Emerging Markets Finance & Trade, 53:1135–1151, 2017

Copyright © Taylor & Francis Group, LLC

ISSN: 1540-496X print/1558-0938 online
DOI: 10.1080/1540496X.2016.1278166

Is Working Capital Information Useful for Financial

Analysts? Evidence from China
Jie Gao1 and Jiancai Wang2
1
School of Economics and Management, Harbin Institute of Technology Shenzhen Graduate School,
Shenzhen, China; 2School of Management and Economics, Beijing Institute of Technology, Beijing,
China

ABSTRACT: Financial analysts are important information intermediaries in the capital market. This study
investigates whether information about working capital management is useful for financial analysts of
Chinese firms. With a sample of listed companies from 2004 to 2014, we find that the efficiency of
working capital management is positively associated with the number of analyst following and analyst
forecast accuracy, and negatively associated with analyst forecast dispersion. Specifically, when the cash
conversion cycle becomes longer, number of analyst following and the accuracy of their mean forecasts
decrease, while the forecast dispersion increases. The findings of this study indicate a potential mechan-
ism through which information about working capital management is incorporated in stock price in
emerging markets such as China.
KEY WORDS: analyst following, analyst forecast accuracy, analyst forecast dispersion, capital market,
working capital management
JEL CLASSIFICATION: M11, M41, G24

Operations management is a fundamental part of any organization. According to 2011 Forbes

magazine report, about three quarters of all CEOs come from an operations background, and the
success of a firm hinges largely on the efficiency of its operational activities. Working capital, defined
as the difference between current assets and current liabilities, comprises an essential part of the net
operating assets of a company. Working capital management mainly refers to the management of
inventory, accounts receivable, and accounts payable, and it is an important aspect of firm financial
and operations management. For example, Apple’s supply chain is ranked as the best in the world from
2010 to 2013, and the way it handles inventory plays a very important role in its success besides
design and innovation. The efficient management of accounts receivable and accounts payable also
facilitates the success of Lao Gan Ma, the most prestigious brand of Chinese spicy source.
Financial analysts are important intermediaries and active participants of capital markets. They are
believed to have expertise and information advantage in analyzing the financial and operational
performance of target companies when making earnings forecast or stock recommendations. For
many financial analysts, operational matters are a top concern. According to an analysis done on
1502 analyst conference transcripts of 54 companies in the apparel industry from 2003 to 2006 in the
United States, operations-related word such as “stores” and “inventory” appears very frequently,
ranking second only to marketing-related words (Lai 2013). Joos, Piotroski, and Srinivasan (2016)
find that analysts’ equity valuation captures the riskiness of firm operations and long-term value.
Given the vital role working capital management plays in the evaluation of operational performance of
companies by financial analysts, a natural question arises as to how information on working capital
management affects the behavior of financial analysts. Specifically, does information about the
efficiency of working capital management, such as the management of inventory and accounts

Address correspondence to Jian-Cai Wang, School of Management and Economics, Beijing Institute of
Technology, Beijing, China. E-mail: mswangjc@gmail.com
1136 J. GAO AND J. WANG

receivables, affect analysts’ decision to follow the firm and the accuracy of their earnings forecasts?
Further, do they generate impact on the disparity of their opinions regarding the future performance of
the firm? Although it has been widely accepted in practice that financial analysts use information
about firm operations in providing their financial service, there has been little empirical evidence
linking firm operational efficiency with analyst behavior.
In this study, we investigate the impact of working capital management on analyst following and
forecast characteristics with Chinese listed companies from 2004 to 2014. We find that the efficiency
of working capital management, as measured by the inverse of cash conversion cycle, is positively
associated with analyst following and analyst forecast accuracy, while it is negatively associated with
analyst forecast dispersion. The findings indicate that higher efficiency of working capital management
could attract more analysts and reduce the average information uncertainty of financial analysts.
Dividing the cash conversion cycle into days of inventory, days of accounts receivable, and days of
accounts payable generates consistent results.
This study contributes to the literature in various aspects. First, this study contributes to the
literature on analyst behavior research. While previous studies have investigated the effect of firm-
specific factors (such as firm size, institutional ownership, and disclosure policy) and market-specific
factors (such as return variability and stock price) on analyst following and forecast characteristics
(Bhushan 1989; Dhaliwal et al. 2012; Lang and Lundholm 1996; Linnainmaa, Torous, and Yae 2016;
O’Brien and Bhushan 1990), this study adds to the literature by showing that indicators about working
capital management help explain the cross-sectional variation in the number of analyst coverage, as
well as their forecast accuracy and disparity. Our findings indicate that lack of control for operating
efficiency indicators when studying analyst behavior is likely to generate biased results. The empirical
findings about the association between working capital management and analyst behavior also provide
implications for financial analysts to improve their forecast efficiency when they choose target firms or
design their forecast models.
This study also contributes to the literature on the economic consequences of working capital
management. Extant empirical studies have largely examined the impact of working capital manage-
ment on firm financial performance or market stock returns (Alan, Gao, and Gaur 2014; Chen, Frank,
and Wu 2005, 2007; Deloof 2003; Ebben and Johnson 2011; Garcia-Teruel and Martinez-Solano
2007; Kroes and Manikas 2014). While previous research examines investors’ response to operations
news, we focus on the reaction of financial analysts, thus providing a potential mechanism through
which information about working capital management is incorporated in stock price. Meanwhile, by
including indicators about working capital management as additional causing factors of analyst
coverage and their forecast features, investors could better interpret analysts’ reports and understand
the information environment of the target companies.
The rest of the article is organized as follows. The second section develops the hypotheses, the third
section describes the data and research design, the fourth section presents empirical results, and the last
section concludes.

