Drawing upon resource dependence theory (RDT), this study benchmarks the operational consequences of working capital risk (WCR) considering organizational structure (business group (BG) vs independent firm).
Using a large dataset of 228 manufacturing firms listed on the Bombay Stock Exchange (BSE 500) from 2015 to 2023, the study employs panel data regression to test the proposed hypotheses. All models control for year and industry effect. More importantly, we have addressed the potential endogeneity concern with the help of 2SLS IV regression tests.
The findings show that higher WCR lowers production efficiency by 0.291 units and inventory efficiency by 0.443 units. However, BG affiliation positively moderates WCR–efficiency relationship. Consistent with the inherent advantage of BG network in terms of buffering financial constraint, it is observed that BG affiliation not only neutralizes the negative impact of WCR on production efficiency but yields a net positive impact (i.e. net effect size is +3.04). It highlights the dual role of organizational structure in providing financial stability and resource sharing.
The present study is one of the first studies that attempts to operationalize WCR with the help of receivable cycle and understand its effects on firm performance, considering the role of BG setup. The study contributes to the literature by bridging gaps in WCM research and highlighting practical strategies for firms to optimize working capital. It emphasizes actionable implications for managers to enhance liquidity, strengthen supplier relationships and leverage organizational structure to buffer against WCR.
