Corporate Governance Quality and Cash Conversion Cycle : Evidence from Jordan

This study aims at examining the impact of corporate governance quality on cash conversion cycle (CCC) in Jordan. Using OLS regression for a sample of all industrial companies listed on Amman Stock Exchange during the period (2009-2013). The results revealed that CCC is affected negatively by corporate governance quality, which provides an implication to industrial companies in Jordan to boost their compliance with corporate governance code in order to improve their working capital management efficiency. Furthermore, the outcomes showed a variation in corporate governance categories between sub-samples, which supports contingency theory that rejects the approach of “one size fits all”. The findings provide implications for future studies to deal with firm characteristics as context dependent rather than simply as control variables. The results also provide implications for regulatory bodies in Jordan that highlight the importance of “comply or explain” approach to some corporate governance rules embracing the “one size does not fit all” approach. This study fills a gap in the existing literature by studying the quality of corporate governance and by using the context dependent approach.


Introduction
The purpose of this study is to examine the impact of corporate governance quality on cash conversion cycle of all industrial companies in Jordan.This study is mainly motivated by the global attention to corporate governance and the focus on working capital management (WCM) by researchers that followed the global financial crises.In this regards, the Organization for Economic Co-operation and Development, OECD (2009) indicated that the corporations' working capital was affected by the global financial crises since these corporations faced increasing in their receivables collection period and inventories conversion period due to the decreasing in the demand for their products, which reflected negatively their working capital and hence their liquidity (Abuzayed, 2012).Particularly, (Garcı ´a-Teruel & Martı ´nez-Solano, 2007) indicated that cash conversion cycle, which considered as a key factor in working capital management, refers to "the average number of days between the date when the firm must start paying its suppliers and the date when it begins to collect payments from its customers".
Working capital management has significant role in corporate finance since efficient WCM is significant for business going concern and its profitability (Siddique & Khan, 2008).Furthermore, efficient WCM will lead a company to respond quickly and favorably to unexpected change in the variables of the market and to obtain competitive advantages over its competitors (Appuhami, 2008).However, inefficient WCM will lead a company to liquidity crisis through lessening the firm's profitability and credibility.Particularly, the management of working capital requires a tradeoff between risk and return; higher risk and higher return are associated with aggressive WCM while the lower risk and lower return are associated with conservative WCM (Afza & Nazir, 2007).The board of directors is responsible for formulating policies related to accounts receivable, inventory purchases and maintenance, accounts payable and other policies in the company where weak policies related to accounts receivable, accounts payable and inventory management have a negative impact on the cash conversion cycle (Gill & Biger, 2013).The conflict of interest between managers and shareholders, as examined in the agency theory, could have an impact on the level of working capital (Jensen & Meckling, 1967).As well, weak corporate governance will lead to inefficient working capital management which has a negative impact on shareholder wealth (Isshaq, et al., 2009).
Securities Commission) issued Corporate Governance Code for Shareholding Companies Listed on the Amman Stock Exchange and indicated that "to give companies flexibility in implementing the corporate governance rules and sufficient time to adapt to them, in order to enhance awareness of these rules and to achieve full compliance gradually; the application of these rule would initially be through comply or explain approach".On the other hand, researchers in Jordan paid much attention to the issue of corporate governance where several empirical studies linked corporate governance with company performance, dividend policy and earnings management (Marji, 2010;Zedan & Abunassar, 2014;Abd al-Halim, 2013;Al-Halahlah, 2013, Abbadi et al., 2016).However, most of these studies measured corporate governance through limited mechanisms, and few of them studied the quality of corporate governance and the context dependent approach.As well, less attention has been paid to the area regarding the linkage between corporate governance quality and cash conversion cycle in Jordan, which resulted in a gap in the existing literature.This study tries to fill this gap by investigating the impact of corporate governance quality, measured based on governance index, on the cash conversion cycle of all industrial companies in Jordan during the period (2009-2013) using context dependent approach (i.e.large and small firm size; high and low sales growth; high and low net profit margin ratio).The findings of this paper may be useful to the researchers in explaining the inconsistency and ambiguity in corporate governance literature through shedding a light on the context dependent approach.As well, this study may be useful to the regulatory bodies in Jordan through proving evidence that supports the "comply or explain" approach to some corporate governance rules.
The rest of the study is organized as follows.Next section includes a review of related previous literature on the effect of corporate governance on cash conversion cycle.Section three presents the study methodology including the study sample and period, the variables under examination, and models of the study.The final section reports the empirical results and conclusions of the study.