Hypotheses Development
Working capital is defined as the difference between current assets and current liabilities of a company.
The efficiency of working capital management is an important component of a firm’s operational
performance. Working capital management mainly refers to the management of inventory, accounts
receivable, and accounts payable. Cash conversion cycle （CCC）is a commonly used measure of
working capital management. CCC represents the time period between the collection of cash from
customers and the payment to the suppliers. It increases with days of inventory and accounts
receivable, but decreases with days of accounts payable. When CCC becomes shorter, liquidity
increases, uncertainty associated with working capital management decreases, and the efficiency of
cash flow management increases. Previous studies generally agree on a negative association between
the length of cash conversion cycle and firm financial performance (Deloof 2003; Ebben and Johnson
 WORKING CAPITAL INFORMATION AND FINANCIAL ANALYSIS 1137

2011; Garcia-Teruel and Martinez-Solano 2007). The expected better future performance is likely to
attract more financial analysts due to potentially more investment banking opportunities in the future.
Less uncertainty associated with cash flow management also increases the supply of analysts because
of more valuable reports to sell. Moreover, higher expected future growth is likely to increase investor
demand for analyst services. According to Bhushan (1989), the equilibrium number of analyst
following is determined by the intersection of supply and demand of analyst services. When both
the supply and demand of analyst services increase, the equilibrium number of analyst coverage is
higher. Thus, we expect that lower CCC is linked to higher number of analyst following.
Higher inventory turnover reduces the cash invested in inventory and increases firm liquidity.
Although holding less inventory may increase the risk of stock out, in practice firms generally could
avoid excess cost associated with stock shortage through Just-In-Time program, Vendor Managed
Inventory (VMI) program, automated replenishment system, etc. (Achabal et al. 2000; Harrington
1996; Myers, Daugherty, and Autry 2000). Better financial performance and higher liquidity due to
higher inventory turnover (Capkun, Hameri, and Weiss 2009; Koumanakos 2008) are likely to attract
more analysts. Similarly, when accounts receivable turnover increases, firms are able to collect cash
from customers more quickly and liquidity increases. Higher accounts receivable turnover also means
that uncertainty associated with the collection of doubtful accounts decreases, which facilitates the
financial performance. All these lead to higher number of analysts following.
When firms delay the payment to their suppliers for a longer period of time, they could save more
cash for their own operations and increases liquidity. This is likely to contribute to better future
financial performance. However, delaying the payment might harm its relationship with suppliers
(Fawcett, Waller, and Fawcett 2010). Raghavan and Mishra (2011) demonstrate that when suppliers
run out of cash due to lengthened payment period, the whole supply chain will be adversely affected,
which will generate unfavorable impact on the firm itself. Extant studies about the relationship
between accounts payable turnover and firm financial performance have generated mixed results
(Farris and Hutchison 2002; Garcia-Teruel and Martinez-Solano 2007). The uncertainty associated
with firm performance due to higher days of accounts payable is likely to increase investors’ demand
of analyst service. Due to the mixed findings regarding the relation between the number of days of
payable and firm performance and the potentially countervailing effects of supply and demand for
analyst service, number of analyst following might either increase or decrease with the payment cycle.
Thus, we posit our hypothesis on accounts payable in the null form.
Based on the above analysis, our first set of hypotheses is as follows:
H1: The length of cash conversion cycle is negatively associated with the number of analyst
following.
H1a: Number of days of inventory is negatively associated with the number of analyst
following.
H1b: Number of days of accounts receivable is negatively associated with the number of analyst
following.
H1c: Number of days of accounts payable is not associated with the number of analyst
following.
When cash conversion cycle increases, either the number of days of accounts receivable or
inventory increases or that of accounts payable decreases. The liquidity is then reduced, and the
uncertainty associated with cash flow management would increase. The increased uncertainty is likely
to increase the difficulty for average analysts to make earnings forecast of the target company, leading
to an increase in their forecast error. Meanwhile, shorter CCC leads to better financial performance and
information environment (Land and Lundholm 1993; Francis, Nanda, and Olsson 2008). Better
information environment is likely to lead to less bias in the average analyst forecasts (Platikanova
and Mattei 2016). Based on the above arguments, we expect that CCC is negatively associated with
analyst forecast accuracy.
1138 J. GAO AND J. WANG

