Working capital management policy in health care: The effect of leverage

Hospitals, which are mainly capital intensive, require large amounts of financial resources to render high-quality services. Accordingly, health care managers and policy makers should take into account the level of debt in managing working capital. This study, therefore, aims to explore whether the financial leverage moderates the relationship between the working capital and profitability for the publicly-listed European Hospitals. The data set including 52 hospitals with 468 observations was solicited from the ORBIS. A regression analysis was carried out. The results reveal that increasing the length of the cash conversion cycle for hospitals with high financial leverage decreases profitability. On the contrary, increasing the length of the cash conversion cycle for the ones having low leverage boosts profitability. The findings of this study suggest that since leverage influences the relationship between the cash conversion cycle and profitability, the degree of financial leverage is an important indicator to be considered by health care managers and policy makers in managing working capital. In addition, by clarifying the effect of leverage, this study helps policy makers understand and estimate the possible impact of working capital changes on profitability. This study also helps managers and decision makers not only apply a tight working capital policy but also decide whether to increase or decrease the length of cash conversion cycle to improve hospital profitability.