., wholesalers and the retailers) separately. Do business cycles affect wholesalers and retailers in a similar fashion'?

When we compare the two tables (Tables 4 & 5), we can see some big differences in the two groups' LT debt, NWC, and cash flow values across the business cycles. The wholesalers seem to do much better in the recessionary period when compared to the retailers. First, in terms of LT debt and NWC, the wholesalers do not suffer in the recessionary period. They have similar values for LT debt in the expansionary and the recessionary periods (15.14 per cent in the expansionary periods versus 16.56 per cent in the recessionary period, p-value = 0.1898). They also have similar values for NWC in the expansionary and the recessionary periods (26.94 per cent in the expansionary periods versus 27.20 per cent in the recessionary period, p-value = 0.55 13).

On the other hand, in terms of LT debt and NWC, the retailers seem to suffer in the recessionary period. They have more LT debt (13.79 per cent vs. 11.89 per cent, p-value=0.0026) and less NWC (21.13 per cent vs. 22 09 per cent, p-value = 0.045 1) in the recessionary period compared to the expansionary periods. These findings indicate that while the wholesalers do not suffer in terms of borrowing more money or having less net working capital to run their operations during the recession, the retailers tend to suffer. Due to the recession, the retailers need to borrow more money (and probably at more unfavorable rates) support themselves. They also see their net working critical levels due to the recession.

When we compare the two groups' cash flows, again we see big differences. Interestingly, the wholesalers actually increase their cash flows from operations during the recessionary period. The median value for N C F-Operations jump from 3.13 per cent of sales during the expansionory periods to 5.97 per cent of sales during the recession (significant at one per cent level). This shows that they are well prepared for the recession. Table 4 shows that they use this extra cash in financing (i.e. possibly in holding down their debt levels). The N C F- Financing jumps from -of sale's during the expansionary periods to -0.60 per cent of sales during the recession (significant at one per cent level).

While the Wholesalers are doing well with respect to their cash flows in the recession, the retailers again suffer. For the retailers, there is no significant change in cash flows from operations or in cash flow for financing. But, we see in Table 5 that the cash that they spend in investments go down significantly, in the recession. For these firms, the N C F-investments dropped from -6.05 per cent of sales during the expansionary periods to -5.97 percent of sales during the recession. This drop shows the retailers are forced to reduce their investments due to the recession.

Overall, the comparison of Tables 4 and 5 reveals that the retailers generally tend to suffer in recessionary periods in many aspects while the wholesalers tend to do well. The wholesalers seemed to be well prepared for the recession in the year 2001.

Conclusions

We first obtain the amount of current assets and current liabilities as a fraction of total assets used by the overall sample of US wholesale and retail firms over the entire business cycle. The median value of current assets for all trade firms is found to be 62 per cent of their total assets. The median value of current liabilities is 31.53 per cent of total assets compared to long-term debt usage which is only 13.46 per cent of their total assets. As a result, we can conclude that short-term working capital management is extremely essential for wholesale and retail firms.

On comparing the short-term assets between wholesalers and retailers, we find that wholesalers maintain more overall current assets compared to retailers, although retailers hold more cash and inventories. This is attributable due to the strikingly high accounts receivables for wholesale firms (median receivables of 26.5 per cent of assets for wholesalers compared to only 5.34 per cent of assets for retailers).

Also, we find that wholesalers have moderately higher debt levels, both short-term and long-term debt, compared to retailers. Wholesalers are found to maintain higher net working capital due to their significantly higher receivables arising out of larger short-term credit extension to its customers. In terms of their cash flows, retailers are seen to be creating higher operating cash flows and spending more on their investments. There is an overall net cash outflow from financing activities for wholesalers, while retailers obtained some modest positive cash flows from financing.