When it takes longer to sell the inventory, the average level of inventory increases, raising the risk
of inventory depreciation and increasing the difficulty for average analysts to make accurate forecast of
the cost of goods sold. This would lead to an increase in their forecast error. Higher number of days of
accounts receivable indicates that the firm collects payment from its customers more slowly, increasing
the risk of payment collection. Meanwhile, when days of accounts receivable increase, the percentage
of doubtful accounts is likely to increase (Tsai 2011). All these are expected to make it more difficult
for analysts to forecast the actual sales revenue and net income of target company. Thus, we expect
that accounts receivable turnover rate is positively associated with analyst forecast accuracy.
Higher number of days of accounts payable indicates more effective usage of suppliers’ money,
increasing firms’ liquidity. However, it also could indicate that the firm is not able to make timely
payment to its suppliers, harming the relationship with suppliers; in this regard, longer payment cycle
also implies less efficiency in the working capital management. Because higher days of accounts
payable can indicate either efficient or inefficient management of working capital, its impact on
analyst forecast accuracy could be potentially either positive or negative, and thus, we posit the
hypothesis about the association between number of days of accounts payable and analyst forecast
accuracy in a null form.
Collectively, based on the above analyses, we propose our second set of hypotheses as follows:
H2: The length of cash conversion cycle is negatively associated with analyst forecast accuracy.
H2a: Number of days of inventory is negatively associated with analyst forecast accuracy.
H2b: Number of days of accounts receivable is negatively associated with analyst forecast accuracy.
H2c: Number of days of accounts payable is not associated with analyst forecast accuracy.
While analyst forecast accuracy indicates how far the mean forecasts of analysts deviate from the actual
earnings, analyst forecast dispersion measures the degree of disagreement among individual analysts
regarding the actual value of firm earnings. Financial analysts use both public information and their private
information to make financial forecasts. The dispersion in their forecasts arises from different forecast
models, different weight put on private information, and different interpretation of public information. The
effect of working capital management efficiency on analyst forecast dispersion stems from analysts’
different interpretation of public information and their private information acquisition activities.
A longer cash conversion cycle (CCC) means lower turnover of cash flows from the selling
process. This could be caused by either higher number of days of inventory, higher number of days
of accounts receivable, or lower number of days of accounts payable. Better financial performance
(Deloof 2003) and more extensive public disclosure (Francis, Nanda, and Olsson 2008) resulted from
shorter CCC are likely to attenuate the private information acquisition activities of analysts, reducing
the disagreement in their forecasts. Meanwhile, when the uncertainty associated with the operating
activities increases due to lengthened CCC, the degree of disagreement regarding analysts’ interpreta-
tion about the cash flow management would become higher, which is likely to lead to higher
dispersion among analysts’ forecasts. Thus, we expect a positive association between the length of
cash conversion cycle and analyst forecast dispersion.
When the number of days of inventory increases, the uncertainty associated with the selling process
increases. Meanwhile, the increased risk associated with inventory depreciation raises the uncertainty
for the analysts to estimate the operational cost. Thus, longer days of inventory are likely to enlarge the
extent of disagreement among individual analysts regarding operational activities, increasing the
dispersion of their forecasts. Meanwhile, higher uncertainty about inventory management could also
drive analysts to acquire more private information, which is also likely to increase the disparity among
their forecasts. When number of days of accounts receivable increases, the uncertainty involved in the
selling process increases, and the risk from the collection of doubtful accounts also becomes higher.
These are likely to enlarge the disparity of analyst forecasts when they interpret the information in
different ways and acquire more diversified private information.
As discussed before, longer days of accounts payable could reflect either higher efficiency of
working capital management, or the inability of the firm to make timely payment to its suppliers.
 WORKING CAPITAL INFORMATION AND FINANCIAL ANALYSIS 1139

The countervailing effects are likely to enlarge the disparity of analysts’ interpretation of the informa-
tion and increase analyst forecast dispersion.
Based on the above analyses, we propose our third set of hypotheses as follows:
H3: The length of cash conversion cycle is positively related to analyst forecast dispersion.
H3a: Number of days of inventory is positively related to analyst forecast dispersion.
H3b: Number of days of accounts receivable is positively related to analyst forecast dispersion.
H3c: Number of days of accounts payable is positively related to analyst forecast dispersion.

Data and Variable Description

Data
We collect our data for fiscal years 2004–2014 about all Chinese public companies in the manufactur-
ing industry listed in Shanghai and Shenzhen Stock Exchanges from CSMAR database, the largest
database which provides economic and financial data about listed companies in China (http://www.
gtarsc.com/). We exclude observations before 2004 because there is little coverage of analyst forecasts
for Chinese companies before that year. We exclude the observations with missing data, and winsorize
the top and bottom 0.5% of the variables, the final sample comprises 7084 firm-year observations.

Measurement of Analyst Following, Analyst Forecast Accuracy, and Forecast Dispersion

Analyst following is the number of analysts who make earnings forecast for the firm in a given year.
Analyst forecast error is estimated with the following equation:

FE ¼ jAEPS  FEPS j=jAEPS j (1)

where |FE| is the absolute value of forecast error. AEPS is the actual earnings per share. FEPS is the
mean of analyst forecasts of EPS for a given firm year. If there is more than one forecast by the same
analyst in a given year, then the most recent forecast is used.
Analyst forecast dispersion is measured as the standard deviation of analyst forecasts issued in for a
given firm year divided by the absolute value of the mean forecast.

DISPERSION ¼ STDðFEPS Þ=MEAN ðFEPSÞ

Control Variables
To investigate the impact of working capital management on analyst following and forecast character-
istics, we control for the effect of other factors that can be associated with both the dependent variables
and working capital management efficiency so that to avoid the omitted/correlated variable problem.
These factors include firm size (SIZE), leverage (LEV), and standard deviation of ROE (SROE).
Bigger firms are likely to have better information environment, thus attract more analysts (Bhushan
1989; Lang and Lundholm 1996; O’Brien and Bhushan 1990), and affect analyst forecast properties.
Firm size is also likely to be associated with the efficiency of working capital management. Firm
leverage, which is an indicator of financial risk, is also likely to affect the number of analyst following
and forecast characteristics; it might also affect the efficiency of operations management. The standard
deviation of ROE is also likely to affect the incentive of analysts to acquire information about the firm
and analyst forecast characteristics. The detailed description of control variables is as follows:
Leverage (LEV) = total debt divided by total assets;
Firm size (SIZE) = the natural log of total assets;
Standard deviation of ROE (SROE) = standard deviation of ROE for firm i in the past five years.
1140 J. GAO AND J. WANG