Literature Review
There are a very few studies investigated the impact of corporate governance on working capital management efficiency (Gill & Biger, 2013).In contrast, the impact of corporate governance as well cash conversion cycle as a proxy of working capital management on performance has been widely examined and yielded to mixed results.However, Tingbani (2015) argued that the association between working capital management and profitability may not be linear, where his argument was motivated by the contrasting results regarding the impact of corporate governance as well working capital management on profitability.To determine this association based on a sample of 225 companies listed on London Stock Exchange for the period 2001-2011; the paper adopted a contingency theory approach and interacted three contingent variables (environment, resources and Management).Particularly, industrial characteristic was used as proxy of environmental variable, company's cash flow as a proxy of resources variable and company's board size as a proxy of management variable.The results of the regression analysis showed that the interaction of environmental, resources and management factors significantly moderates the association between cash conversion cycle and profitability.The study suggested that working capital management has an indirect impact on profitability, and its impact is constrained and modified by organizational contingencies (environment, resources and management factors) of the firm.Gill & Biger (2013) selected a sample of 180 American manufacturing firms listed on the New York Stock Exchange (NYSE) during the period from 2009-2011 and employed general least squares model with cross section weight of seven industries to test the impact of corporate governance on working capital management efficiency.Corporate governance, which measured through board size, CEO tenure, CEO duality and audit committee, was the independent variable, and WCM efficiency, which measured through cash conversion cycle, cash holdings, current ratio and cash conversion efficiency was the dependent variable.Whereas, the sales growth, internationalization of the company, company size and company performance were used as control variables.The results showed that board size has a negative coefficient, CEO duality, CEO tenure and audit committee have a positive coefficients however all the coefficients were insignificant related to cash conversion cycle.Kajananthan & Achchuthan (2013) conducted a study to test the effect of corporate governance, measured through percentage of independent director, CEO duality, board committee and board meeting, on working capital management efficiency, measured through cash conversion cycle and current ratio, for a sample of 25 listed manufacturing firms in Colombo Stock Exchange during the period from 2007-2011.The results of the regression analysis indicated that all corporate governance mechanisms used in the study were insignificant related to cash conversion cycle.Gill, et al. (2015) tested the impact of corporate governance on cash conversion cycle for a sample of 189 American manufacturing firms listed on the New York Stock Exchange (NYSE) for the period 2009-2013.Corporate governance was measured through, board size, percentage of independent directors, audit committee, CEO duality and CEO tenure, and company size, sales growth and net profit margin ratio were used as control variables.The results of weighted least squares (WLS) with cross section weight of seven industries showed that cash conversion cycle is affected negatively by percentage of independent directors and positively by CEO tenure.Whereas, board size, CEO duality, audit committee, firm size, sales growth and net profit margin were insignificant related to cash conversion cycle.Goel, et al., (2015) studied the impact of corporate governance on working capital management efficiency for a sample of 127 large industrial companies in India for the period 2004-2013.The results showed that board size has a positive impact on working capital management efficiency.Percentage of independent directors and percentage of independent member in the audit committee have a negative significant impact on working capital management efficiency.Aghajari et al., (2015) examined the impact of corporate governance on working capital management efficiency for a sample of 75 companies listed in Tehran Stock Exchange during the period (2009)(2010)(2011)(2012)(2013)(2014).Corporate governance was measured through CEO duality, institutional shareholders ownership and CEO tenure.Whereas, working capital management was measured though cash conversion cycle, current ratio and cash conversion efficiency.The paper used three control variables namely; firm size, sales growth and net profit margin ratio.The findings of the regression analysis showed that cash conversion cycle is affected positively by CEO duality and negatively by institutional shareholders ownership and by CEO tenure.However, the three control variables namely; sales growth, firm size and net profit margin ratio were insignificant related to cash conversion cycle

Study Sample
The study sample consisted of all industrial companies listed on Amman stock exchange (ASE) that have publically available annual reports during the period (2009)(2010)(2011)(2012)(2013), which considered the most recent data available prior to the publication of this paper.In order to include the company in the study sample, required data to calculate all study variables should be available for two consecutive years.A sample of 60 companies out of 69 companies (the study population) met the required criterion.To avoid the impact of the extreme values, the top and bottom 1% of the observations on each of the study variable were excluded.The final number of companies included in the analysis was 59 companies with 257 firm-year observations.

