WORKING CAPITAL AND FINANCIAL DISTRESS: THE ROLES OF CORPORATE LIFE CYCLE AND ECONOMIC DEVELOPMENT

Abstract

The study explores the potential of non-linearity between working-capital policy and corporate financial health and investigates if it changes throughout the corporate life cycle stages and in different institutional environments. This study uses a sample of 25,258 listed non-financial, non-utility firms in 134 economies with 347,736 firm-year observations to investigate the association between the cash conversion cycle (CCC) and Altman's international Z''-score and an accounting-based distress-zone indicator, from 2000 to 2025. The quadratic specifications yield all positive terms for the CCC, and all the squared terms are negative, with fitted vertices for the baseline model being 355.29 days, 335.42 days for the sector and year fixed effects model and 376.53 days for the firm fixed effects version. The distress models show the convex relationship in which risk minimising fitted turning points are found in the range of 259.60 days to 306.25 days. The proximity of, or departure from, a number of the vertices to the 365-day support is treated as indicative of the model-based boundary and is not considered as universal operating targets. The attitude towards the length of the operating cycle differs from life-cycle and development groups: mature and advanced economy companies are more tolerant of the lengthening of their operating cycle whereas declining and emerging market companies are less tolerant of operating cycle lengthening. The inventory interpretation also shows separate inventory, receivables and payables. Lagged and dynamic specifications preserve the basic curvature, whereas peer-IV and system-GMM estimates can have positive CCC association, but not necessarily be able to replicate the quadratic turning point. Overall, the evidence indicates fragility of working capital is related to the state of the organization, and liquidity policy should be interpreted alongside the composition of the operating cycle and financing conditions.