Director co‐option and the cash conversion cycle

• Published date: 01 April 2022
• Author: Oneil Harris,Jonathan Hampton
• Date: 01 April 2022
• DOI: http://doi.org/10.1002/jcaf.22540

Received:  December Accepted:  January 

DOI: ./jcaf.

RESEARCH ARTICLE

Director co-option and the cash conversion cycle

Oneil HarrisJonathan Hampton

Department of Finance, East Carolina

University, Greenville, North Carolina,

USA

Correspondence

OneilHarris, East Carolina University,

Departmentof Finance, Greenville, NC

, USA.

Email:harriso@ecu.edu

Abstract

This study examines whether co-opted directors degrade or improve working

capital efficiency. We find strong evidence that firms with more co-opted boards

exhibit lower cash conversion cycles and so aremore efficient at managing work-

ing capital. After controlling for other factors, board co-option reduces the length

of the cash conversion cycle by about −.%, whereas the co-option of indepen-

dent directors reduces the cycle by nearly −.%. These results persist even after

addressing endogeneity and are robust to alternate measures of the cash conver-

sion cycle. In general, our study lends credence to the argument that co-option

reduces managerial myopic behavior asit reduces the likelihood of dismissal and

so motivates managers to make better investment decisions that may improve

firm proficiency.

KEYWORDS

board co-option, cash conversion cycle

1 INTRODUCTION

The corporate cash conversion cycle is generally used to

analyze the effectiveness of a firm’s working capital man-

agement and its need for external financing (see Braun and

Raddatz, ,TongandWei,;Wang). Accord-

ing to Appuhami (), proficient working capital man-

agement is a sign that a company can react quickly and

satisfactorily to unexpected changes in market conditions,

and therefore can influence a firm’s ability to gain com-

petitive advantages over its rivals. Hence, the cash con-

version cycle assesses how efficiently a company man-

ages its short resources, which is critical for firm success.

For example, a lower cash cycle plays an important role

in strengthening corporate solvency by improving firms’

operating cash flows (Gill et al., ). Thus, it comes as

no surprise that firms with longer cash conversion cycles

exhibit lower profitability and higher debt levels (see Rad-

datz, , Braun and Raddatz, ,TongandWei,;

Wang , ).

This paper examines the relationship between the cor-

porate cash conversion cycle and the co-option of board

members. Director co-option is a fairly new topic, so

the research on its impact on corporate outcomes is still

ongoing. Furthermore, the effects of corporate governance

mechanisms on the efficacy of working capital manage-

ment have not received much attention. Gill and Biger

() suggest that firms utilizing “good” board manage-

ment and oversight can significantly improve the profi-

ciency of their working capital. In accord, Al-Rahahleh

() reports a negative relationship between the cash

cycle and corporate governance quality.By the same token,

Gill et al. () report that the presence of more indepen-

dent directors on the board shortens the inventory period

and the overall length of the cash conversion cycle of man-

ufacturing firms in the United States (U.S.).

Yet, while the board is obliged to represent the inter-

est of shareholders, studies show that directors tend to be

loyal to the chief executive officer (CEO) involved in their

appointment (see Coles et al., ; Harris et al., ).

J Corp Account Finance. ;:–. © Wiley Periodicals LLC129wileyonlinelibrary.com/journal/jcaf