Financial Performance Measures

### **Chapter 7**

## Looking beyond the Numbers: Determinants of Financial Performance of Portuguese Wine Firms

*Carmem Leal, Bernando Cardoso, Rogério Bessa, José Vale, Rúben Nunes and Rui Silva*

#### **Abstract**

This chapter focuses on the analysis of the determinants of financial performance (FP) of Portuguese wine firms. Unbalanced panel data were analyzed using fixedeffects regression. The sample consisted of 386 Portuguese wine firms, for the period 2014–2017. FP is the dependent variable of this study, having been measured through return on assets (ROA) using as explanatory variables debt-to-equity, net working capital, current ratio, days payable out-standing (DPO), and days receivables outstanding (DRO). The results show: (1) DRO, debt-to-equity and net working capital are the variables that best explain the FP measured by ROA; (2) Debt-to-equity and DRO have a negative relationship with ROA, whereas current ratio, working capital, and DPO have a positive relationship with profitability measured by ROA. The findings suggest that there are other qualitative elements in the wine sector, beyond numbers, that support the explanation of its performance. The way this industry is heavily controlled affects its success. Furthermore, factors such as the style of corporate governance and the lengthy production cycle can have a significant impact on its FP. it is strongly advised that qualitative approaches be employed in conjunction with quantitative research in future studies to obtain the most comprehensive and accurate results.

**Keywords:** financial performance, wine firms, liquidity, profitability, panel data, R software

#### **1. Introduction**

Winemaking is one of the most representative economic activities in a number of countries, owing to the wide range of fine products available and the convergence of producers' know-how, craftsmanship, and traditions.

The wine industry has been studied from a variety of perspectives. In recent years, the culture of quality wine has been bolstered by significant investments made by both large corporations and medium-and-small-sized businesses. This study focuses on the factors that influence winemakers' economic and financial performance.

#### **Figure 1.**

*Evolution of Portuguese wine exports from 2009 to 2020. Source: Instituto do Vinho e da Vinha,* in *https://www. ivv.gov.pt/np4/9865.html.*

The evolution of the wine firm's level of exports in Portugal can be used to assess its importance. As shown in **Figure 1**, the value of exports in thousands of euros nearly doubled from 2009 to 2020.

In 2019, the overall value of exported food commodities will be around 7.4 million euros, with wine exports accounting for roughly 15% of the total [1]. These figures alone can indicate the importance of this industry for Portugal, in addition to the quality of the products and their international renown. As a result, it appeared appropriate to investigate this sector's financial performance.

Over the last four decades, little attention has been paid to the area of short-term finance, specifically working capital management (WCM). This can happen for a number of reasons, the first of which is that decisions about working capital are made on a daily basis. As a result, their individual impact is negligible. Second, unlike capital investment decisions, these routine decisions are reversible over time. However, many research studies, such as see Refs. [1, 2], have shown that WCM has a significant impact on a firm's profitability. Talha et al. [3] observed that aggressive liquidity management improves operating performance and is typically associated with higher corporate values.

The economic recovery has increased managers' awareness of short-term financial management and associated flows. Firms were forced to manage their short-term financing policies more efficiently during a recession and with a decrease in investment strength on the part of the banking sector.

As a result, issues concerning working capital management have become as important as capital structure, financial autonomy, and liabilities. This paradigm shift was accelerated by the economic downturn, during which efficient working capital management contributes exponentially to increased business performance [1].

Not only in the context of crisis but also on a daily basis, the possibility of acquiring a level of debt that might compromise shareholders' wealth is a very real problem. Thus, it is up to managers to align the financial structure with the organization's resources to ensure corporate sustainability, always safeguarding the obligations of the commitments assumed.

Financial management and short-term decision-making must, therefore, be understood as important tools for medium and long-term business objectives that can guarantee them a successive improvement of processes and, consequently, an efficient business.

#### *Looking beyond the Numbers: Determinants of Financial Performance of Portuguese Wine Firms DOI: http://dx.doi.org/10.5772/intechopen.103141*

The efficient allocation of resources allows the increase of business gains, but only when there is continuous fulfillment of obligations toward the others. Thus, to ensure this financial balance, the proper management of short-term resources using the analysis of ratios is one of the main factors for maintaining the organization's health [2].

One of the main objectives of short-term management is to ensure the existence of liquidity in firms since this is one of the most important assumptions for organizational success. Without efficient liquidity management, the guarantee of compliance with business obligations can be compromised due to a lack of cash, which can enhance decision-making that entails an increased risk for the company's sustainability.

Short-term management is critical for the wine sector and allows the guarantee of business continuity in a sector where the competition is fierce.

The wine sector is vulnerable to the costs of raw materials and external supplies and services that predominate in frequency during a production cycle, given the activities that will attract income. In this way, it is necessary to understand how shortterm management can contribute to the maintenance of good yields, such as those related to a firm's assets.

The main objective of this investigation is to understand the impact of liquidity measures on the financial performance of wine firms. Thus, the relationship between ROA, days payable outstanding (DPO), days receivables outstanding (DRO), net working capital (NWC), debt-to-equity ratio, and current ratio (CR) will be analyzed. The goals of this research are to determine whether the DRO and debt-to-equity ratio have a negative relationship with the ROA and whether this has a significant relationship with the indicators of DPO, working capital, and current ratio. The current study will be conducted for a sample of 303 wine firms over a four-year period. The remainder of this study is organized as follows. Section 2 reviews the related literature and develops our hypotheses. Section 3 explains how we measure our key variables and specifies the empirical model used for hypothesis testing. Section 4 describes our data and summary statistics. Section 5 discusses our main empirical findings and reports the results of our robustness checks, Section 6 concludes and sets out some final reflections.

#### **2. Literature review and hypothesis development**

#### **2.1 Liquidity and working capital**

Liquidity represents the ability of an asset to convert to cash, and it is regarded as a precondition to ensure that firms are able to meet their short-term obligations [3, 4].

The current ratio is used as a liquidity criterion and measures the capacity of firms to meet their current obligations, typically due in 1 year. Excessive liquidity indicates accumulated idle funds, and inadequate liquidity not only adversely affects the creditworthiness of the firm but also interrupts the production process and hampers its earning capacity to a great extent. Keeping this indicator at an optimum level implies ensuring an adequate level of current assets, which must be above that of short-term liabilities [5].

Following this reasoning, we can anticipate that an increase in the current liquidity will lead to an increase in profitability as some literature has proved [6–9]. However, a high level of this indicator can be a sign of over liquidity, with possible adverse effects on the profitability as is indicated by research findings of [10–13].

In a study conducted in the Republic of Serbia, the authors analyzed the impact of traditional liquidity indicators on the profitability in the meat processing industry using data from official financial reports of the firms for the period from 2016 to 2019 and concluded that liquidity has no effects on profitability of those firms [14]. Similar results were obtained by Pervan and Višić in the Croatian manufacturing industry for the period from 2002 to 2010 [15].

As evidence, there is no consensus on the existence and quality of the relationship between liquidity and profitability. Thus, the first hypothesis of this study can be stated as follows:

*Hypothesis 1*: There is a possible impact of liquidity on the profitability of Portuguese wine firms.