Based on a closer examination of the differences in the levels of assets, debt, and cash flows for the overall sample of trade firms between a recessionary period and an expansionary period the hypothesized procyclical effects on current assets and long-term debt are confirmed in our findings. Wholesale and retail firms have more cash balances and fewer inventories during the expansionary period. Also, our hypothesis regarding higher net working capital during an expansionary period is supported. Interestingly, we find that the operating cash flows for trade firms were lower during the expansionary period compared to the recessionary period.

Finally, our research findings reveal that for wholesalers, net working capital and long-term debt levels are not significantly affected by the business cycle. On the other hand, retailers have significantly less net working capital and more long-term debt in the recessionary period compared to the expansionary period. As a result, we can conclude that wholesalers are able to better manage their working capital and debt levels in the recessionary periods compared to retailers. In terms of cash flows, we find wholesalers to be better prepared for the recession. Wholesalers are seen to increase their operating cash flows during the recessionary period, and they seem to have used some of the cash provided from operations into paying off financing expenses, as we find a larger cash outflow for financing during the recession. On the other hand, retailers do not show any significant change in cash flows from operations or financing during recession. Cash used for investments dropped significantly for retailers, implying a sharp reduction in these firms' investment activities during the recession.

Some of the suggested strategies (as in Pearce and Robinson (2002) for firms during recessions include increasing liquidity, tightening credit, reducing debt levels and deferring capital expenditures. Tightening credit policies is indirectly linked to increasing firm liquidity which may help to sustain the firm better during a recession. Increasing liquidity for firms during a recession, could allow the firms to take advantage of special deals that could arise, due to recessionary effects on less prepared, cash-strapped suppliers. The liquidity positions of firms could be improved by reducing inventory levels and accounts receivables. Higher cash balances could be a source of acquiring fixed assets during the recovery stage. In our sample of U.S. wholesale and retail firms, we found significantly lower cash balances for all firms during the 2001 recession period, compared to the expansionary period. The lower cash balances can be attributed t(o high levels of account receivables and inventory balances maintained by both wholesale and retail firms in the recessionary period. Wholesale firms had significantly higher levels of accounts receivables compared to retail firms, while retail firms had significantly higher inventory balances compared to the wholesalers.

Reducing debt during recessions could decrease cash demands for firms due to lower interest payments. Lowering debt, on the other hand, could reduce the cash balance of the firm during a recession. In our sample, we observed that long-term debt increased significantly during the recession only for the retail firms. This suggests that retail firms were more dependent on debt financing during the recession compared to the wholesale firms.

Deferring capital expenditures on fixed assets provides more cash and allows firms to get more from its existing facilities, especially during a recession. However, a possible disadvantage of delaying capital expenditures could be resulting delays in production arising out of increased consumer demand as the recovery phase begins. Our findings show that cash outflows for investing in fixed assets were significantly lower for retail firms during the recessionary period. Therefore, our results imply that retail firms were deferring capital expenditures and maintaining their existing facilities, as consumers were more concerned with price than with technological innovations of retailers during the recession. However, it appears that operating cash flows decreased for firms during the expansionary period when consumer demand increased. Firms appear to not have been well prepared operationally to meet the increased demand, possibly due to lower cash flows into investing and financing activities during the 2001 recession period. Overall, our findings show that retailers were not well-prepared for the 2001 recession and they suffered considerably in terms of net working capital, long-term debt, and cash flows. They need to be better prepared in these areas in order to survive these economic shocks.

References

(1.) Pearce, J. A., R. Robinson, Business Tactics for Confronting Economic Recession and Planning for Recovery, The Entrepreneurial Executive (7: 2002)

(2.) Little, P. L., J. W. Mortimer, M. A. Keene, and L. R. Henderson, Evaluating the Effect of Recession on Retail Firms' Strategy Using DuPont Method: 2006-2009 Journal of Finance and Accounting (2009) www.ww.aabri.com/manuscripts/11814.pdf

(3.) Little, P. L., B. L. Little, and D. Coffee, The Du Pont Model: evaluating Alternative Strategies in the Retail Industry Academy of Strategic Management Journal (Annual: 2009)

(4.) Dooley, K. J., T. Yan, S. Mohan, and M. Gopalakrishnan, Inventory Management and the Bull Whip Effect During the 2007 Recession: Evidence From the Manufacturing Sector, Journal of Supply Chain Management (January 2010).