Cash Conversion Cycle
CCCit = OCit -PDPit (1) Where: CCCit: Cash Conversion Cycle for company i in year t; OCit: Operating Cycle for company i in year t; PDPit: Payables Deferral Period for company i in year t.

OCit =RCPit + ICPit
(2) Where: RCPit: Receivables Conversion Period for company i in year t; ICPit: Inventories Conversion Period for company i in year t.

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The Receivables Conversion Period RCP = 365(AvRecit / Sit) (3) Where: Sit: Net credit sales for company i in year t; AvRecit: Average of receivables for company i, calculated by dividing (2) into the sum of Receivable at the end of year t-1 and Receivables at the end of year t.

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The Inventories Conversion Period ICPit = 365(AvInvit / CGSit) (4) Where: CGSit: Cost of goods sold for company i in year t; AvInvit: Average of inventories for company i, calculated by dividing into (2) the sum of Inventories at the end of year t-1 and Inventories at the end of year t.

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The Payables Deferral Period PDPit = 365(AvPayit / Pit) (5) Where: Pit: Net credit purchases for company i in year t; AvPayit: Average of payables for company i, calculated by dividing (2) into the sum of Payables at the end of year t-1 and Payables at the end of year t.

The Independent Variable: Corporate Governance Quality
Corporate governance quality is measured based on governance index that used by (Prommin et al., 2014) in measuring corporate governance quality.Consistent with (Abbadi et al., 2016), the index is modified in accordance with the rules required by corporate governance code issued by Jordan Securities Commission (JSC).The governance index is classified into 4 categories with a total of 10 standards where one point is awarded for each standards that is satisfied and hence zero point otherwise.All these standards are required by corporate governance code issued by JSC under "comply or explain" approach except standards 9 which is voluntarily adopted.Table 1 provides the governance standards that ranges from 1 to 10 as well the table also provides the rule on each standard that is required by corporate governance code for shareholding companies listed on the ASE.
The paper also employs three control variables;  Sales growth (SG it ), is the percentage change is sales of company i, ((sales tsales t-1 ) / sales t-1 ),  Firm size (FS it ), is the logarithm of total asset of company i in year t,  Net profit margin ratio (NPM it ), is net income divided by sales of company i in year t.

Study Model
The following OLS regression is utilized to examine the impact of corporate governance quality on the cash conversion cycle, taking into consideration firm size, sales growth and net profit margin: Where: α 0 the constant, α 1 , α 2 , α 3 , α 4 , α 5 , α 6 , α 7 and α 8 are the slope coefficients, e 1it the error term.C. Have practiced the profession on a full time basis for at least three consecutive years, after receiving his license to practice the auditing profession.D. Have in his firm at least one partner or employee who must also meet the above-mentioned requirements.

10) Existence of Nominations and remunerations Committee
The board of directors shall form the following permanent committees: The Nominations and Compensations Committee, whose main tasks are: 1. Ensuring the independence of independent members on a continuous basis.2. Setting the policy of compensations, privileges, incentives, and salaries and to review them on a yearly basis.3. Defining the company's needs of qualifications at the upper executive management and employees levels, and the criteria for their selection.4. Drawing the company's human resources and training policy, monitoring its implementation, and reviewing it on an annual basis