Working capital (WC) is an approach to improving a company's liquidity, profitability, and value [4, 16]. Working capital management provides enough cash to meet the short-term obligations and operating costs of a firm [17, 18], and its main purpose is to free up capital that has been locked up in day-to-day operations to boost liquidity. Even for companies with promising long-term prospects, working capital integrates short-term financial management with strategic decisions, impacting profitability, risk, and so value [19]. Academicians, managers, and policymakers have recognized the importance of effective WCM in a firm's survival in the aftermath of the global financial crisis [20].

"WC can be viewed as a statically, as a 'stock' value, or dynamically as a 'flow' value" [4]. In the first case, WC is defined as a company's current assets minus its current liabilities and is referred to as net working capital in this scenario. In the latter case, working capital requirements are inextricably linked to the process of earning and spending money, and they are a part of the cycle of activities that this process entails.

The most common measure of working capital management is the cash conversion cycle (CCC) [21, 22]. CCC is defined as the time lag between the collection of revenue from the sales of finished goods or services and the payment to the suppliers for the purchase of raw materials. The cash conversion cycle comprises of days receivables outstanding (DRO), days inventory outstanding (DIO), and days payable outstanding (DPO). A shorter CCC could be driven by a shorter DRO, a shorter DIO, or a longer DPO [23, 24]. The aim is to reduce the length of the CCC to a reasonable minimum, the shorter the CCC, the lower the capital requirements, improving the firm's profitability [16, 25].

The relationship between firm profitability and WCM has become exceedingly popular among academics [26, 27].

Despite major variances in working capital practices throughout businesses and even within industries over time, there is widespread agreement on the negative association between shorter DRO and DIO, and hence shorter CCC, and greater profitability [7, 13, 25, 28, 29]. The role of DPO in WCM is unclear and unexplored. In empirical studies, DPO is often negatively correlated to profitability [10]. Since the negative effect was also sometimes found to be insignificant, this relation remains unclear. In this regard, we formally state our second and third hypotheses as follows:

*Hypothesis 2.1*: The DRO is negatively related to the profitability of Portuguese wine firms.

*Hypothesis 2.2:* The DPO is related to the profitability of Portuguese wine firms.

Net working capital (NWC) is a measure of a firm's liquidity that is intended to be positive since it is defined as the difference between a firm's current assets and current liabilities [10, 30]. NWC is predicted to have a favorable impact on a company's

*Looking beyond the Numbers: Determinants of Financial Performance of Portuguese Wine Firms DOI: http://dx.doi.org/10.5772/intechopen.103141*

profitability; nevertheless, the importance of NWC in a specific company is decided by macroeconomic conditions, which have a substantial impact on the company's investments and financing. Managing NWC effectively means maximizing shareholder profit while minimizing the risk of a firm's failure [13]. There is an enormous amount of studies about the possible relationship between NWC and profitability, but there is no consensus. A significant number of studies suggest the existence of a negative impact of working capital management on a company's profitability [7, 8, 10, 13, 25, 28, 31], supporting the premise that an aggressive strategy of WCM positively influences a company's profitability. Nonetheless, the results of some studies show otherwise [11, 32–34]. These authors point out the positive impact of WCM on companies' profitability and success, thus supporting a conservative strategy (e.g., positive impact of NWC). These discrepancies could be attributed to the inconsistency and volatility of economic (and other) conditions in the various countries and environments where the studies were conducted, the analysis of various industries, differences in the distribution of company types within samples, different methods and approaches used in the analysis, and so on [11]. This leads to the following hypothesis:

*Hypothesis 3:* There is a possible impact of NWC on the profitability of Portuguese wine firms.

#### **2.2 Leverage and profitability**

Many empirical researches have been conducted on the relationship between leverage and profitability; nevertheless, the results of these investigations are inconclusive. This indicates that the impact of leverage on performance is greatly dependent on the circumstances, and theories such as pecking order, capital structure, and agency theory can help explain the discrepancies [35].

Various studies in developed countries such as the United States, France, Belgium, the United Kingdom, Italy, and Germany demonstrate a positive association between debt and profitability [36–38]. Others, on the other hand, show that a company's leverage is inversely associated with its profitability, suggesting that a larger debt ratio leads to lower profitability [39–41]. There are also authors who argue that there is no connection between the two concepts [42].

In general, more evidence in developing countries supports the concept that leverage and profitability are negatively linked than the other way around [43–45]. Other research shows mixed or nonlinear outcomes when it comes to the impact of financial leverage on performance [46, 47]. Following existing literature, we present the fourth hypothesis:

*Hypothesis 4:* There is a possible impact of leverage on the profitability of Portuguese wine firms.

#### **3. Research methodology**

#### **3.1 Data and sample selection**

The sample of the study is composed of 412 wine firms operating in Portugal from 2014 to 2017. After eliminating the firms with missing values, insufficient and extreme data, an unbalanced panel 9,264 firms firm-year observations on 386 firms is finally obtained.

Because of its benefits, the panel data approach is used. First, the panel data technique may account for unobservable heterogeneity. Second, it removes or minimizes estimation bias and data multicollinearity concerns [48].

R software was used to collect and analyze panel data. The ideal starting point for the analysis was to generate summary descriptive statistics to provide an overview of the panel data set under investigation. The sample minimum, sample maximum, mean, and standard deviation were thus the basic summary statistics. The intensity and direction of the relationship between the study variables were determined using correlation analysis. Univariate plotting was done before estimating panel data models. Because panel or time series stochastic features might be trending, random walk (drift), or both trend and drift, this aided in displaying data and summarizing its distribution [49]. Finally, diagnostic tests were performed, and the hypotheses were tested using a panel regression analysis approach.

#### **3.2 Study variables**

In this study accounting metrics were given primacy over market measures, following previous literature, while evaluating the wine business, which has extremely distinctive characteristics [50, 51]. Inspired from these arguments, as dependent variables in this study, return on assets (ROA) was used as a proxy for firm profitability in line with some of the prior studies [14, 39, 50, 51]. Please see **Table 1** for the variable definition.

#### **3.3 Data analyses**

The main justification for using a fixed-effects panel model is to eliminate the influence of serially correlated errors [52]. The main difference between the fixedeffects and the random-effects models is that the variation between entities is believed to be random and uncorrelated with the independent variables [53]. The advantage of fixed- and random-effects models over the OLS method is that they allow researchers to adjust for all stable characteristics of each company included in the sample over the study period.

After obtaining the results of the OLS, fixed-effects, and random-effects, the F-test is used to select between the fixed-effects and the OLS. Furthermore, the Lagrange Multiplier (LM) test of Breusch and Pagan [54] is used in the selection of the randomeffects and the OLS. Because the F test is significant in all of the models, it reveals that the Fixed-effects method outperforms the OLS method. The Hausman (1978) test is


**Table 1.** *Variables definition.* *Looking beyond the Numbers: Determinants of Financial Performance of Portuguese Wine Firms DOI: http://dx.doi.org/10.5772/intechopen.103141*

then used to determine whether the fixed-effects or random-effects method is superior. Because the Hausman test is significant, the results favor the fixed-effects method [55].