Descriptive Statistics
Table 1 presents descriptive statistics. It takes on average 133.25 days to sell inventory (median is
101.77 days) and firms wait on average 69.46 days to pay their purchases (median is 61.8 days). On
average, firms receive payment from the sale of goods after 73.23 days (the median is 55.85 days). The
average cash conversion cycle is 137.03 days (median is 106.03.35 days), meaning that the average
number of days between firms paying for their purchase and receipt of cash from goods sold is
137.03 days. Compared with the findings by Kroes and Manikas (2014) who investigate the associa-
tion between working capital management and firm performance of US manufacturing firms, Chinese
firms sell inventory and collect payment from customers more slowly than US firms (number of days
of inventory and that of accounts receivable are 97.1 and 59.7, respectively, for US firms), while the
average number of days of accounts payable is comparable to US firms (with the average of
66.7 days). The average number of analysts that follow a firm is 9.6, which is much lower than the
average number of analyst following in the United States (Chung and Jo 1996). The reason is the
capital market in China has been established only a few years ago, and the financial intermediaries are
not as developed as those in the United States. On average, the ratio of the absolute level of mean
analyst forecast error to the absolute level of earnings per share is 0.82. The average leverage level is
0.43, and the average ROA (Return on Assets) is 5.1%.

Empirical Analysis
Correlation Analysis
Table 2 presents Pearson correlation coefficients for the variables considered. According to the
correlation matrix, the number of analyst following is negatively associated with analyst forecast
error. The association between cash conversion cycle (and number of days of accounts receivable) and
analyst following is negative and significant. The association between cash conversion cycle (number
of days of accounts receivable and number of days of accounts payable) and analyst forecast error is
positive and significant. Number of days of accounts payable is positively associated with analyst
forecast dispersion. Consistent with Bhushan (1989) and Lang and Lundholm (1996), SIZE is
positively associated with number of analyst following and negatively associated with analyst forecast
dispersion. Bigger firms sell their inventories and collect payment from customers more quickly, as
demonstrated by a negative association between SIZE and number of days of inventory (accounts
receivable and cash conversion cycle). LEV and SROE are negatively associated with number of
analyst following and positively associated with analyst forecast error and forecast dispersion,
suggesting firms with higher risk are likely to attract less analysts, increasing the disagreement

Table 1. Descriptive statistics.

Mean St. dev. Minimum Median Maximum Obs.

Number of analyst following 9.577 9.684 1 6 60 7084

Analyst forecast error 0.817 1.711 0.000 0.260 16.421 7084
Analyst forecast dispersion 0.190 0.214 0.000 0.129 1.885 7084
Number of days of inventories 133.252 104.751 6.838 101.768 715.999 7084
Number of days of accounts receivable 73.233 66.426 0.113 55.850 443.659 7084
Number of days of accounts payable 69.459 43.790 1.011 61.800 396.617 7084
Cash conversion cycle 137.026 127.158 −217.728 106.027 882.533 7084
SIZE 21.832 1.126 19.120 21.674 26.751 7084
LEV 0.428 0.199 0.008 0.435 1.794 7084
SROE 0.070 0.195 0.000 0.034 3.979 7084
ROA 0.051 0.054 −0.728 0.046 0.400 7084
Table 2. Pearson correlation coefficients.
Days of Days of Cash Number of Analyst Analyst
Days of accounts accounts conversion analyst forecast forecast
inventory payable receivable cycle following error dispersion SIZE LEV SROE ROA

Days of 1.000
inventory
Days of 0.224*** 1.000
accounts
payable
Days of 0.280*** 0.513*** 1.000
accounts
receivable
Cash 0.893*** 0.108*** 0.577*** 1.000
conversion
cycle
Number of 0.024** 0.108 −0.099*** −0.036*** 1.000
analyst
following
Analyst forecast 0.019 0.056*** 0.062*** 0.029** −0.150*** 1.000
error
Analyst forecast 0.004 0.023* −0.003 −0.006 0.122*** 0.292*** 1.000
dispersion
SIZE −0.116*** 0.009 −0.241*** −0.225*** 0.382*** −0.010 0.143*** 1.000
LEV −0.108*** 0.106*** −0.140*** −0.198*** −0.059*** 0.114*** 0.088*** 0.482*** 1.000
SROE −0.030** 0.070*** −0.044*** −0.072*** −0.059*** 0.074*** 0.024** 0.005 0.223*** 1.000
ROA 0.022* −0.120*** −0.088*** 0.013 0.404*** −0.303*** −0.151*** −0.044*** −0.418*** −0.150*** 1.000

Notes：***, **, and * indicate the significance level at 1%, 5%, and 10%, respectively.
WORKING CAPITAL INFORMATION AND FINANCIAL ANALYSIS
1141
1142 J. GAO AND J. WANG

among the analysts in making their forecasts. Firms with higher leverage or higher volatility of ROE
sell their inventories, collect payment from customers more quickly, and pay their suppliers more
slowly probably due to cash constraints, as shown by a negative relation between LEV and number of
days of inventory (accounts receivable), and positive relation between LEV and number of days of
accounts payable. Firms with better financial performance (higher ROA) pay their suppliers and
collect payment from customers more quickly; they also have higher analyst coverage, higher analyst
forecast accuracy, and lower analyst forecast disparity. Moreover, better performed firms tend to be
smaller and have lower leverage and less volatile earnings.

