The Effect of Working Capital Management on Reducing the Stock Price Crash Risk (Case Study: Companies Listed in Tehran Stock Exchange)

Present study examines the effect of working capital management on reducing the risk of decrease in stock prices. Decrease in stock prices can be due to weak and inefficient strategies taken by managers. One of the most important strategies taken by management is working capital management. Working capital management deals with managing the current assets and current liabilities. In case of inadequate policies to manage the company's working capital, finance manager could decrease current assets and increase current liabilities. Adopting this approach can lead the company to insolvency and bankruptcy due to poor liquidity position. Delay in payment of company’s debts can affect the credit rating of company and diversely affect company’s reputation and consequently weaken competitive advantage which can finally lead to decrease in stock prices. Considering the importance of working capital management in performance of firms, this research aims to answer the question whether working capital management can affect the stock prices or not.
To measure the working capital we made use of Gitman’s cash conversion cycle (1974) and Chen’s negative factor stock return skewness model (2001) to measure the stock prices falls in 59 listed companies in Tehran stock exchange between 1998 and 2011. This study provides strong evidence that working capital management is likely to significantly reduce the risk of falling stock prices.