Indian Journal of Fundamental and Applied Life Sciences ISSN: 2231– 6345 (Online) An Open Access, Online International Journal Available at www.cibtech.org/sp.ed/jls/2015/01/jls.htm 2015 Vol.5 (S1), pp. 2086-2093/Alireza et al. Research Article © Copyright 2014 | Centre for Info Bio Technology (CIBTech) 2086 WORKING CAPITAL, FIRMS PERFORMANCE AND FINANCIAL DISTRESS IN FIRMS LISTED IN TEHRAN STOCK EXCHANGE (TSE) Alireza Delavar, *Saeid Jabbarzadeh Kangarluei and Morteza Motavassel Department of Accounting, Urmia Branch, Islamic Azad University, Urmia, Iran *Author for Correspondence ABSTRACT This study examines the relationship between working capital management, company performance and financial constraints of companies listed in Tehran Stock Exchange. To achieve the objectives of the study, 71 firms listed in Tehran Stock Exchange is studied for the period 2004 to 2012. In this study, to measure firm performance, Tobin's Q-ratio has been used. In addition, for measuring financial constraints, Zscore index, and for performance of the company the net trade cycle is applied. To test the hypothesis, multiple regression model using SPSS software has been used. The results indicate that there is no significant relationship between working capital management and firm performance. The results also indicate that there is no significant relationship between working capital management and firm performance. The results further indicate that financial constraints have no effect on the relationship between working capital management and financial performance of companies listed in Tehran Stock Exchange. Keywords: Working Capital Management, Financial Constraints Performance of Company INTRODUCTION The recent economic downturn of 2007–2008 has brought renewed focus on working capital policies. Working capital management is one of critical scopes in financial management because of its influence in liquidation and profitability. There is a possibility of bankruptcy even through profitability in the case of mismanagement of working capital. Working capital deals with current assets and current liability which consists a large part of total assets in firms. Extra investment in current assets leads to lower investment. However, firms with low current assets may encounter difficulties in their business process. Efficient working capital management is in a way which trades off between risk of short term debt default and avoiding from overinvestment in current assets (Raheman and Nasr, 2007).In sum, increasing of receivables and inventories as working capital needs more costly funding and decreases firms return because these assets are low return generating assets. Similarly, decreasing of receivables and inventories as working capital may result in mitigating firm’s sale which itself lowers firms value. Both above situation may result in inefficient firm’s performance and firm’s financial distress (Baños-Caballero et al., 2013).Firms may have optimal working capital leading to their value maximizing (Deloof, 2003). Significance of this issue for both firms managers and also investors have derived attentions to research its impact on firm’s performance and possible financial distress. With respect to a fore mentioned importance of working capital for firms going concern and financial distress, in this research two main questions are answered: 1-What is the relationship between working capital management and firm’s performance? 2- What impact financial distress will have on this relationship? However, this study examines the relationship between working capital management, company performance and financial constraints of companies listed in Tehran Stock Exchange. The findings will be helpful for firms in recognition of possible mismanagement of working capital implications. Conceptual Framework and Literature Developed investment decisions literature indicates a positive relationship between capital and firms value (Chung et al., 1998). In addition, Miller and Modigliani show that investments decisions and financing are independent. After then, researches confirm the relationship between investments decisions and financing (Fazzari et al., 1988; Hubbard, 1988). However, empirical research as to investment impact on working capital and its potential financing impact on this relationship is rare (Kim and Chung, 1990).