The model tested was:

$$\text{ROA}\_{\text{t},\text{i}} = \mathbf{a}\_{\text{t}} + \boldsymbol{\beta}\_{1}\text{DRO}\_{\text{i},\text{t}} + \boldsymbol{\beta}\_{2}\text{DPO}\_{\text{i},\text{t}} + \boldsymbol{\beta}\_{3}\text{DTE}\_{\text{i},\text{t}} + \boldsymbol{\beta}\_{4}\text{CR}\_{\text{i},\text{t}} + \boldsymbol{\beta}\_{5}\text{NWC}\_{\text{i},\text{t}} + \boldsymbol{\eta}\_{\text{i}} \tag{1}$$

#### **4. Empirical results**

**Table 2** reports summary statistics (mean) for the main variables used in this study. The mean for ROA is 3% in 2014 and 4.75% in 2017. The mean days receivable outstanding is 163 in 2014 going down to 158 days in 2017. The mean days payable outstanding is 231 in 2014 going up to 246 days in 2017. The mean of debt-to-equity and current ratio are approximately 0.98 and 7, respectively, going down in 2017 to 0.81 and 5,39, respectively. Finally, the net working capital presents in 2014 the mean value of 1,448,068 €, going up to 1,802,862 € in 2017.


#### **Table 2.**

*Wine firms – descriptive statistics (mean).*


*\*\*\*Represents significance at 1% level.*

#### **Table 3.**

*Model estimation – (fixed effects-dependent variable – ROA).*

All these values evolve in a positive direction, as well as expected according to theory.

**Table 3** presents the results obtained. The regression coefficients show that DRO (7.7958e-05) and DTE (1.1657e-04) have a negative influence on ROA and are significant at the 1% level. As can be seen in **Table 2**, both DPO (3.9019e-06) and CR (1.9768e-04) have a positive influence on ROA. However, the positive influence of DPO and CR on ROA is not statistically significant. Finally, NWC (2.4266e-09) has a statistically significant positive influence on ROA and is significant at the 5% level. Apart from these results, the F value in fixed-effects is highly significant, meaning that the model has appropriate fit measures (**Table 2**).

The computed R2 was approximately 10% showing that there are some other variables that can explain the profitability of Portuguese wine firms. The liquidity measures can explain 10% of their ROA during the period of 2014 to 2017.

#### **5. Discussion**

The higher the ROA, the more efficient the firm's performance in relation to its assets. The amount of efficiency in a firm's performance might be an alternative in encouraging stockholders to invest in a firm. According to the results presented the Portuguese wine firms show an upward in terms of ROA for the period analyzed.

When it comes to the independent variables, it is clear that DRO has a negative and considerable impact on ROA. This suggests that the firms with the longest wait time for payment from their customers are the least profitable. To properly manage their CCC, they should work to close this gap. The outcome is comparable to the findings of [7, 13, 25] which, consequently, leads to the acceptance of hypothesis 2.1. Following the findings reported by [39, 56], the coefficient for accounts payable management, measured with DPO, is positive but not significant, giving evidence to reject hypothesis 2.2. The work of Yazdanfar and Öhman [38] that looked at the evolution of working capital management and its impact on profitability and shareholder value of 115 German companies, discovered that DPO has a positive but not significant association with ROA and they have discussed the importance of DPO has a positive sign [56], on the purpose of CCC theory, and not negative as some others authors defend [7, 13, 25, 28, 31]. Moodley et al. [56] proposed another dependent variable in place of ROA to capture the true effects of CCC and follow the theory.

The results also show that the Portuguese wine firms have high levels of debt (but in a downward trend) and the relationship of debt-to-equity on ROA is significantly negative, implying that a higher debt ratio results in lower profitability, as previously found by Čavlin et al.; Dawar; and Balakrishnan and Fox [14, 43, 45], leading to the acceptance of hypothesis 4. The result obtained contradicts the works of Wald; Margaritis and Psillaki; Yazdanfar and Öhman [36–38] that stated that developed countries tend to find a positive relationship between debt and profitability. Despite its status as a developed country, Portugal's industry is more comparable to that of developing countries, where managers use debt to pay the previous debt (even having idle funds) relying heavily on short-term debt, demonstrating no strategy for correct debt use, financing, for example, long-term investments recurring to short-term debt.

The liquidity, measured by the current ratio, was found positively linked to profitability, but the influence was not significant. The estimated sign is consistent with past research, but the model revealed that liquidity had no impact on the profitability of Portuguese wine firms, as Čavlin et al. [14] presented in their study about meat

*Looking beyond the Numbers: Determinants of Financial Performance of Portuguese Wine Firms DOI: http://dx.doi.org/10.5772/intechopen.103141*

processing activity in the Republic of Serbia. In this sense, it is not possible to accept the first hypothesis of this study.

In terms of NTW's potential impact on ROA, the calculated model revealed a positive and significant effect, verifying our third hypothesis. This result follows [11, 31–33] showing a conservative approach to working capital management by Portuguese wine firms. They appear to prefer longer CCC cycles to pursue an aggressive strategy.

#### **6. Conclusion, implications, and limitations**

Winemaking is one of the most representative economic activities in several countries as a result of the variety of fine products and the convergence of know-how, craftsmanship, and traditions of producers and Portugal is a respected country of producers with excellent and well-known products.

The wine sector has been studied from various aspects. In recent years, the culture of quality wine has been enhanced also through sizeable investments by both large corporations and medium- and small-sized companies.

However, the most relevant research databases (Web of Science, Scopus, Google Scholars, and EBSCO) indicate a scarcity of research on the economic and financial performance of these types of businesses.

Taking this into account, it is feasible to conclude that this study contributes to the literature on financial analysis of the wine business by addressing a gap in the literature on financial indicators of liquidity and performance.

In this sense, the purpose of this research is to demonstrate the importance of short-term financial indicators on the profitability of Portuguese wine firms.

The profit position of a firm is influenced by numerous factors and in this study, the authors wanted to additionally explore the impact of some liquidity indicators in the Portuguese wine firms in the period 2014–2017.

It was found that an increase in the level of net working capital increases profitability of the company and leverage was negatively related to ROA. Firms policies promoting the decrease of DRO result in increased profitability. In this sense, the guarantee of low levels of general indebtedness helps wine firms increase their profitability.

The above speaks in favor of a conservative strategy of working capital management of Portuguese wine firms and this position is in line with the type of firms. Mostly of Portuguese wine firms are family firms and their management strategy tends to be more conservative than non-family firms [51].

The estimation model emphasized that the profitability of Portuguese wine firms, measured by ROA, is less explained by liquidity variables than by other qualitative variables, such as management style (whereas the family is on the Board, or not) and financing policies.

The poor adjustment might be also associated with the specificities of the wine sector, the fact that it is a regulated market, which is largely geared toward exports (variable not included in the estimation model), usually with more traditional or less professional management and which have a specific production cycle (with long periods of the operating cycle).

In terms of practical implications, we were able to show that, on average, the Portuguese wine sector manages its cash cycle conservatively, likely because it is a family-run business with few naturally aggressive managers or risk-takers, and that, based on the findings, they are not properly concerned with liquidity measures in

#### *Banking and Accounting Issues*

their daily management. It is critical to enlarge and update this sample to more firmly establish these conclusions.

