Corporate Governance and Working Capital Management — Inclusive Approach for Measuring the Firm Performance

The least effective working capital management and poor corporate governance resulted in the 2008 global financial crisis besides various other factors as highlighted by the prior studies. So far, the existing literature reveals that WCM and CG affect firm performance (FP) on an individual basis. However, the collective effect of working capital management and corporate governance on firm performance has been paid the least attention. This study investigates the collective effect of working capital management and corporate governance on firm performance for Australia and Hong Kong markets, being the top two markets in the Pacific region. For this purpose, a system generalized method of moments based on two steps is applied to address the endogeneity issue. The results establish that working capital management and corporate governance affect firm performance on an individual basis and then these individual effect results compliment the collective effect results. The limitation of the study is that it did not consider two stages of Least Squares Regression due to difficulty in the identification of instrumental variables for both explanatory variables. As a policy implication, firm manager may take the benefit of the findings of this study while devising financial policies to enhance firm performance. Future investors may use the findings of this study to make an informed decision on future investment in both markets.