Working Capital as a Contingent Operating Policy: Firm Life-Cycle and Economic-Development Heterogeneity in Global Cash Conversion Cycles

Abstract

Why do different profitability implications for firms with the same working-capital positions? Prior research often estimates an average cash conversion cycle (CCC) effect, and firm life-cycle and cross-country research typically views organizational maturity and external financing environment as two sources of heterogeneity. We integrate these and we examine whether the shape and location of the CCC–performance relation are co-varying with the economic-development context and the firm life-cycle stage. This sample consists of 31,112 listed non-financial and non-utility firms in 134 countries covering 379,191 firm-year observations in 2000–2025. Signs of operating, investing and financing cash-flows are used to define firm life-cycle stages and profitability is modeled as a non-linear function of the CCC. Baseline specifications are conducted with year effects, and firm-clustered inference with complementary firm fixed-effects, lagged regressor, instrumental variables, alternative outcome, and dynamic panel sensitivity analysis. The pooled quadratic estimates result in a concave CCC–ROA profile, but with a fitted turning point around 133 days. This number is not structurally invariant; neither does the firm fixed-effects specification show the same interior optimum as the pooled specification nor is the turning point identical for the lagged, 2SLS, and dynamic specifications. Nevertheless, when viewed in cross-section, there are systematic heterogeneities. Fitted turning point is longer in growth firms than in mature firms and the pattern of maturity to decline is different between advanced and emerging/ developing economies. The evidence suggests that the benefits from using working capital and the costs of financing it change depending on the maturity of the organisation, its ability to finance and the economic environment. Instead of giving a single “optimal” level for the CCC, the study provides boundary conditions for interpreting working-capacity intensity and emphasizes the importance of sensitivity of the estimator as substantive evidence, rather than cloaked in a single magic number optimum.