To better explain the performance of these organizations, and overcome some limitations, future developments must include:


### **Acknowledgements**

This work is supported by national funds, through the FCT – Portuguese Foundation for Science and Technology under the project UIDB/04011/2020.

### **Author details**

Carmem Leal<sup>1</sup> \*, Bernando Cardoso<sup>2</sup> , Rogério Bessa<sup>2</sup> , José Vale<sup>3</sup> , Rúben Nunes<sup>2</sup> and Rui Silva<sup>1</sup>

1 CETRAD—University of Trás-os-Montes e Alto Douro, Vila Real, Portugal


\*Address all correspondence to: cleal@utad.pt

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Looking beyond the Numbers: Determinants of Financial Performance of Portuguese Wine Firms DOI: http://dx.doi.org/10.5772/intechopen.103141*

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#### **Chapter 8**

## Impact of Short-Term Management on Portuguese and Spanish Firms' Performance

*Carmem Leal, Diogo Rocha and Elisabete Neves*

#### **Abstract**

An effective and efficient working capital management ensures companies a greater ability to survive in an increasingly competitive and challenging business world and therefore plays a key role in the manager's operational and financial decisions. Thus, the main objective of this chapter is to show empirically the extent to which working capital management influences the measures of business performance evaluation. To achieve the proposed objective, the ROA, ROE, and Tobin's Q were used as measures of performance. For this study, data from Portuguese and Spanish companies were used, which are listed on Euronext Lisbon and the Madrid Stock Exchange, respectively, resulting in a final sample of 106 companies. The methodology used to test the hypotheses formulated was dynamic panel data methodology (with GMM system) for a period between 2010 and 2016. The results obtained in this research show, in a general way, that there are significant differences in the determinants of performance depending on the samples used, whether they are the Spanish Sample or the Portuguese Sample.

**Keywords:** working capital management, business performance measures, financial analysis, dynamic panel data, Iberian companies

### **1. Introduction**

The literature on the corporate finance area has been directed toward long-term management, more specifically to investment issues [1], capital structure [2], dividends [3], and business evaluation [4].

Although medium- and long-term management (LTM) is extremely important for the creation of a company's value, it is necessary that short-term management is carefully treated, since individual LTM decisions cannot create value for the company alone.

More recently, companies have been placing greater emphasis on the impact that short-term management has on corporate performance because a large part of the account balances presented in the accounts relates to short-term investments and resources [5].

It should be noted that managers must perceive a balance between each component of short-term management to maximize the company's value and ensure a higher organizational performance as well as a better competitive advantage [6].

In the last years, and as a result of the increase in competitiveness among companies, the management of current assets as an aid in the search for greater profitability has been the target of the Academy's interest [5, 7, 8].

A wide range of authors [8–10] considers that the Cash Conversion Cycle (CCC) is one of the most important short-term management measures and, therefore, the most used to study this subject, since in these author's studies they measure the impact that this variable has on corporate performance.

Thus, the Cash Conversion Cycle assumes a relevant role in the present study, since it is considered that this variable encompasses a set of preponderant factors for the short-term management and the firms'survival. These factors can be translated into three concepts: Average Collection Period (ACP), Average Stocking Period (ASP), and Average Payments Period (APP). This being said, in this chapter, six models will be investigated and each of the dependent variables (ROA, ROE, and Tobin's Q) will have two models. The existence of two models for each of the dependent variables is due to the fact that in the first instance each of the components of the CCC (ACP, ASP, and APP) is tested individually, and only then the CCC is tested in a single variable. Each of the six previously referenced models will be tested on two samples, namely the Spain Sample and the Portugal Sample.

In this sense, the present work aims to analyze the impact of short-term management on the performance of Iberian companies. For this, some hypotheses will be raised according to the existing literature, that is intended to be corroborated, to understand which are the determining variables in the explanation of corporate performance. Specifically, there will be used as explanatory variables, the Cash Conversion Cycle, ACP, ASP and APP, and current ratio. On the other hand, leverage, firm size, and tangible fixed assets will be used as control variables.

Additionally, it is intended to increase the literature related to the topic addressed throughout this chapter, since this subject is still little debated and discussed. After the crisis of 2008, short-term management assumed a greater preponderance, and consequently, the number of published studies on short-term management [11] increased.

This study will be directed to large companies in Portugal and Spain, listed on the corresponding stock exchanges, for the period between 2010 and 2016. The final sample resulted in 106 companies, which resulted in a total of 660 observations.

In short, this article is organized as follows—in Section 2 the literature review and respective hypotheses will be presented. Section 3 presents the methodology for the study. Sections 4 and 5 will present the main results and the conclusion, respectively.

#### **2. Literature review and hypothesis definition**

In the financial literature, there are several measures of corporate performance evaluation. Some of these measures have been more consensual and are the so-called traditional measures [12].

Therefore, the fact that there is no specific performance measure that guarantees greater efficiency and effectiveness than the other measures lead to the use of three measures of performance evaluation, more specifically Return on Assets (ROA), Return on Equity (ROE), and Tobin's Q.

#### **2.1 Average collection period (ACP)**

The Average Collection Period is one of the components of the Cash Conversion Cycle and is characterized as the time (calculated in days or months) that, on average, companies take time to charge their customers what they sell to them.

According to García‐Teruel, Deloof, Pais and Mathuva et al. [5, 9, 10, 13], when it comes to the relationship between ACP and performance, we find that the larger the firm's ACP, the smaller the business performance will be. In the specific case of García‐Teruel et al. [5], a negative relationship between ACP and ROA arises because the companies increase the average time of receipt of their clients so that they can increase purchases. However, although with these companies increase sales, the consequent increase in the ACP implies a decrease in ROA. Thus, according to the authors, a more restrictive credit policy by reducing the payment time of the clients, contributes to better performance.

The negative relationship between accounts receivable and profitability found by the authors mentioned above suggests that less profitable companies will try to reduce the ACP promptly to close and reduce the differences in the Cash Conversion Cycle.

Regarding Tobin's Q as a performance measure, a positive relationship was observed between ACP and Tobin's Q in Ref. [14].

Regarding these studies, it is possible to define the following hypothesis:

H1: there is a significant relationship between the Average Collection Period and the corporate performance measures (with no predicted sign).

#### **2.2 Average stocking period (ASP)**

The Average Stocking Period shows how long a product on average is in stock, so, it is expected that the lower the ASP, the greater the turnover of the product.

García‐Teruel, Deloof and Pais et al. [5, 9, 10] in their studies concluded that the ASP and performance are negatively related. In contrast, Mathuva et al. [13] determined a positive relationship between ASP and performance. For this author, the higher the company's level of stocks, the lower the likelihood of stock-outs of the company. However, Kim et al. [15] suggest that there are counterparts to the fact that there are large volumes of stocks of raw materials and commodities, and they argue that a large volume of stocks may increase the likelihood of goods not being sold or exceeding the validity date, thus contributing to the increase of losses, which implies the minimization of corporate profits.

