Working Capital Management and Firm Performance: The Moderating Effect of Inflation Rates

The economic crisis that occurred between 2007 and 2008 in Nigeria resulted in serious liquidity crises for firms operating in the country. This was demonstrated in firms' inability to purchase inventories needed for production. As a result, firms were faced with declining performance. Previous studies have shown that working capital management (WCM) provides liquidity in the form of cash flow and improves firms' performance under regular macroeconomic conditions. However, few studies have focused on determining the influence of WCM on firm performance, especially during a financial crisis. This study adopts the Contingency Theory to determine the effect of inflation rates on WCM and firm performance under conditions of crisis. The study utilizes panel data of 675 firm-year observations derived from the listed firms on the Nigerian Stock Exchange from 2007-2015. The data gathered were analyzed using the fixed effect model. The findings demonstrate a mixed and inconsistent relationship between WCM variables and firm performance. Furthermore, the findings indicate that inflation rates significantly moderate the relationship between WCM and firm performance in terms of Return of this study imply that the effectiveness of WCM on firm performance is influenced by inflation rates. Thus, this study recommends managers to appropriately align their WCM strategies and policies to fit the contingencies of their operating environments to enhance performance.