The Relationship between Working Capital Management and Financial Bankruptcy Risk of Listed Companies in the Stock Exchange of Thailand

Abstract

Background and Objectives: Working capital management is important for maintaining liquidity, operational continuity, and financial stability because inventory, receivables, and payables directly influence cash flows and firms’ ability to meet financial obligations. This issue is particularly relevant during periods of economic volatility and liquidity constraints, when bankruptcy-risk assessment becomes important to managers, investors, and creditors. This study aimed to examine and compare the relationship between working capital management and financial bankruptcy risk based on the EM-Score Model (2005) and the Zmijewski Score Model (1984) among companies listed on the Stock Exchange of Thailand. The working capital management components examined were Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO).
Methods: This quantitative study used secondary data from companies listed on the Stock Exchange of Thailand during 2019–2023. The population comprised 507 companies, equivalent to 2,535 firm-year observations. After excluding banks, financial institutions, and companies with incomplete data required for the study, the final sample consisted of 379 companies and 1,895 firm-year observations. Financial bankruptcy risk was measured using the EM-Score Model and the Zmijewski Score Model. Data were analyzed using descriptive statistics, Pearson correlation analysis, and multiple regression analysis. Although the Cash Conversion Cycle (CCC) was initially considered as a working capital management variable, it was excluded from the final regression models because of its high correlation with DIO, which could create multicollinearity. Therefore, DIO, DSO, and DPO were included as the independent variables in the final regression analyses.
Results: The findings showed that DIO and DSO were not significantly associated with financial bankruptcy risk under either model. DPO was the only working capital management variable significantly associated with bankruptcy risk in both models. Under the EM-Score Model, DPO was negatively associated with EMS (B = -0.011, β = -0.103, p < 0.001). Because a lower EMS indicates a weaker financial position, this result implies that a longer DPO is associated with higher financial bankruptcy risk. Under the Zmijewski Score Model, DPO was positively associated with ZMS (B = 0.048, β = 0.121, p < 0.001), likewise indicating that a longer DPO is associated with higher bankruptcy risk. The EM-Score regression model had an Adjusted R-squared of 0.008, whereas the Zmijewski Score regression model had an Adjusted R-squared of 0.020. Although the Zmijewski model showed a higher explanatory value, the difference in Adjusted R-squared alone is insufficient to conclude that it provides superior predictive accuracy.
Application of this study: The findings can support trade payable and liquidity management among listed companies. Managers should closely monitor DPO and determine payment periods that are consistent with operating cash flows, trade credit conditions, and the firm’s liquidity position. Extending payment periods within agreed supplier terms may help retain cash for operations and reduce the need for external short-term financing. However, excessively prolonged payment periods may signal financial strain and weaken the confidence of creditors and investors. Investors and creditors may therefore use DPO together with the risk assessments produced by the EM-Score and Zmijewski Score models as supplementary indicators for monitoring financial vulnerability. Regulatory authorities may also encourage clearer disclosure of working capital quality and short-term liability management policies to enhance transparency in financial risk assessment.
Conclusions: Among the working capital management components included in the final regression models, DPO was the only variable significantly associated with financial bankruptcy risk under both the EM-Score and Zmijewski Score models, while DIO and DSO were not significant. Despite the opposite coefficient signs resulting from the different scoring interpretations of the two models, both results provide substantively consistent evidence that a longer DPO is associated with higher financial bankruptcy risk. Firms should therefore balance the liquidity benefits of extending payment periods against their ability to meet obligations and maintain financial credibility. Bankruptcy risk should nevertheless be evaluated together with operating cash flows, liquidity, capital structure, and other firm-specific financial conditions to obtain a more comprehensive assessment of financial vulnerability.