According to the literature, and there being no consensus among the several studies, the hypothesis to be formulated will be the following:

H2: there is a significant relationship between the Average Stocking Period and the corporate performance measures (with no predicted sign).

#### **2.3 Average payments period (APP)**

The last component of the Cash Conversion Cycle to be presented will be the Average Payment Period. This ratio indicates the time (calculated in days or months) that, on average, companies take to pay their suppliers.

García‐Teruel and Deloof et al. [5, 9] concluded that there is a negative relationship between APP and profitability. According to Deloof et al. [9], this happens because companies that have a bigger difficulty in settling their accounts with suppliers have lower profitability levels. In the same line of thinking, a study by Pais et al. [10] for

Portuguese SMEs, concluded that there is a negative relationship between APP and ROA.

However Mathuva et al. [13] argued that the larger the APP, the longer the period that the suppliers finance the company's activities. In this sense, the author identified a positive and significant relationship between APP and profitability.

Nurein et al. [14] using Tobin's Q as a performance measure, came to the conclusion that the APP is positively related to Tobin's Q, thus sharing Mathuva et al. [13] conclusion.

Considering the previous conclusions, it is possible to formulate the following hypothesis:

H3: there is a significant relationship between the Average Payments Period and the corporate performance measures (with no predicted sign).

#### **2.4 Cash conversion cycle**

The Cash Conversion Cycle was developed by Richards et al. [16] and characterizes as being the time interval since the company has expenses in the acquisition of raw materials from its suppliers until the moment it sells its products to its clients [17].

Uyar et al. [18] argues that companies with shorter CCC are more profitable because they are less dependent on external financing and therefore, they will have to bear lower costs than a company with a longer CCC, which consequently will make them more cost-effective.

Regarding Tobin's Q as an evaluation measure of performance, it is found that for Vural et al. [19] there is a positive and significant relationship between the Cash Conversion Cycle and Tobin's Q, so an increase in CCC will lead to an increase in Tobin's Q.

Despite this, Mohamad et al. [20] and Nurein et al. [14], when conducting two studies in Malaysia, concluded that CCC negatively affects Tobin's Q, arguing that a lower CCC means higher performance when measured according to Tobin's Q.

Although there is no unanimity in the empirical literature, the vast majority defends the existence of a negative relationship between CCC and corporate performance. Thus, the following hypothesis will be defined:

H4: there is a significant relationship between the CCC and the corporate performance measures (with no predicted sign).

#### **2.5 Current ratio**

Following Husna et al. [21] current ratio consists of the ease with which assets held by companies can be converted into means of payment, that is, the ability of companies to meet their obligations as they mature. According to Uyar et al. [18], the way companies manage their liquidity is fundamental regardless of their size.

Raheman and Eljelly et al. [22, 23] found a negative relationship between the current ratio and corporate performance. According to Eljelly et al. [23], the negative relationship results from the companies' need to constantly present high levels of liquidity, and this causes companies to arise unnecessary costs that will lead to loss of profitability.

Jose et al. [7] point out that there is a negative relationship between current ratio and performance, which results from the lack of efficient liquidity management,

obliging companies to use external financing to meet the short-term obligations, which will entail costs for organizations, and therefore, the company's profitability will decrease.

However, Goddard, Fagiolo and Safdar et al. [24–26] show the existence of a positive relationship between the variables in question. According to Goddard et al. [24], the companies with the highest levels of liquidity, besides being the companies with the best profitability, are also the ones with the greatest ability and flexibility to adapt more quickly to the changes to which they are subject.

Following this reasoning Fagiolo et al. [25] argue that firms with higher levels of liquidity are able to overcome certain obstacles that may arise when companies resort to external financing.

Du et al. [27] conducting a study in Chinese companies, have concluded that there is a positive relationship between current ratio and Tobin's Q, which they justify with Holmström et al. [28] arguments since for these authors, companies that manage to maintain adequate levels of liquidity are able to avoid potential risks to the company, contributing to increase the company's value.

Considering the divergence in the previous results, the hypothesis to be formulated will be the following:

H5: there is a significant relationship between the current ratio and corporate performance measures (with no predicted sign).

#### **2.6 Leverage**

Leverage is a very important variable for companies because, in addition to the explicit costs that arise with leverage, a bad decision can increase the company's financial risk and, consequently, affect its profitability. The use of external financing would only leverage the ROE due to the effect of the fiscal economy of interest and on the assumption that ROA exceeds the average cost of borrowing.

Pais, Vural, Goddard and Muritala et al. [10, 19, 24, 29] argue that between debt and corporate performance (when measured through ROA, ROE, and Tobin's Q) there is a negative relationship.

Goddard et al. [24] argues that the negative relationship between variables arises because, during the period when companies are paying off the debt, they are losing investment opportunities in projects that could generate returns for the company.

Although many studies advocate the existence of a negative relationship between leverage and corporate performance, some authors stand up for the existence of a positive relationship between these variables.

Olokoyo et al. [30] conducting a study on 101 listed companies in Nigeria, concluded that debt positively influences Tobin's Q. However, when using ROA as an evaluation measure of performance, the author observes that leverage negatively influences ROA.

Also Berger and Adams et al. [31, 32] have concluded that there is not always a negative relationship between leverage and performance, that is, the fact that a company uses external financing does not mean less performance. Even more debt can imply more and better investments and this can leverage the company's profitability.

Regarding the divergence of opinions presented by the various studies, the hypothesis will be the following:

H6: there is a significant relationship between the leverage and the corporate performance measures (with no predicted sign).

#### **2.7 Firm size**

The firm size is a preponderant factor in investment decisions, in access to external financing, in access to capital markets, among others [33].

According to Jose, Banos-Caballero, Serrasqueiro and Lee et al. [7, 8, 34, 35], what makes large-scale enterprises more profitable is their ability to increase production while at the same time reducing the average cost of production and thus taking advantage of economies of scale.

Although the existing literature finds a positive relationship between firm size and performance, there are studies that prove the existence of a negative relationship between these variables. In this sense, Goddard et al. [24] show a negative relationship between firm size and profitability (ROA). For these authors, the reason behind this relationship is the less interference and control of the owners in the manager's activities, due to the increase of the size of the companies. In this way, the manager's investment options can increase their personal benefits, however, it contributes to the decrease of the company's performance.

In addition, Yoon et al. [36] shares the idea that increasing the size of the company beyond the ideal level can reduce the firm's performance.

So, in this sense, the following hypothesis is presented:

H7: there is a significant relationship between the firm size and the corporate performance measures (with no predicted sign).

#### **2.8 Tangible fixed assets**

Several studies [34, 37–39] show that tangible fixed assets can be a variable that has an impact on the performance of the firms, and as such will be used in this study as a control variable.

Asset tangibility refers to the composition of the asset of an organization. A company that has sufficient assets can use them as collateral in the event of liquidation, allowing the company easier access to external sources of financing, as Singh et al. [11] refer.

Serrasqueiro et al. [34] concluded that tangible fixed assets negatively influence corporate performance. The Portuguese authors followed the arguments of Serrasqueiro and Nucci et al. [34, 39] to support the result obtained in their study. The argument used by them advocates that companies that are more inclined to innovate and invest in R & D activities are those that present greater opportunities for longterm investment and, consequently, higher performance. In this way, companies that invest more in intangible assets will be more profitable than those that make their investments in tangible assets.