Regression Results
We use multivariate regression analysis to investigate the impact of working capital management on
analyst following and their forecast characteristics. As there might be omitted unobservable variables
that could affect analyst behavior across firms, to control for the omitted variable bias, we use two-way
fixed effect models which allow different intercepts across firms, rather than the pooled OLS regres-
sions which assume a common intercept across the observations. The cluster robust standard errors are
also estimated to control for autocorrelation of error terms. Panel A of Table 3 presents the regression
results regarding the effect of working capital management on the number of analyst following.
Consistent with Hypothesis 1a, the coefficient on days of inventories is negative and significant at
1% level, indicating when inventories turn over more quickly, that is, when inventory management
becomes more efficient, the number of analyst following increases. The absolute value of the
coefficient is 0.008, suggesting that on average, number of analyst following will increase by 1
when days of inventories decrease by around 125. Regression 2 shows that number of days of
accounts receivable is negatively associated with analyst following, consistent with the argument
that shorter accounts receivable collection period implies more efficient cash flow management,
increasing the equilibrium number of analyst following, providing support for H1b. The absolute
value of the coefficient is 0.025, indicating that number of analyst following increases by 1 when days
of accounts receivable decreases by about 40. There are a negative and significant relations between
number of days of payable and analyst following, consistent with the reasoning that analysts consider
the decrease in the number of days of accounts payable as an indicator of better financial condition,
thus increasing their willingness to follow the firm. The absolute value of the coefficient is 0.023,
suggesting that number of analyst following will decrease by 1 when days of accounts payable
increase by approximately 43. The length of cash conversion cycle is negatively associated with the
number of analyst following, with the coefficient significant at 1% level. While cash conversion cycle
is considered as a comprehensive measure of working capital management efficiency, the regression
results are consistent with Hypothesis 1 that more efficient working capital management attracts a
higher number of analysts to follow the firm. The coefficient suggests that on average, number of
analyst coverage increases by 1 when the cash conversion cycle decreases by 143. Moreover, when
financial leverage increases, the number of analyst following decreases due to perceived higher
operational risk. Consistent with the findings of previous studies (Bhushan 1989; Lang and
Lundholm 1996; O’Brien and Bhushan 1990), firm size is found to be positively associated with
the number of analyst following.
Previous studies have found that the efficiency of working capital management could affect the
financial performance (Deloof 2003; Ebben and Johnson 2011; Garcia-Teruel and Martinez-Solano
2007), and financial performance is likely to generate impact on analyst behavior. Thus, it is possible
that working capital management influences analyst behavior through the mediation effect of financial
performance. To investigate whether working capital management has additional explanatory power
beyond financial performance, that is, to disentangle the effect of financial performance from working
capital management, we adopt two steps. In the first step, we examine the effect of working capital
management on financial performance (denoted by Return on Assets); in the second step, we include
 WORKING CAPITAL INFORMATION AND FINANCIAL ANALYSIS 1143

Table 3. Panel A regression of analyst following on working capital management.

Number of analyst following

Dependent variable (1) (2) (3) (4) (5)

Number of days of inventories −0.008 −0.006

(0.001) (0.028)
Number of days of accounts receivable −0.025 −0.020
(0.000) (0.000)
Number of days of accounts payable −0.023 −0.016
(0.000) (0.000)
Cash conversion cycle −0.007
(0.001)
SIZE 5.935 6.177 6.045 5.960 6.281
(0.000) (0.000) (0.000) (0.000) (0.000)
LEV −7.971 −7.898 −7.145 −8.234 −7.082
(0.000) (0.000) (0.000) (0.000) (0.000)
SROE −0.281 −0.091 −0.127 −0.266 −0.090
(0.618) (0.875) (0.814) (0.641) (−0.800)
Year dummies Included Included Included Included Included
Intercept −118.460 −122.941 −120.585 −118.993 −124.072
(0.000) (0.000) (0.000) (0.000) (0.000)
Observation 7084 7084 7084 7084 7084
Overall R2 0.214 0.205 0.213 0.215 0.191

Panel B regression of financial performance on working capital management

ROA

Dependent variable (1) (2) (3) (4) (5)

Number of days of inventories −0.072 −0.052

10–3 10–3
（0.000） （0.002）
Number of days of accounts receivable −0.220 −0.173
10–3 10–3
（0.000） （0.000）
Number of days of accounts payable −0.196 −0.129
10–3 10–3
（0.000） （0.000）
Cash conversion cycle −0.064
10–3
（0.000）
SIZE 0.013 0.015 0.014 0.013 0.016
（0.000） （0.000） （0.000） （0.000） （0.000）
LEV −0.144 −0.143 −0.137 −0.147 −0.137
（0.000） （0.000） （0.000） （0.000） （0.000）
Year dummies Included Included Included Included Included
Intercept −0.170 −0.207 −0.186 −0.175 −0.217
（0.005） （0.001） （0.002） （0.004） （0.000）
Observation 7084 7084 7084 7084 7084
Overall R2 0.210 0.193 0.216 0.214 0.165

(Continued )
1144 J. GAO AND J. WANG

Table 3. Panel A regression of analyst following on working capital management. (Continued)

Panel C regression of No. of analyst following on working capital management and ROA

Number of analyst following

Dependent variable (1) (2) (3) (4) (5)

