An empirical study of the relationship between working capital policies and stock performance in Sweden

Sammanfattning: The purpose of this study was to investigate what impact the working capital policies have on the stock performance on the Swedish stock market during the years 2009-2012. Furthermore, the study explores if the firm size or industry of the firms have any impact on the working capital policy and if the theory of risk/return tradeoff indicating that an aggressive policy should generate a higher risk premium holds. This topic is rather unexplored since earlier studies have focused on working capital policies relationship with accounting profit rather than with stock return.In order to come up with answers to the research questions a quantitative research method has been used and data has been collected from the companies listed on the Swedish stock exchanges annual reports and stock prices from the Thomson Reuters Datastream. A database with all numbers and calculations was then constructed in Excel in order to easily transform the numbers into SPSS where the statistical tests where done. As statistical test the Pearson’s correlation was used to find if there is and correlation between working capital and stock return, beta and standard deviation. These tests where then done again but with the companies divided into policies, firm size and sectors.The results of this study show no clear relationship between Swedish firm’s working capital policy and the stock return. Regarding the relation with risk and return, the result indicates that working capital has a significant correlation with risk and that the aggressive policy of managing working capital is more risky. Moreover the size of firms does neither affect the relationship between working capital policies and stock return nor the risk/ return tradeoff. However, when dividing the sample into sectors especially one industry resulted in some standout findings. The industrial sector had significant correlations between level of working capital and risk/return. Concluding, there is no significant relationship between stock performance and working capital policies but after conducting this research we still regard working capital as one important component to take into account both for managers and investors.