(5.) Niskanen J., and M. Niskanen Accounts Receivable and Accounts Payable in Large Finish Firms' Balance Sheets: What Determines Their Levels LTA4/00 [degrees] P. 489-503 LTA, 2000-lta.hse.f

(6.) Rimo, A., P. Panbunyuen, The Effect of Company Characteristics on Working Capital Management: A Quantitative Study of Swedish Listed Companies (2010) umu.diva-portal.org

(7.) i) Pedro Juan Garcia-Teruel, Pedro Martinez-Solano, (2007) Effects of Working Capital Management on SME Profitability, International Journal of Managerial Finance (3: 2)

ii) Michael, S. C., S. Kim, The Organizational Ecology of Retailing: A Historical Perspective, Journal of Retailing, (2: 2005)

iii) McGuckin, R., M. Spiegelman, and B. Van Ark ; The U.S. Advantage in Retail and Wholesale Trade Performance: How Can Europe Catch up'? Working Paper in Perspectives on a Global Economy, (2005)-zinc.zew.de

(8.) Betancourt, R.R, and D. Gautschi, Two Essential Characteristics of Retail Markets and their Economic Consequences, Journal of Economic Behavior & Organization (August 1993)

(9.) Blinder, Alan S. Retail Inventory Behavior and Business Fluctuations, Brookings Papers on Eeonomie Activity (2: 1981)

(10.) Blinder, Alan and Louis J. Maccini, Taking Stock: A Critical Assessment of Recent Research on Inventories, Journal of Economic Perspectives (Winter 1991)

(11.) Hornstein, Andreas, Inventory Investment and the Business Cycle Federal Reserve Bank of Richmond Economic Quarterly (Spring 1998)

(12.) West, Kenneth D., A Comparison of the Behavior of Japanese and US Inventories, International Journal of Production Economies (February 1992)

(13.) Zakrajsek, E., Retail Inventories, Internal Finance, and Aggregate Fluctuations: Evidence from US Firm-Level Data Research Paper No. 9722, Federal Reserve Bank of New York (July 1997)

(14.) Irvine, F. O., Retail Inventory Investment and the Cost of Capital The American Economic Review, (September 1981).

The authors own full responsibility for the contents of the paper.

HALIL D. KAYA, Ph.D.

Faculty Member

Accounting, Finance and Information Systems Dept.

Eastern Kentucky University

Richmond, KY 40475, U.S.A.

e-mail : Halil.Kaya@eku.edu

GAURANGO BANERJEE, Ph.D.

Associate Professor

Department of Finance and Economics

University of Texas

Brownsville, TX 78520, U.S.A.

e-mail : Gaurango.banerjee@utb.edu
TABLE 1
SUMMARY STATISTICS

Indicator                         Mean     Median   St. Dev.

Assets (% of assets)

Cash & ST investments               9.11     3.98      12.16
A/R                                17.70    13.88      15.52
Inventory                          29.33    27.61      18.40
Total current assets               59.85    62.00      20.99

Liabilities (% of assets)

A/P                                18.28    15.90      12.42
Total current liabilities          34.96    31.53      17.35
Long-term debt                     17.28    13.46      17.04

Net Working Capital ($ million)

NWC                               258.76    66.42     677.44

Cash Flows ($ million)

NCF--Operations                   103.54     4.66     542.68
NCF--Investments                  -88.31    -6.63     489.17
NCF--Financing                     12.14    -0.02     287.74
Net change in cash and equi.        3.61     0.00     178.15
N                                  9,668

TABLE 2
COMPARISON OF WHOLESALE AND RETAIL TRADE FIRMS IN TERMS OF
INVESTMENT FINANCING AND CASH FLOW MEASURES

                            Wholesale Firms

Indicator                   Mean    Median   St.dev.