Descriptive Results
Table 1 presents descriptive statistics for the study variables regarding 257 firm year observations of 59 industrial companies listed on ASE during the period (2009)(2010)(2011)(2012)(2013).The average sales growth of these companies is -0.01 (median -0.004), which suggests that companies within the sample over the study period face on average a decrease in sales volume relative to the previous years.Furthermore, the average net profit margin ratio of these companies is -0.02 (median 0.02), which indicates that companies within the sample over the study period face on average a bad period with negative percentage of net income to sales.
As can be noticed from the table, companies within the sample over the study period take on average 101.75 days (median 74.99 days) to collect payments on sales from their customers, sell their inventory on average after 186.87 days (median 173.77 days) and pay to their supplier on their credit purchases on average after 81.65 days (median 68.78 days).The cash conversion cycle is on average 206.959days (median 176.54 days).From a liquidity perspective, the companies within the sample do not have a strong liquidity position since they have to pay suppliers before collecting from customers.Whereas, the governance quality ranges from 3 to 10 with an average of (5.612) an indication that part of companies within sample over the study period violate the rules of corporate governance code.So far, Jordanian companies have not yet reached the phase of full compliance with corporate governance code issued by JSC.1), FS is firm size (natural logarithm of total assets), SG is sales growth ((current year sales-previous year sales)/previous year sales), NPM is net profit margin ratio ( net income/sales).

Correlation between Study Variables
Table 4 presents correlation coefficients between the study variables.One could argue that corporate governance quality could be associated with only one or two components of CCC, to examine this argument and to gain more insight about the relationship between governance quality and the components of CCC; each component is included separately in the correlation analysis.As can be noticed, the governance quality has a significant negative coefficient with CCC, which implies that strong governance quality is associated with short CCC and hence efficient WCM.Furthermore, governance quality is significantly associated with the three components of cash conversion cycle.
As can be observed, sales growth, firm size and net profit margin ratio have significant negative correlation coefficients with CCC, which indicate that the larger the firm size, sales growth and net profit margin ratio, the shorter the CCC, which reflects positively on the efficiency of WCM.As can be noticed, the significant positive coefficient between governance quality and firm size is an indication that large companies perform better governance quality relative to small companies.* Correlation is significant at the 0.05 level (2-tailed).

Regression Analyses and Results Discussion
Table 4 presents the results of the benchmark model, which aims to examine the impact of corporate governance quality on cash conversion cycle for the full sample without taking into consideration any company characteristics as well the table provides the results of sub-samples after portioning the full sample according to company size, sales growth and net profit margin ratio.These sub-samples of the full sample are motivated by the results of the previous studies which reported a significance difference between small and large firm size; high and low sales growth; high and low net profit margin ratio.1), FS is firm size (natural logarithm of total assets), SG is sales growth ((current year sales-previous year sales)/previous year sales), NPM is net profit margin ratio ( net income/sales).
The results of the benchmark model showed that cash conversion cycle is affected negatively by governance quality, which indicates that the stronger the governance quality the shorter the cash conversion cycle and hence the more efficient management of working capital.This results support the results of (Goel, et al., 2015;Aghajari et al., 2015;Gill et al., 2015) and contradict the results of (Gill & Biger, 2013;Kajananthan, & Achchuthan, 2013).
The results across large and small firm size sub-samples confirmed the benchmark model results in that cash conversion cycle is affected negatively by governance quality.However, the explanatory power rose to 0.172 across large firm size and remained 0.14 across small firm size, which suggests that the efficiency of working capital in case of large firm size is better explained by corporate governance quality relative to small firm size.Furthermore, the results across high and low sales growth sub-samples confirmed the benchmark model results.However, the explanatory power rose to 0.182 across high sales growth sub-sample and dropped to 0.118 across low sales growth sub-sample, which suggests that the efficiency of working capital management in case of high sales growth is better explained by the quality of corporate governance relative to low sales growth sub-sample.
As well, the results across high and low net profit margin ratio sub-samples confirmed the benchmark model results in that cash conversion cycle is affected negatively by governance quality.However, the explanatory power across high net profit margin ratio sub-sample rose to 0.165 and remained 0.144 across low net profit margin ratio sub-sample.

