Questioning Fleuriet's Model of Working Capital Management on Empirical Grounds

Abstract

The paper reports the result of empirical tests on the validity of Fleuriet's model, also known in Brazil as Advanced or Dynamic Working Capital Analysis. According to some authors, the model, which was introduced in Brazil in the 80's, brought important innovations to working capital analysis and management. One of the model's fundamental but untested assumptions is that current financial assets and liabilities are erratic variables uncorrelated to the firms' operations, unlike cyclical or operating current assets, which are directly correlated to the firm's operations. With the use of statistical and econometric methods involving correlation analysis, and cross-section and panel-data regressions, and using a sample of 80 Brazilian firms listed on the Brazilian stock exchange, we show that this assumption must be rejected, since the results make clear that those supposedly erratic variables are in fact strongly correlated to the firms' operating levels. The conclusion is that Fleuriet's model is empirically inconsistent and its validity must be questioned.

Keywords: Fleuriet's model, working capital management, empirical tests, Brazilian firms

JEL Classification: M40, M41, G30, G39, C12, C21, C23