Assets (% of assets)

Cash & ST investments       7.99    3.01     11.79
AIR                         27.47   26.50    14.47
Inventory                   25.56   25.52    16.53
Total current assets        64.85   68.92    22.06

Liabilities (% of assets)

A/P                         20.80   17.79    14.49
Total current liabilities   37.48   34.91    19.12
Long-term debt              17.97   15.41    16.79

NWC (% of assets)

NWC                         27.37   27.02    21.08

Cash Flows (% of sales)

NCF--Operations             -5.04   3.52     219.69
NCF--Investments            -11.9   -2.20    76.38
NCF--Financing              15.08   -0.22    194.60
Net change in cash          -1.85   0.00     111.15
and equi.                           4,434

                                                       Wilcoxon
                            Retail Firms               2-Sample Test

Indicator                   Mean    Median   St.dev.   p-value

Assets (% of assets)

Cash & ST investments       10.06   4.98     12.38     <0.0001
AIR                         9.42    5.34     10.87     <0.0001
Inventory                   32.51   29.93    19.28     <0.0001
Total current assets        55.61   56.85    19.04     <0.0001

Liabilities (% of assets)

A/P                         16.14   14.56    9.86      <0.0001
Total current liabilities   32.81   29.37    15.37     <0.0001
Long-term debt              16.70   12.14    17.24     <0.0001

NWC (% of assets)

NWC                         22.80   21.83    19.52     <0.0001

Cash Flows (% of sales)

NCF--Operations             -0.69   5.48     78.32     <0.0001
NCF--Investments            -9.31   -6.02    45.84     <0.0001
NCF--Financing              7.26    0.03     54.86     0.0078
Net change in cash          -2.76   -0.05    88.42     0.0030
and equi.                           5,234

TABLE 3
INVESTMENT, FINANCING, AND CASH FLOW MEASURES ACROSS BUSINESS CYCLES

                            Expansionary Period

Indicator                   Mean    Median   St.dev.

Assets (% of assets)

Cash & ST investments       9.43    4.24     12.34
AIR                         17.69   13.93    15.56
Inventory                   29.10   27.20    18.38
Total current assets        59.94   62.00    21.09

Liabilities (% of assets)

A/P                         18.23   15.87    12.35
Total current liabilities   34.83   31.17    17.28
Long-term debt              17.01   13.15    16.90

NWC (% of assets)

NWC                         25.11   24.36    20.21

Cash Flows (% of sales)

NCF--Operations             -2.41   4.44     167.62
NCF--Investments            -11.1   -4.14    61.84
NCF--Financing              11.02   -0.01    133.99
Net change in cash          -2.46   0.00     107.11
  and equi.
N                                   8.0181

                                                       Wilcoxon
                            Recessionary Period        2-Sample Test

Indicator                   Mean    Median   St.dev.   p-value

Assets (% of assets)

Cash & ST investments       7.54    3.09     11.07     <0.0001
AIR                         17.72   13.52    15.32     0.5012
Inventory                   30.40   29.13    18.45     0.0058
Total current assets        59.41   62.00    20.49     0.2762

Liabilities (% of assets)

A/P                         18.50   16.04    12.77     0.5519
Total current liabilities   35.56   32.26    17.64     0.1450
Long-term debt              18.58   15.24    17.67     0.0020

NWC (% of assets)

NWC                         23.85   23.38    21.12     0.0675

Cash Flows (% of sales)

NCF--Operations             -3.99   5.85     111.07    0.0068
NCF--Investments            -7.67   -4.20    60.87     0.4494
NCF--Financing              9.95    -0.24    154.86    0.0079
Net change in cash          -1.82   0.00     47.47     0.4686
  and equi.
N                                   1,650

TABLE4
WHOLESALE TRADE FIRMS IN EXPANSIONARY VERSUS RECESSIONARY PERIOD

                            Expansionary Period

Assets (% of assets)        Mean    Median   St.dev.