Maina et al. [38] concluded that there is a negative and significant relationship between tangible fixed assets and ROE. The authors add that companies that invest heavily in tangible assets will experience a decrease in ROE. This result goes against the one found by Muritala et al. [29]. This author found a negative and significant relationship between the two variables. As for the relationship found between tangible fixed assets and Tobin's Q, the results reveal a negative and significant relationship.

Considering all the studies presented for the tangible fixed assets the hypothesis to be formulated is the following:

H8: There is a significant relationship between tangible fixed assets and corporate performance measures (with no predicted sign).

#### **3. Data, variables, and methodology**

#### **3.1 Sample**

To carry out this research, a quantitative approach was used, based on the Amadeus database. Therefore, the sample of this article covers the period from 2010 to 2016, thus giving rise to an unbalanced panel with 106 non-financial companies, corresponding to a total of 660 observations.

This study's sample was limited to non-financial firms, since the companies from the financial sector have distinct characteristics from non-financial companies, and as such, they must be studied in an independent way [40, 41]. In addition to the financial companies, the companies of the sports sector were also eliminated from the sample, since they use a different accounting system in the preparation of their financial statements. Considering the sample's definition, companies that had little information for the desired indicators (e.g., did not have information for 4 consecutive years) were excluded [42].

#### **3.2 Selection and description of variables**

Considering the literature review, **Table 1** shows the form of calculation of each of the variables used in this article.

#### *3.2.1 Estimation method*

To test the proposed hypotheses, the dynamic panel data methodology was used. This methodology allows the only one-time model to aggregate time-series and cross-section data.


#### **Table 1.**

*Selection and description of variables.*

According to Neves et al. [43], some of the advantages associated with the use of this methodology are—the control of individual heterogeneity, correction of endogeneity, the existence of less collinearity between variables, the possibility of handling high amounts of information, and greater efficiency in estimation.

Thus, unlike the cross-section analysis, panel data allows the control of individual heterogeneity. This point is fundamental for the accomplishment of the present work, since the performance of each company is directly related to the individual specificities of each one of the companies, and without the control of heterogeneity, the obtained results could be biased. Moreover, this methodology allows solving another fundamental point, namely endogeneity (which arises from the causal relationship that the various dependent variables (ROE, ROA, and Tobin's Q) may have with the explanatory variables of the study).

Consequently, endogeneity can be a problem in the model of the present work, and therefore, it is necessary to keep it controlled.

Specifically, we use all the variables on the right side of the model with t-1 mismatches for the level equations, as Blundell et al. [44] suggested, by deriving the system estimator used in this article.

The models to be tested throughout this article are presented below:

Model 1: *ROAit* ¼ *β*<sup>0</sup> þ *β*1ð Þ *ACP it* þ *β*2ð Þ *ASP it* þ *β*3ð Þ *APP it* þ *β*4ð Þ *CR it* þ *β*5ð Þ *Lev it* þ *β*6ð Þ *Size it* þ *β*7ð Þ *Tang it* þ *μit* Model 2: *ROAit* ¼ *β*<sup>0</sup> þ *β*1ð Þ *CCC it* þ *β*2ð Þ *CR it* þ *β*3ð Þ *Lev it* þ *β*4ð Þ *Size it* þ *β*5ð Þ *Tang it* þ *μit* Model 3: *ROEit* ¼ *β*<sup>0</sup> þ *β*1ð Þ *ACP it* þ *β*2ð Þ *ASP it* þ *β*3ð Þ *APP it* þ *β*4ð Þ *CR it* þ *β*5ð Þ *Lev it* þ *β*6ð Þ *Size it* þ *β*7ð Þ *Tang it* þ *μit* Model 4: *ROEit* ¼ *β*<sup>0</sup> þ *β*1ð Þ *CCC it* þ *β*2ð Þ *CR it* þ *β*3ð Þ *Lev it* þ *β*4ð Þ *Size it* þ *β*5ð Þ *Tang it* þ *μit* Model 5: *Tobin*<sup>0</sup> *sQit* ¼ *β*<sup>0</sup> þ *β*1ð Þ *ACP it* þ *β*2ð Þ *ASP it* þ *β*3ð Þ *APP it* þ *β*4ð Þ *CR it* þ *β*5ð Þ *Lev it* þ *β*6ð Þ *Size it* þ *β*7ð Þ *Tang it* þ *μit* Model 6: *Tobin*<sup>0</sup> *sQit* ¼ *β*<sup>0</sup> þ *β*1ð Þ *CCC it* þ *β*2ð Þ *CR it* þ *β*3ð Þ *Lev it* þ *β*4ð Þ *Size it* þ

*β*5ð Þ *Tang it* þ *μit*

#### **4. Results and discussion**

In this chapter, the main results of this article will be presented and discussed. Firstly, the Descriptive Statistics of each of the three samples will be presented and then the main results.

#### **4.1 Descriptive statistics**

**Table 2** provides summary statistics (mean, standard deviation, minimum and maximum) of the variables used in the construction of the dependent and explanatory variables.

**Table 3** presents summary statistics (mean, standard deviation, minimum and maximum) of the variables used in the construction of the dependent and explanatory variables.

#### **4.2 Model 1: estimation**

Based on **Table 4**, the fact that ACP negatively influences ROA means that Spanish companies will have to reduce their client's ACP so that they can increase the

*Impact of Short-Term Management on Portuguese and Spanish Firms' Performance DOI: http://dx.doi.org/10.5772/intechopen.103009*


#### **Table 2.**

*Descriptive statistics of Spain.*


#### **Table 3.**

*Descriptive statistics of Portugal.*



*Note: the regression is performed using an unbalanced data panel consisting of 68 companies and 440 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) he Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 4.**

*Results of the model (1) for Spain.*

performance of their companies. Thus, if companies manage to reduce their ACP, they will be able to reduce the CCC as well. Therefore, the results follow the reasoning of García‐Teruel et al. [5] carried out in Spain as well the studies published by. The results are still in harmony with the studies of Pais and Yazdanfar et al. [10, 45], allowing to corroborate hypothesis 1 previously proposed.

The positive relationship between the current ratio and ROA validates hypothesis 5, as well as the studies carried out by Goddard and Safdar et al. [24, 26]. Goddard et al. [24] argues that the greater the level of liquidity of a company, the greater the company's ability to face changes of a competitive nature in the markets in which they operate.

Hypothesis 7 contemplates the possibility that the firm size is positively related to performance evaluation measures, and this hypothesis is corroborated by the results found in **Table 4**. According to Jose and Banos-Caballero et al. [7, 8] what makes the larger companies more profitable is the capacity to increase their production, reducing the average cost of production and taking advantage of economies of scale.

Finally, **Table 4** demonstrates a negative relation between leverage and ROA. This relationship supports hypothesis 6 and confirms the studies [10, 30]. According to Goddard et al. [24], the more leveraged firms are, less profitable will be, because while they are paying the debt they are, simultaneously, losing investment opportunities in projects that could generate a return to the company.