Categories of Governance Index
To gain more insight about which category of governance index has more impact on CCC and hence the efficiency of working capital management, the analysis was run on each category of governance index separately.Table 5 depicts the results of categories of governance index  The results of the benchmark model showed that all governance categories have negative impact on cash conversion cycle and hence positive impact on the efficiency of working capital management.The outcomes across large firm size sub-sample confirmed the benchmark model results.However, across small firm size sub-sample the results confirmed the benchmark model only in that standards regarding board meetings have significant negative impact on CCC.Whereas, standards regarding audit and board of directors became weakly significant at 10% level of significance.As can be noticed, the explanatory power for board meetings rose across small firm size sub-sample from 0.087 to 0.17, which suggests that small companies benefit from adopting board meetings standards in improving the efficiency of WCM more than large companies since board meetings standards explained 17% of the working capital management efficiency across small firm size sub-sample.
The findings across high sales growth sub-sample confirmed the benchmark model results.Whereas, the results across low sales growth sub-sample confirmed the benchmark model results only in that board meetings and audit standards have significant negative impact on CCC.As can be noticed, the explanatory power of nominations and remunerations committee across high sales growth sub-sample rose to 0.133 and dropped to 0.002 across low sales growth sub-sample, which indicates that in case of high sales growth companies benefit from the existence of this committee in improving the efficiency of WCM more than in case of low sales growth; since the existence of nominations and remunerations committee explained 13.3% of the working capital management efficiency across high sales growth sub-sample.
As can be reflected in the table, the results across high net profit margin ratio sub-sample confirmed the outcomes of the benchmark model.As well, the results across low net profit margin ratio sub-sample confirmed the benchmark model results except for the board of directors category which became weakly significant at 10% level of significance.As can be noticed, the explanatory power of the audit standards rose to 0.104 across low net profit margin ratio sub-sample, an indication that in case of low net profit margin ratio, companies benefit from adopting audit standards in improving the efficiency of WCM more than in case of high net profit margin ratio; since the audit standards explained 10.4% of the working capital management efficiency across low net profit margin ratio sub-sample.
It can be concluded that there is a variation between corporate governance categories across the sub-samples, and a category of standards that benefits or harms the efficiency of WCM in case of large firm size, high sales growth or high net profit margin ratio does not necessarily benefits or harms the efficiency of WCM in case of small firm size, low sales growth or low net profit margin ratio respectively.These variations support the contingency theory that rejects the idea of universal best practices of corporate governance and rejects the approach of "one size fits all" (Donaldson 2001).In this regards, Filatotchev et al. (2007) suggested that this inconsistency and ambiguity in corporate governance literature might be referred that corporate governance mechanisms seem to differ with respect to organizational context.Scott (2003) suggested that corporate governance mechanisms might be less or more effective depending upon the context of different organizational environments.Aguilera et al., (2008) indicated that the effectiveness of governance mechanisms might depend on firm size or age, the phases of growth or decline in the company's development, the character of innovation in different markets and sectors, and the regulatory and institutional constraints on business activity.Accordingly, Aguilera et al., (2008) recommended future studies to deal with firm characteristics not simply as "control variables" that result in universal relationships, but to deal with firm characteristics as context-dependent.Black et al., (2012) conducted a study across (Brazil, India, Korea and Russia) and portioned the full sample according to size, growth and profitability.The results of (Black et al., 2012) showed a variation in the association between corporate governance and firm market value between sub-samples across firms and countries where they referred the reason of these variations to the approach "one size does not fit all".

Corporate Governance Quality
The awareness on corporate governance in Jordan has been increasing over time, and the compliance of corporate governance code by industrial companies in Jordan is also increasing over time which implies that corporate governance quality is increasing over time.From this view; it is expected that corporate governance quality in the latter part of the sample i.e 2012-2013 higher than in the earlier part of the sample i.e 2009-2010 taking into consideration that there is no reason to assume that CCC is decreasing over time or working capital management efficiency is increasing over time.As exploitation to this fact, in order to determine whether the increase in the governance quality has a direct impact on the efficiency of WCM; the earlier part of the sample is distinguished from the latter part of the sample by portioning the full sample into two sub-samples namely; recent year sub-sample and early year sub-sample.These sub-samples of the full sample are motivated by the results of previous studies who agreed that corporate governance quality increased over time (Sawicki 2009;Prommin et al., 2012;Prommin et al., 2014, Abbadi et al., 2016).Table 6 depicts the results of OLS regression analysis for the full sample and the sub-samples based on year.The difference between the explanatory powers across sub-samples supports the argument that corporate governance quality has increased over time and its ability to increase the efficiency of working capital management has also increased over time.

