Statistical mediation analysis can help to identify and explain the mechanisms behind the linkage between capital structure and corporate performance through the mediating effect of working capital management. We use a sample of 1149 Spanish firms in 2019. A path analysis shows that overinvesting in working capital management reduce the positive impact of internal funds on corporate performance. We show that efficient working capital management is value enhancing when a firm converges to a financial optimal level. As a robustness test, we check for the potential effect of working capital on firm’s solvency through cash and we find that holding cash has got a positive mediation effect. Thus, we prove the nonlinear relationship between working capital and firm performance and that efficient management technique through cash holding could improve the positive impact on firm’s solvency and consequently corporate performance.
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