CONCEPTUALIZING THE DETERMINANTS OF WORKING CAPITAL FINANCING POLICY

The purpose of this conceptual paper is to hypothesize the determinants that affect the decision of financing the requirements of working capital. A firm can adopt an aggressive, conservative, and matching strategy to finance its requirements of working capital. Selection of these strategies is affected by some factors. This paper hypothesizes that firms which generate high free cash flow would require more a short-term debt and; consequently, adopt a matching strategy. In addition, this paper hypothesizes that large firms can choose between conservative, matching, or aggressive financing strategy to finance their working capital requirements unlike small firms which have to adopt the matching financing policy. Finally, this paper hypothesizes that firms that have efficient working capital management tend to adopt the matching financing strategy and firms that have inefficient working capital management tend to issue equity to meet their financing needs. This paper recommends doing many empirical studies in this topic.