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International SAMANM Journal of Finance and Accounting

ISSN 2308-2356

January 2014, Vol. 2, No. 1

55

Effects Of Working Capital Management On Firm’s

Bankruptcy Probability

ImanJoneidi Jafari

1

, Maryam Salahinezhad & Arezu Jalili

Abstract:

In this study, we examine the effects of working capital management on firm’s bankruptcy

probability listed in Tehran Stock Exchange. Inefficient working capital management

makes firms face with shortage or cash surplus and they can’t pay the debts and reached

commitments on time. On the other hand, they can’t invest their cash surplus in

appropriate time and due to this, it has an undesirable effect on financial situation of the

firms. One of the inter-organization factors that might make an increase in probability of

firm’s bankruptcy is inefficient working capital management of the firms. To measure the

working capital management in this study, we use cash conversion cycle criteria and to

measure the probability of bankruptcy, Altman model is used. The results of this study

along with the financial data of 54 firms listed in Tehran Stock Exchange during the years

of 2002-2010 indicate that,there is a negative relationship between working capital

management and the risk of bankruptcy, and this means that, whatever a firm’s cash

conversion cycle is longer, it will be in a worse situation of bankruptcy risk.

Keyword: working capital management,bankruptcy, cash conversion cycle, Altman

model.

Introduction

Today, rapid technological development and widespread environmental changes, makes

the economics gain increasing velocity, and increasing institutions competition, make an

advance in the probability of bankruptcy and limit the profit achieving. Therefore,

financial decisions of the managers are more strategic than before and new control

methods, are used more accurate and widespread. Usually, large corporation bankruptcy is

happened due to lack of optimal working capital annual ongoing losses (Hajiha, 2009).

1 Corresponding author, Department of Accounting, Ayatollah AmoliBranch ,Islamic Azad

University,amol,iran. E-mail: Iman.joneidi2254@gmail.com