Cash conversion cycle and value-enhancing operations: Theory and evidence for a free lunch

Rodrigo Zeidan, Offer Moshe Shapir

Research output: Contribution to journalArticlepeer-review

49 Scopus citations


The empirical literature shows that firms overinvest in working capital and that these investments are economically inefficient. We decompose working capital investments in the cash conversion cycle and growth effects in the presence of x-inefficiency. We predict that reductions in the cash conversion cycle should increase shareholder value. Direct evidence follows from a case study of a listed company in Brazil, MRV. Changes in operations reduced CCC from 508 days in 2012 to 351 days in 2015, decreasing working capital requirements by US $1.02 billion. Indirect evidence comes from (1) a synthetic control comparing MRV's free cash flow to equity to its direct and distant competitors; (2) an event study of share prices, and (3) a dynamic cash flow estimation using Tobin's Q as the dependent variable. Outcomes suggest that CCC management, controlling for effects on operating margins, result in higher stock prices and profitability, and increased cash flow. The theoretical framework and results reconcile the literature and provide a rationale for the overinvestment and the inefficiency of working capital investments.

Original languageEnglish
Pages (from-to)203-219
Number of pages17
JournalJournal of Corporate Finance
StatePublished - 1 Aug 2017
Externally publishedYes


  • Cash conversion cycle
  • Dynamic cash flow
  • Operating working capital
  • Shareholder value
  • Synthetic control
  • Working capital management

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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