The Impact of Working Capital Management on Financial Leverage: Evidence from Bahrain Capital Market

Abstract

This research examines the impact of the efficient working capital management on financial leverage of listed industrial companies in Bahrain Bourse, which is a non-tax charging country. Moreover, it is investigated the optimal capital structure by balancing from one hand, issuing debt as monitoring tool. It utilized the descriptive evaluative type of research. An organizationally based, descriptive portion of design was pursued using relevant data from both primary and secondary resources. The main findings of this research are as follows: Firstly, the Reliability Test shows that the Cronbach’s Alpha is 0.936 and so there is very strong reliability in the data among all variables in this study. Secondly, the Means for all variables are more than 4 in the 5points-Likert-scale, which means that the respondents confirmed the effectiveness of these variables. Thirdly, the p-values of the independent variables: Days Inventory Outstanding, Days Sales Outstanding, and Days Payable Outstanding in association with the dependent variable: Debt-Equity Ratio is all 0.000, which is smaller than 0.01, level of significance, and there is extremely strong evidence of significant relationships between all independent variables and Debt-Equity Ratio. Fourthly, no significant difference among the four industrial companies means that there is high validity of the results. Finally, Days Inventory Outstanding is the most critical issue in attaining the optimal cash conversion cycle with 88.5%. The main findings of the study show that there are significant relationships between independent variables and dependent variables. In addition, there are no significant differences among the four listed industrial companies. Finally, the most critical issue to attain the optimal cash conversion cycle is ability to manage the Days Inventory Outstanding. The second critical issue is to manage the Days Sales Outstanding and the least one is the Days Payable Outstanding.