Multidimensionality of text based financial constraints and working capital management

Using a novel text-based measure of financial constraints and primarily employing firm fixed-effect model, we find that financial constraints have a significantly negative association with cash conversion cycle (CCC), implying that financially constrained firms have a higher level of working capital management efficiency. In order to get a deeper insight, we consider two distinct dimensions, − ‘growth oriented’ and ‘contractual-obligation oriented’ financial constraints - and re-examine the relationship with CCC and its components. We find that firms facing growth oriented (contractual-obligation oriented) financial constraints have shorter (longer) CCC. It appears that compared to contractual-obligation oriented financially constrained firms, growth-oriented constrained firms receive more favorable treatments from their suppliers (longer payable period) as well as from their customers (shorter receivable period) - leading to a lower CCC. On the other hand, contractual-obligation oriented financially constrained firms have a longer inventory period, resulting in a longer CCC.