Conclusions
The results of the benchmark model, which aims to examine the effect of corporate governance quality on cash conversion cycle, revealed that cash conversion cycle is affected negatively by governance quality which reflects positively the efficiency of working capital management.As well, the results of the sub-samples, which distinguished between large and small firm size; high and low sales growth; high and low net profit margin ratio, showed that CCC is affected negatively by governance quality.
The results also documented that a category that benefits or harms the efficiency of WCM to one sub-sample does not necessarily benefits or harms the efficiency of WCM to the other sub-samples which supports contingency theory that rejects the idea of universal best practices of corporate governance and rejects the approach of "one size fits all".Moreover, the results of the descriptive analysis showed that part of companies within the sample over the study period violate the rules of corporate governance code.So far, Jordanian companies have not yet reached the phase of full compliance with corporate governance code, which may mainly attributed to the flexibility given to these companies under "comply or explain" approach.However, the results of the recent year sub-sample and the early year sub-sample pointed out that corporate governance quality has increased over time, and its ability to improve the efficiency of working capital management has also increased.
Accordingly, industrial companies in Jordan particularly in case of large firm size, high sales growth or high net profit margin ratio should boost their compliance with corporate governance code in order to improve their efficiency of WCM.However, small companies should exploit the board meetings standards; companies in case of low sales growth should exploit the board meetings and audit standards; companies in case of low net profit margin ratio should exploit the board meetings, audit and nominations and remunerations committee standards in order to improve their efficiency of working capital management.It is recommended to future studies to deal with firm characteristics as context dependent rather than simply as "control variables".As well, the limitations of the study are considered as implicit recommendations for future studies where the study index was limited to 10 standards and the study period was limited to 2009-2013.Finally, this study highlights the importance of "one size does not fit all" concept.Therefore, regulatory bodies in Jordan particularly Jordan Securities Commission should take into consideration the "one size does not fit all" approach when issuing corporate governance rule and to continue with "comply or explain" approach to some corporate governance rules is better than indicating "the application would be initially be through comply or explain approach".

Table 1 .
Corporate governance quality indexThe Committee shall meet regularly, not less than four times a year, and minutes of its meetings must be taken appropriately 8) Expertise of Audit Committee All members of the Audit Committee must have knowledge and experience in finance and accounting, and at least one of them must have worked previously in accounting or finance fields, and that person must have an academic or professional certificate in accounting, finance or related fields 9) Engagement of Big 4 auditors (PWC, KPMG, E&Y or Deloitte) The company's external auditor should: A. Possess a valid license to practice the profession.B. Be a member of the Jordan Association of Certified Public Accountants.

Table 2 .
Descriptive statistics of the industrial companies variables, 2009-2013, 257 firm-year observations Note: Table2presents descriptive statistics of the study main and control variables after deleting outliers defined as the top and bottom 1% on each of the study variables RCP is receivables conversion period ((365*(Average receivables/Net credit sales)), ICP is inventories conversion period ((365*( Average inventories/Cost of goods sold)), PDP is Payables deferral period ((365*(Average payables/Net credit purchases)), CCC is cash conversion cycle (RCP+ICP-PDP), GOV is governance quality measured based on governance index as shown in table(

Table 3 .
Correlation between study variables RCP is receivables conversion period ((365*(Average receivables/Net credit sales)), ICP is inventories conversion period ((365*(Average inventories/Cost of goods sold)), PDP is Payables deferral period ((365*(Average payables/Net credit purchases)), CCC is cash conversion cycle (RCP+ICP-PDP), Gov is Governance quality measured based on governance index as shown in table (1), FS is firm size (natural logarithm of total assets), SG is sales growth ((current year sales-previous year sales)/previous year sales), NPM is net profit margin ratio ( net income/sales).** Correlation is significant at the 0.01 level (2-tailed).

Table 6 .
OLS regression results for full sample and sub-samples based on year