Capital investment, working capital management, and firm performance: Role of managerial ability in US logistics industry

• Published in: Transportation research. Part E, Logistics and transportation review Vol. 176; p. 103224
• Main Authors: Banerjee, Pradip, Deb, Soumya G.
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.08.2023
• Subjects: Capital expenditure; Firm performance; Managerial ability; Working-capital management; Working-capital management; Firm performance; Capital expenditure; Managerial ability
• ISSN: 1366-5545; 1878-5794
• DOI: 10.1016/j.tre.2023.103224

•The paper examines the interlinkage between capital investment (CAPEX), efficiency in working capital management (WCM), managerial ability (MA), and firm performance in the transportation and logistics industry in the US from 1988 to 2018 using a sample of 3,811 firm-year observations.•The study highlights the positive relationship between managerial ability and firm performance, as well as the positive associations between managerial ability and both CAPEX and WCM efficiency. It also reveals that the relationships between managerial ability and firm performance are mediated through enhanced CAPEX and efficient WCM.•It is demonstrated that, managers with higher ability strike a balance between short-term working capital investments and long-term capital investments, leading to higher firm performance.•It is further shown that, effective WCM is crucial in the capital-intensive transportation and logistics industry, as it optimizes the use of capital assets, reduces the need for external financing, and improves profitability and firm performance. This paper studies the interlinkage between capital investment, efficiency in working capital management, managerial ability, and firm performance, for a sample of transportation and logistics firms from US between the period 1988 to 2018. Our results indicate that able managers increase the investment in CAPEX and also concurrently engage in more efficient working capital management. We also show these managers help achieve greater firm performance through visible mediation effects of enhanced CAPEX and optimum use of working capital. We posit that managers with higher ability are in continuous pursual of optimizing firm performance, which motivates them to engage in higher levels of CAPEX vide a trade-off with short-term investment in working capital. Given the challenges and costs of raising external funds, able managers contemporaneously engage in more efficient working capital management to release excess working capital funds, and utilize them for enhancing CAPEX levels. Additionally, we show that the efficiency in working capital management emanates from efficiency in managing inventory, managing receivables as well as managing payables simultaneously. Our results are robust and remains unaltered after controlling for several firm-specific and macroeconomic parameters as well as potential endogeneity concerns.