Working capital dynamics

We assess short-run variations in firms' working capital allocations in light of finding persistence in these allocations in the recent literature. Specifically, we study the extent and speed of mean reversion in firms' working capital allocations to evaluate if firms tend to follow firm-specific value-maximizing optimal allocations. Furthermore, we assess whether and to what extent firms trade off their working capital to accommodate capital expenditure shocks. While we find frequent inter-temporal offsetting movements in working capital allocations in the short run, we do not find evidence of a systematic trade-off between working capital and fixed asset investments. JEL Classification: G30, G31, G32