Cash & ST investments       8.17    3.16     11.83
AIR                         27.56   26.48    14.49
Inventory                   25.30   25.21    16.45
Total current assets        64.86   68.85    22.22

Liabilities (% of assets)

A/P                         20.83   17.81    14.47
Total current liabilities   37.32   34.72    19.07
Long-term debt              17.75   15.14    16.62

NWC (% of assets)

NWC                         27.55   26.94    20.99

Cash Flows (% of sales)

NCF- Operations             -4.96   3.13     231.89
NCF- Investments            -12.7   -2.15    74.64
NCF-Financing               14.85   -0.16    187.82
Net change in cash and      -2.76   0.00     120.24
  equi,
N                                   3,671

                                                       Wilcoxon
                            Recessionary Period        2-Sample Test

Assets (% of assets)        Mean    Median   St.dev.   p-value

Cash & ST investments       7.11    2.35     11.58     <0.0001
AIR                         27.03   26.63    14.37     0.2450
Inventory                   26.82   27.15    16.87     0.0309
Total current assets        64.80   69.07    21.27     0.6670

Liabilities (% of assets)

A/P                         20.66   17.74    14.58     0.7128
Total current liabilities   38.30   35.47    19.34     0.2607
Long-term debt              19.01   16.56    17.52     0.1898

NWC (% of assets)

NWC                         26.50   27.20    21.47     0.5513

Cash Flows (% of sales)

NCF--Operations             -5.45   5.97     148.69    <0.0001
NCF--Investments            -8.25   -2.46    84.15     0.1951
NCF--Financing              16.20   -0.60    224.09    0.0005
Net change in cash and      2.44    0.00     48.87     0.4717
  equi,
N                                   763

TABLE 5
RETAIL TRADE FIRMS IN EXPANSIONARY VERSUS RECESSIONARY PERIOD

                            Expansionary Period

                            Mean    Median   St.dev.

Assets (% of assets)

Cash & ST investments       10.50   5.26     12.67
A/R                         9.36    5.27     10.85
Inventory                   32.32   29.71    19.30
Total current assets        55.79   57.02    19.13

Liabilities (% of assets)

A/P                         16.04   14.46    9.70
Total current liabilities   32.73   29.31    15.31
Long-term debt              16.39   11.89    17.11

NWC (% of assets)

NWC                         23.05   22.09    19.29

Cash Flows (% of sales)

NCF--Operations             -0.27   5.44     81.12
NCF--Investments            -9.75   -6.04    48.61
NCF--Financing              7.82    0.02     58.33
Net change in cash          -2.20   -0.07    94.79
  and equi
N                                   4,347

                                                       Wilcoxon
                            Recessionary Period        2-Sample Test

                            Mean    Median   St.dev.   p-value

Assets (% of assets)

Cash & ST investments       7.90    3.78     10.60     <0.0001
A/R                         9.72    5.66     10.98     0.1477
Inventory                   33.48   31.16    19.19     0.0646
Total current assets        54.77   56.14    18.59     0.1491

Liabilities (% of assets)

A/P                         16.63   14.91    10.64     0.2588
Total current liabilities   33.20   30.03    15.68     0.3516
Long-term debt              18.22   13.79    17.79     0.0026

NWC (% of assets)

NWC                         21.57   21.13    20.56     0.0451

Cash Flows (% of sales)

NCF--Operations             -2.73   5.75     62.88     0.6190
NCF--Investments            -7.17   -5.97    28.62     0.0709
NCF--Financing              4.50    0.06     32.61     0.7614
Net change in cash          -5.50   -0.01    45.93     0.5597
  and equi
N                                   887
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Article Details
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Author:Kaya, Halil D.; Banerjee, Gaurango
Publication:Journal of Financial Management & Analysis
Article Type:Abstract
Geographic Code:1USA
Date:Jul 1, 2012
Words:6931
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