Number of days of inventories −0.005 −0.004

(0.026) (0.121)
Number of days of accounts receivable −0.016 −0.013
(0.000) (0.003)
Number of days of accounts payable −0.015 −0.016
(0.000) (0.006)
Cash conversion cycle −0.004
(0.019)
SIZE 5.423 5.594 5.503 5.439 5.674
(0.000) (0.000) (0.000) (0.000) (0.000)
LEV −1.984 −2.105 −1.518 −2.157 −1.682
(0.141) (0.119) (0.262) (0.110) (0.216)
SROE 0.282 0.387 0.373 0.290 0.380
(0.643) (0.536) (0.536) (0.636) (0.548)
ROA 42.394 41.186 41.846 42.313 40.341
(0.000) (0.000) (0.000) (0.000) (0.000)
Year dummies Included Included Included Included Included
Intercept −111.936 −115.000 −113.419 −112.272 −115.919
(0.000) (0.000) (0.000) (0.000) (0.000)
Observation 7084 7084 7084 7084 7084
Overall R2 0.306 0.292 0.302 0.305 0.279

Notes: p values are in parentheses.

ROA as additional independent variable when examining the effect of working capital management on
analyst following.
Panel B of Table 3 shows that more efficient working capital management is associated with higher
ROA, with the coefficient on cash conversion cycle and its components (days of inventory, days of
accounts receivable, and days of accounts payable) all negative and significant at 1% level. This result
is consistent with Deloof (2003), Garcia-Teruel and Martinez-Solano (2007), indicating that the
positive association between working capital management efficiency and financial performance also
applies for Chinese firms. Panel C of Table 3 presents the regression results of the effect of working
capital management on analyst behavior with ROA as additional independent variable. It shows that
the coefficients on cash conversion cycle (as well as its components) and ROA are both significant,
indicating that financial performance works as a partial mediator in the relation between working
capital management and number of analyst following. The overall results suggest that working capital
management efficiency has additional explanatory power beyond financial performance in explaining
the variation in analyst coverage across firms.
Panel A of Table 4 presents regression results about the effect of working capital management
efficiency on analyst forecast accuracy. The dependent variable is analyst forecast error. The coeffi-
cient on number of days of inventories is positive and statistically significant at 1% level, providing
support for H2a. This is consistent with the notion that when inventory management efficiency
decreases, it becomes more difficult for analysts to make their forecasts about firm earnings due to
increase of the uncertainty associated with the forecast of sales revenue and operational cost, thus
increasing analyst forecast error. The coefficient suggests that analyst forecast error will increase by
10% when number of days of inventories increases by 50. Similarly, number of days of accounts
 WORKING CAPITAL INFORMATION AND FINANCIAL ANALYSIS 1145

Table 4. Panel A regression of analyst forecast accuracy on working capital management.

Analyst forecast error

Dependent variable (1) (2) (3) (4) (5)

Number of days of inventories 0.002 0.001

(0.000) (0.000)
Number of days of accounts receivable 0.008 0.007
(0.000) (0.000)
Number of days of accounts payable 0.004 0.001
(0.015) (0.465)
Cash conversion cycle 0.002
(0.000)
SIZE −0.016 −0.092 −0.026 −0.031 −0.105
(0.854) (0.298) (0.767) (0.726) (0.230)
LEV 0.670 0.639 0.566 0.742 0.554
(0.011) (0.014) (0.035) (0.005) (0.035)
SROE 0.281 0.225 0.251 0.280 0.234
(0.256) (0.358) (0.331) (0.247) (0.332)
Year Dummies Included Included Included Included Included
Intercept 0.426 1.811 0.697 0.663 1.906
(0.823) (0.354) (0.714) (0.731) (0.323)
Observation 7084 7084 7084 7084 7084
Overall R2 0.030 0.024 0.038 0.028 0.021

Panel B regression of analyst forecast accuracy on working capital management and ROA

Number of days of inventories 0.002 0.001

(0.000) (0.008)
Number of days of accounts receivable 0.006 0.006
(0.000) (0.000)
Number of days of accounts payable 0.002 0.106
(0.172) (0.943)
Cash conversion cycle 0.002
(0.000)
SIZE 0.084 0.018 0.081 0.069 0.010
(0.335) (0.841) (0.341) (0.426) (0.910)
LEV −0.492 −0.452 −0.545 −0.423 −0.469
(0.096) (0.118) (0.067) (0.154) (0.109)
SROE 0.172 0.135 0.152 0.174 0.145
(0.493) (0.588) (0.556) (0.480) (0.556)
ROA −8.232 −7.750 −8.262 −8.109 −7.645
(0.000) (0.000) (0.000) (0.000) (0.000)
Year dummies Included Included Included Included Included
Intercept −0.840 0.316 −0.718 2.274 0.361
(0.656) (0.868) (0.701) (0.000) (0.848)
Observation 7084 7084 7084 7084 7084
Overall R2 0.101 0.079 0.107 0.094 0.075

Notes: p values are in parentheses.