**Table 5** shows a considerable number of significant variables when the evaluation measure of performance used is ROA, considering the estimated model for Portuguese companies.

The negative relation between APP and ROA found in this study follows the conclusions obtained by Pais et al. [10] for a study of large Portuguese firms. Banos-Caballero and Deloof et al. [8, 9] also reached this relationship, arguing that an increase in APP will lead to a decrease in profitability. The evidence found thus corroborates hypothesis 3.

As can be seen in **Table 5**, the more leveraged the company's capital structure, the greater ROA will be, so the results obtained validate hypothesis 6 and the results of Berger and Adams et al. [31, 32] who show that when a company uses external financing does not mean that there will be a decrease in corporate performance. For these authors, managers only need to be able to efficiently manage their resources,

*Impact of Short-Term Management on Portuguese and Spanish Firms' Performance DOI: http://dx.doi.org/10.5772/intechopen.103009*


*The regression is performed using an unbalanced data panel consisting of 37 companies and 220 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 5.**

*Results of the model (1) for Portugal.*

since there is a reduction in cash flows, derived from the regular payment of the debt. In addition, companies sometimes take advantage of the financial leverage effect of increasing debt to increase their profitability levels.

One of the common relationships between Portugal's sample and Spain's sample is the existing positive relationship between firm size and ROA, thus confirming hypothesis 7, as well as the studies of [34, 45].

In the Spanish case, we observed a positive relationship between the current ratio and ROA. However, when estimating model 1 for Portuguese companies we verified that the current ratio is not significantly related to ROA.

Another difference between the two samples is due to the existence of a negative relationship between tangible fixed assets and ROA for Portuguese companies, thus being in conformity with hypothesis 8 previously placed.

#### **4.3 Model 2: estimation**

The estimation of model 2 for the large Spanish companies, in **Table 6**, makes it possible to verify that although the CCC is used to the detriment of the ACP, ASP, and APP, the significant relationships are the same in both models.

Also, based on **Table 6**, it can be seen that CCC has a negative relationship with ROA, which is in accordance with the studies of Uyar and Goddard et al. [18, 24] as well with the hypothesis 4 previously formulated.

Based on the results of **Table 7**, and comparing to **Table 5**, we observe that when CCC is used to the detriment of ACP, ASP, and APP, for the sample of large Portuguese companies, some differences arise in both models.


*The regression is performed using an unbalanced data panel consisting of 68 companies and 440 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (ii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 6.**

*Results of the model (2) for Spain.*


*The regression is performed using an unbalanced data panel consisting of 37 companies and 220 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 7.**

*Results of the model (2) for Portugal.*

Thus, when estimating model 2, we highlight the negative relationship between the current ratio and ROA, with a significance level of 1%. This relationship was not observed when model 1 was estimated. However, in the estimation of model 1, one of the variables that was positively related to ROA was leverage. Regarding model 2 leverage ceases to be one of the significant variables.

**Table 7** demonstrates a positive relationship between CCC and ROA, differing from the relationship between these same variables for the sample of large Spanish companies.

#### **4.4 Model 3: estimation**

When the evaluation measure of performance used is ROE, only leverage presents significance with the dependent variable used (see **Table 8**).

Thus, one can accept hypothesis 6, and corroborate the results of Muritala et al. [29]. The more leveraged companies present higher financial costs, which will contribute to the decrease of ROE [46].

Considering the results presented in **Table 9**, it is possible to verify that when the sample of the Portuguese companies is used with the ROE as a measure of performance, the number of significant variables increases considerably.

Consistent with hypothesis 1, there is a significant relationship between ACP and ROE, which also corroborates the results of García‐Teruel et al. [5], emphasizing the fact that companies increase their ACP to increase their volume of sales, but in their study, the authors concluded that this would not lead to an increase in profitability.

Our results show that a decrease in ASP will lead to an increase in ROE. This inverse relationship between the two variables corroborates hypothesis 2, following Deloof and Pais et al. [9, 10].

According to Sensini et al. [47], when a company experiences a sudden drop in sales aligned with poor stock management, this will increase its losses, and it will decrease its profitability.


*The regression is performed using an unbalanced data panel consisting of 68 companies and 440 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 8.**

*Results of the model (3) for Spain.*


*The regression is performed using an unbalanced data panel consisting of 37 companies and 220 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 9.**

*Results of the model (3) for Portugal.*

It should also be pointed out that leverage is negatively related to ROE, following Muritala and Pouraghajan et al. [29, 46] conclusions and validating our hypothesis 6.

Regarding the tangible fixed assets, it is possible to verify the existence of an inverse relation with ROE, thus agreeing with Maina et al. [38] and confirming our hypothesis 8.

#### **4.5 Model 4: estimation**

Model 4 for the Spain sample demonstrates that leverage is the only variable that has significance with ROE. The same happens in model 3 estimation, so when ACP, ASP, and APP are compiled in a single variable, the CCC, the significant variables do not change as it is possible to see through **Table 10**.

In the specific case of the Portuguese companies'sample, there are a substantial number of significant variables when estimating model 3, however, when the ACP, ASP, and APP are combined into a single variable, the CCC, we see a reduction in the number of significant variables. The differences between the estimation of model 3 and model 4 are due to the loss of significance of ACP and APP, which were excluded from the model to detriment of the CCC, keeping only the leverage and tangible fixed assets as significant variables (**Table 11**).

#### **4.6 Model 5: estimation**

When the Spanish companies were tested, considering Tobin's Q as an evaluation measure of performance, it is possible to verify that ASP shows a positive relationship with Tobin's Q. This result supports hypothesis 2 and corroborates

**Coefficient STD error Z P value** Const 171.305 127.4064 1.34 0.179 CCC 0.0455601 0.0484981 0.94 0.348 CR 3.187983 2.992249 1.07 0.287 Lev 101.9112 19.84812 5.13 0.000\*\*\* Size 6.852814 9.211602 0.74 0.457 Tang 14.43055 43.51256 0.33 0.740 Sargan 13.15944(19) 0.8303 Wald 316.58(6) 0.0000 AR (1) 2.4392 0.0147 AR (2) 0.51475 0.6067

*Impact of Short-Term Management on Portuguese and Spanish Firms' Performance*

*DOI: http://dx.doi.org/10.5772/intechopen.103009*

*The regression is performed using an unbalanced data panel consisting of 68 companies and 440 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 10.**

*Results of the model (4) for Spain.*


*The regression is performed using an unbalanced data panel consisting of 37 companies and 220 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 11.**

*Results of the model (4) for Portugal.*

Nurein et al. [14] remarks. Kim et al. [13] argues that high levels of stocks lead to a reduction in the cost of possible disruptions to the productive process of companies and also means that companies do not run the risk of losing customers due to lack of products.


*The regression is performed using an unbalanced data panel consisting of 68 companies and 379 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 12.**

*Results of the model (5) for Spain.*

Based on **Table 12**, we verify a negative relationship between APP and Tobin's Q, which can be explained by the fact that the companies with the lowest profitability in certain cases are not able to settle the accounts payable [9]. The present relationship thus corroborates hypothesis 3.

