Impact of working capital on firm performance: DoesITmatter?

Abstract Although prior research in operations management has explored the working capital—firm performance relationship, the results from these studies remain inconclusive, with studies finding positive, curvilinear, or even insignificant relationships. This is largely due to contingent factors that make this relationship both complex and idiosyncratic. To strengthen the beneficial effect of working capital on performance, firms must therefore make appropriate investments that would foster more objective, informed, and firm‐specific working capital choices. This article examines one such investment, namely in information technology (IT), that can allow firms to optimize the working capital–firm performance relationship. This is important, as the role of IT in this relationship is yet to be explored. Using proprietary IT data from the Harte Hanks database, and based on a sample of 1,054 US‐based manufacturing firms during 2011–2013, we find that IT investment positively moderates the performance effects of inventory, payables, and receivables cycles, and that these moderating effects vary by the type of IT investment, namely IT infrastructure and IT labor. Drawing on the theory of the Smart Machine, we explain how IT infrastructure and IT labor perform distinct roles that can help automate (i.e., use technology to increase the speed and accuracy of process execution) and/or informate (i.e., use technology to create new information), thereby moderating the working capital–firm performance relationship. We argue and find evidence that, due to the largely transactional nature of working capital processes, IT infrastructure has a relatively stronger moderating effect on performance than IT labor.