receivable is also positively and significantly associated with analyst forecast error due to the increase
in operating uncertainty, providing support for H2b. The coefficient shows that analyst forecast error
will increase by 10% if number of days of accounts receivable increases by 12.5. The length of
1146 J. GAO AND J. WANG

payment period is also positively associated with analyst forecast error, with the coefficient significant
at 5% level, suggesting that there is an increase in uncertainty among analyst forecasts when the
number of days of accounts payable increases, leading to lower analyst forecast accuracy. The
coefficient indicates an increase in analyst forecast error of 10% when days of accounts payable
increase by around 25. Consistent with H2, an increase in cash conversion cycle leads to lower analyst
forecast accuracy due to increase in the overall uncertainty regarding operations activities, with the
coefficient on cash conversion cycle positive and significant at 1% level. Consistent with Bhushan
(1989) and Lang and Lundholm (1996), firm size is positively associated with analyst forecast
accuracy. Further, leverage is negatively associated with forecast accuracy.
Similarly, previous studies have linked working capital management with financial performance,
which might affect the information environment of financial analysts and thus their forecast accuracy
(Deloof 2003; Ebben and Johnson 2011; Lang and Lundholm 1993). To disentangle the effect of
working capital management and financial performance, we also include ROA as additional indepen-
dent variable. The results are shown in Panel B of Table 4. The coefficients on cash conversion cycle
and ROA are both positive and significant at 1% level, suggesting that, similar to the situation of
analyst following, financial performance also serves as a partial mediator in the association between
the overall working capital management and analyst forecast accuracy. It indicates that working capital
management efficiency has additional explanatory power beyond financial performance in explaining
the variations in analyst forecast error. The only exception is number of days of accounts payable. The
coefficient is no longer significant when ROA is included in the regression, indicating that the
efficiency of management of accounts payable generates impact on analyst forecast accuracy purely
through its impact on financial performance.
The regression results about the association between working capital management and analyst
forecast dispersion are shown in Table 5. Consistent with H3b, the association between number of
days of receivable and analyst forecast dispersion is positive and significant at 5% level, suggesting
that the disparity of analyst forecasts increases when firms collect payments from customers more
slowly. The reason could be that when there is more uncertainty associated with the cash collection
of accounts receivables, the disparity among analysts regarding their interpretation of the financial
data increases, which motivates them to acquire private information more actively. The coefficient
on the length of cash conversion cycle is positive and significant at 5% level, consistent with
Hypothesis 3 that when the overall efficiency of working capital management decreases, the
increased uncertainty associated with firms’ operation activities leads to higher disparity among
analyst forecasts.
Panel B of Table 5 presents the results when ROE is also included in the regression. It shows that
while the coefficient on ROA is negative and significant at 1% level, the coefficients on cash
conversion cycle and its components are no longer significant. This finding suggests that financial
performance works as a full mediator in the relation between working capital management and analyst
forecast dispersion, that is, working capital management generates impact on analyst forecast disparity
totally through its effect on financial performance.

Direction of Causality
In this study, we hypothesize that the operation efficiency of working capital affects analyst behavior;
thus, we consider working capital management efficiency as the causing factor of the observed level of
analyst following. However, it is possible that the direction of causality is opposite, that is, higher level
of analyst following causes the firm to increase its efficiency in working capital management, and it is
also possible that analyst following and working capital management are simultaneously affected by
other exogenous variables.
One method to investigate the direction of causality is to examine the relation between changes in
working capital management efficiency and changes in the lag and lead number of analyst coverage. If
the change of the number of analysts following the firm precedes the change of working capital
Table 5. Regression of analyst forecast dispersion on working capital management.
Analyst forecast dispersion

Dependent variable (1) (2) (3) (4) (5)

Number of days of inventories 0.089 0.071

10–3 10–3
(0.108) (0.194)
Number of days of accounts receivable 0.252 0.248
10–3 10–3
(0.031) (0.034)
Number of days of accounts payable 0.031 0.064
10–3 10–3
(0.818) (0.643)
Cash conversion cycle 0.109
10–3
(0.028)
SIZE 0.022 0.020 0.023 0.022 0.020
(0.003) (0.049) (0.020) (0.029) (0.050)
LEV 0.040 0.040 0.041 0.043 0.041
(0.250) (0.252) (0.243) (0.212) (0.251)
SROE 0.015 0.013 0.014 0.015 0.014
(0.419) (0.491) (0.449) (0.419) (0.462)
Year dummies Included Included Included Included Included
Intercept −0.360 −0.315 −0.362 −0.349 −0.318
(0.101) (0.160) (0.099) (0.114) (0.156)
Observation 7084 7084 7084 7084 7084
Overall R2 0.067 0.065 0.067 0.067 0.065

Panel B Regression of analyst forecast dispersion on working capital management and ROA

Number of days of inventories 0.028 0.027

10–3 10–3
（0.611） （0.620）
WORKING CAPITAL INFORMATION AND FINANCIAL ANALYSIS

Number of days of accounts receivable 0.070 0.104

10–3 10–3
（0.561） （0.386）
1147

(Continued )
 1148

Table 5. Regression of analyst forecast dispersion on working capital management. (Continued)

Analyst forecast dispersion

Dependent variable (1) (2) (3) (4) (5)

J. GAO AND J. WANG

Number of days of accounts payable 0.130 −0.171

10–3 10–3
（0.329） （0.215）
Cash conversion cycle 0.055
10–3
（0.273）
SIZE 0.032 0.032 0.034 0.032 0.033
（0.001） （0.002） （0.001） （0.001） （0.001）
LEV −0.078 −0.077 −0.073 −0.076 −0.071
（0.027） （0.028） （0.041） （0.031） （0.045）
SROE 0.004 0.003 0.004 0.004 0.004
（0.859） （0.879） （0.852） （0.852） （0.855）
ROA −0.836 −0.832 −0.850 −0.831 −0.838
（0.000） （0.000） （0.000） （0.000） （0.000）
Year dummies Included Included Included Included Included
Intercept −0.488 −0.475 −0.508 −0.481 −0.487
（0.026） （0.033） （0.020） （0.029） （0.028）
Observation 7084 7084 7084 7084 7084
R2 0.085 0.085 0.084 0.085 0.085

Notes: p values are in parentheses.