In line with hypothesis 6, we are faced with a positive relationship between leverage and Tobin's Q, supported by Olokoyo et al. [30], who argues that high levels of debt are associated with higher performance.

As it is possible to verify in the Spanish companies'sample, there is a negative relationship between firm size and Tobin's Q. Therefore, the results support hypothesis 7 and are still compatible with the previous studies of Goddard, Yoon and Rogers et al. [24, 36, 48].

Consistent with hypothesis 1, if companies increase the ACP this will lead to a decrease in performance, especially for less profitable companies, since these companies are more reliant on receiving money from their customers to pay their short-term obligations. This evidence is in accordance with the Deloof, Pais and Mathuva et al. [9, 10, 13] studies, which also indicate that an increase in the ACP will lead to a decrease in performance. From the point of view of García‐Teruel et al. [5] firms tend to increase their ACP, since they intend to increase their sales volume, but according to the authors, even if this happens the companies end up suffering a decrease in performance, resulting from the increase in the ACP.

Based on **Table 13**, it is possible to verify a positive relationship between ASP and Tobin's Q. These results corroborate hypothesis 2 previously formulated, and according to Nurein et al. [14], a possible justification for the fact that the variables relate positively depends on the inventory presented by the companies, that is, the

*Impact of Short-Term Management on Portuguese and Spanish Firms' Performance DOI: http://dx.doi.org/10.5772/intechopen.103009*


*The regression is performed using an unbalanced data panel consisting of 37 companies and 203 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 13.**

*Results of the model (5) for Portugal.*

larger the inventory of a company the greater the possibility of growth and valuation, since it presents a greater capacity for increase your sales.

The positive relationship between the current ratio and Tobin's Q is a relevant result found. What drives companies with higher levels of liquidity to increase their corporate performance comes from the ability of these companies in reducing potential risks [28]. The evidence found thus supports hypothesis 5, in addition to corroborating the study of Du et al. [27].

#### **4.7 Model 6: estimation**

Based on the observation of **Tables 12** and **14**, we observed that the number of significant variables was maintained both in the estimation of model 5 and in the estimation of model 6, although some of the significant variables were not the same in the two estimates.

Based on **Table 14**, it can be verified that CCC and leverage variables show a positive relationship with Tobin's Q. On the other hand, the variables firm size and asset tangibility show a negative relationship with the performance measure Tobin's Q. In this way, it can be concluded that the difference between the two estimates is that the CCC and asset tangibility become significant variables with Tobin's Q. In contrast, the ASP and APP are no longer significant variables.

There are some perceptible differences between models 5 and 6 regarding the significant variables. The highlight in model 6's estimation was the loss of significance of the tangible fixed assets variable, which was positively related to Tobin's Q for a significance level of 1%. The ACP and the ASP also cease to be significant when they are replaced by a single variable, namely the CCC.


*The regression is performed using an unbalanced data panel consisting of 68 companies and 379 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 14.**

*Results of the model (6) for Spain.*

As already seen in both samples, the results found between leverage and Tobin's Q reveal a positive relation. Although in many cases the use of external financing is associated with a decrease in corporate performance, this is not always so linear, as it can be seen in (**Table 15**) [30–32].


*The regression is performed using an unbalanced data panel consisting of 37 companies and 203 observations. The variables are duly defined in the data, variables, and methodology section. It should also be noted that: (i) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (ii) the Sargan test with a p value greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iii) the Wald test has a p value less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ<sup>2</sup> under a null hypothesis without significance, with degrees of freedom in parentheses.*

#### **Table 15.**

*Results of the model (6) for Portugal.*

#### *Impact of Short-Term Management on Portuguese and Spanish Firms' Performance DOI: http://dx.doi.org/10.5772/intechopen.103009*

The results presented throughout this study show that short-term management variables that have an impact on corporate performance vary according to the dependent variable used to measure corporate performance and also vary across countries.

Between the two samples analyzed, some differences were evident, which may be justified by the way companies are managed. Thus, our results suggest that Portuguese companies are still in a phase of large external financing needs, and therefore probably more exposed to the market and to "external" variables.

On the other hand, Spanish companies already express some preference for the internal management and attitude of the manager, who probably has incentives to act in accordance with the interests of shareholders. Although our results do not test macroeconomic variables and institutional factors, they suggest that Portuguese companies may be facing more agency problems than Spanish ones.

Considering the results obtained, it should be pointed out that the ROE did not present many significant variables, highlighting only leverage, since it is the only significant variable with ROE, for the sample from Spain. This can be justified by the fact that ROE encompasses a wide range of decisions, such as operational, financial, and tax decisions. In spite of all this, it is still worth noting the increase of the significant variables with ROE for the Portuguese sample, this can be justified by the fact that the Portuguese companies need investors. That said, this will be a great measure of evaluation for a future investor.

Finally, when the valuation measure is Tobin's Q, it is possible to verify that almost all independent variables are significant, especially for the sample of Portuguese firms. In this way, it is possible to affirm that Tobin's Q is one of the best dependent variables to evaluate corporate performance. This is a variable that shows interest for all internal and external elements of the company.

#### **5. Conclusions**

Although short-term management is not the focus of corporate finance, it proves to be an extremely useful and important tool for the efficient functioning of companies, since it facilitates the decision-making of their managers.

The present study aimed to contribute to the increase of the literature since it is a subject that has only taken on a leading role in recent years [11]. It was intended to observe the short-term management's impact on the Iberian Peninsula's corporate performance, for which three performance evaluation measures were used, namely ROA, ROE, and Tobin's Q. As such, a panel of 106 large Iberian companies was used for the period from 2010 to 2016.

Using the panel data methodology, the relevance of some results is emphasized. It is worth noting that companies need to reduce the ACP to increase corporate performance.

It is also highlighted the negative relationship between leverage and ROE, which by the way is the only significant relation for this measure when considering the Spanish sample.

Concerning the interest in using alternative performance variables, this study reveals that the ROA and Tobin's Q are the variables that best reflect the corporate performance when studying determinants based on short-term management. This result is even more interesting insofar as the ROA is considered a company/accounting variable and Tobin's Q is a market variable and therefore considers the investor's perception. Additionally, ROE proves to be the worst measure of performance evaluation.

The main limitations encountered were related to the fact that not all the companies presented in the sample offered all the necessary information for the period under analysis. Moreover, the number of scientific publications on this subject is still scarce, in particular regarding European countries, for example. For this reason, it is intended that this study contributes in a positive way to the increase of existing studies not only in Portugal and Spain but also for studies on this subject in Europe.

In future research, it would be interesting to add more European countries to the sample to conduct a comparative study, but also to introduce countries with different tax systems, common law vs. civil law, to see if the determinants of performance would change. In addition, it would be useful to see whether the determinants vary according to the different economic cycles, bull vs. bear markets, introducing sectoral, macroeconomic, and investor sentiment variables.

### **Acknowledgements**

This work is supported by national funds, through the FCT—Portuguese Foundation for Science and Technology under the project UIDB/04011/2020.

### **Author details**


© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Impact of Short-Term Management on Portuguese and Spanish Firms' Performance DOI: http://dx.doi.org/10.5772/intechopen.103009*

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Section 7