 WORKING CAPITAL INFORMATION AND FINANCIAL ANALYSIS 1149

management, then the relation between change in working capital management efficiency and change
of lagged number of analysts should be positive; if the change of the number of analysts follows the
change of working capital management, then the correlation between change of working capital
management efficiency and change of lead number analysts should be positive. As we could observe
from Table 6, most of the correlations for the lead number of analysts are negative and significant,
supporting the hypothesis that change in the number of analysts follow the change in working capital
management. Moreover, most of the correlations for the lagged number of analysts are insignificant
(some are even positive), rejecting the hypothesis that change in the number of analysts precedes the
change in working capital management. These correlation results provide limited evidence that
changes in working capital management efficiency lead to the changes in the number of analysts.
There is little evidence that the causality is in the opposite direction.
To further deal with the endogeneity problem, we also employ the instrumental variable estimation
method. We divided the data into ten subindustries based on CSRC (China Securities Regulatory
Commission) Industry Classification Standard (2001). We use the industry average working capital
variables (i.e., the industry average days of inventory, days of accounts receivable, days of accounts
payable, and cash conversion cycle) as instruments for working capital management efficiency. The
untabulated results show that working capital management efficiency (cash conversion cycle, days of
inventory, days of accounts receivable) continues to be negatively associated with analyst coverage at
5% significance level or better.
Collectively, the results from these tests suggest that endogeneity concerns are not likely to drive
our core findings.

Additional Analysis
We choose the firms covered by at least one analyst as sample; however, firms with no analyst
following might also convey useful information. In the robustness test, we also include the firms with
no analyst coverage when investigating the effect of working capital management on number of

Table 6. Correlation between changes in WCM and lagged and lead number of analysts
following.
Change in days Change in days Change in days Change in cash
of INV of AR of AP conversion cycle

1-Year window
Change in lagged number of analysts 0.010 −0.042 0.015 −0.017
(0.566) (0.012) (0.365) (0.321)
Change in lead number. of analysts −0.028 −0.112 −0.036 −0.058
(0.089) (<.0001) (0.031) (0.001)
2-Year Window
Change in lagged number of analysts −0.037 0.027 0.012 −0.026
(0.064) (0.175) (0.556) (0.191)
Change in lead number of analysts −0.017 −0.083 −0.040 −0.034
(0.403) (<.0001) (0.043) (0.086)
3-Year window

Change in lagged number of analysts 0.014 −0.019 −0.065 0.031

(0.554) (0.400) (0.005) (0.180)
Change in lead number of Analysts −0.000 −0.033 0.006 −0.017
(0.984) (0.156) (0.810) (0.460)
1150 J. GAO AND J. WANG

analyst following. The results are similar to the main analysis above, that is, when the efficiency of
working capital management decreases, the number of analyst following decreases.
Since number of analyst following is a nonnegative integer, we also use Poission and Negative
Binominal regression (model designed for count data) when examining the effect of working capital
management efficiency on the number of analyst following. The results are equivalent to the OLS
regression results presented in Table 3.
Meanwhile, for firms covered only by one analyst, forecast dispersion is zero, which might add bias
to the regression result. In a sensitivity test, we choose the firm year with at least three analysts and
find similar results to the main test shown above that analyst forecast dispersion is negatively
associated with efficiency of working capital management.

Conclusion
In this study, we investigate how the efficiency of working capital management affects analyst forecast
behavior and their forecast characteristics with Chinese listed companies in the manufacturing industry
from 2004 to 2014. We use number of days of inventory, number of days of accounts receivable, and
number of days of accounts payable to measure the management efficiency of each kind of working
capital; we use cash conversion cycle as a comprehensive measure for the overall working capital
management efficiency. We find that working capital management efficiency is positively associated
with the number of analysts following and the accuracy of analyst forecast, while it is negatively
associated with analyst forecast dispersion. Specifically, when the length of cash conversion cycle
increases, the number of analysts who choose to follow the company decreases; the average analysts’
forecasts become less accurate, and their forecast dispersion increases.
The findings of our study add to the literature in several aspects. While it has been widely accepted
in practice that operational issues are important concerns for financial analysts, there has been little
empirical work examining explicitly how working capital management indicators affect analyst
behavior and their forecast features. We demonstrate that information about working capital manage-
ment efficiency affects analysts’ evaluation about firms’ future prospects and their decision to follow a
firm. Moreover, we show that working capital management efficiency also generates impact on the
accuracy and dispersion of analysts’ forecasts. While previous studies generally link working capital
management efficiency directly with financial performance (Deloof 2003) or with market stock returns
(Alan, Gao, and Gaur 2014), this study provides a linkage between working capital management and
analyst behavior, thus revealing a potential mechanism through which information about working
capital management is incorporated in stock price. The findings of our study also shed some light on
the research about the determinants of analyst behavior, suggesting that lack of control for indicators
about working capital management efficiency when studying analyst behavior could result in biased
results. The findings of this study generate meaningful implications for financial analysts to improve
their forecast efficiency and for investors and listed firms to understand and improve the corresponding
information environment.
While this study links working capital management with the behavior of financial analysts, it is also
of importance to examine the impact of working capital management on the market liquidity, so that to
better understand the capital market effect of operational variables. Moreover, while the current study
focuses on observations in China, it is also meaningful to study whether the results apply to other
economies and how institutional characteristics affect the findings.

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