IDEAS home Printed from https://ideas.repec.org/a/spt/fininv/v9y2020i3f9_3_5.html
   My bibliography  Save this article

Working Capital and Earnings Management among Manufacturing Firms: A Review of Literature

Author

Listed:
  • Josiah Aduda
  • Morgan Ongoro

Abstract

This study critically reviewed literature on the relationship between working capital management and earnings management. The specific objectives of the study included determination of documented evidence on; the relationship between working capital management and earnings management, the existence of target working capital management level and target earnings management level and knowledge gaps between the two study variables. Findings on the first objective were conflicting with some researchers establishing a positive relationship, others a negative relationship whereas others were non-conclusive. Findings on the second objective were also conflicting. The divergence in findings were attributed to differences in conceptual, methodological and contextual setups with inconsistencies in operationalization of the study variables playing a pivotal role. The study revealed a biased inclination towards usage of accounting accruals as proxies for earnings management with no consideration for non-accounting accruals like real earnings managements. The study also identified lack of related studies in frontier economies as a potential research gap paving way for future related studies with expanded scope. The study further recommended future research on determination of an optimal working capital level that minimizes real earnings management. JEL classification numbers: G10, G11, G30, G32, G33.

Suggested Citation

  • Josiah Aduda & Morgan Ongoro, 2020. "Working Capital and Earnings Management among Manufacturing Firms: A Review of Literature," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 9(3), pages 1-5.
    • Handle: RePEc:spt:fininv:v:9:y:2020:i:3:f:9_3_5
    as

    Download full text from publisher

    File URL: http://www.scienpress.com/Upload/JFIA%2fVol%209_3_5.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Yan Zhang & Margarethe F. Wiersema, 2009. "Stock market reaction to CEO certification: the signaling role of CEO background," Strategic Management Journal, Wiley Blackwell, vol. 30(7), pages 693-710, July.
    2. Ilya A. Strebulaev, 2007. "Do Tests of Capital Structure Theory Mean What They Say?," Journal of Finance, American Finance Association, vol. 62(4), pages 1747-1787, August.
    3. Leary, Mark T. & Roberts, Michael R., 2010. "The pecking order, debt capacity, and information asymmetry," Journal of Financial Economics, Elsevier, vol. 95(3), pages 332-355, March.
    4. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3-4), pages 573-588.
    5. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    6. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    7. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. Bana Abuzayed, 2012. "Working capital management and firms’ performance in emerging markets: the case of Jordan," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 8(2), pages 155-179, March.
    9. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    10. Yoon, Soon Suk & Miller, Gary A., 2002. "Reply to discussion of "Earnings Management of Seasoned Equity Offering Firms in Korea"," The International Journal of Accounting, Elsevier, vol. 37(1), pages 89-93.
    11. Joseph E. Stiglitz, 2002. "Information and the Change in the Paradigm in Economics," American Economic Review, American Economic Association, vol. 92(3), pages 460-501, June.
    12. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    13. Yoon, Soon Suk & Miller, Gary, 2002. "Earnings management of seasoned equity offering firms in Korea," The International Journal of Accounting, Elsevier, vol. 37(1), pages 57-78.
    14. Highhouse, Scott & Thornbury, Erin E. & Little, Ian S., 2007. "Social-identity functions of attraction to organizations," Organizational Behavior and Human Decision Processes, Elsevier, vol. 103(1), pages 134-146, May.
    15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    16. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    17. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    18. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    19. Marc Deloof, 2003. "Does Working Capital Management Affect Profitability of Belgian Firms?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(3‐4), pages 573-588, April.
    20. Patricia M. Dechow & Amy P. Hutton & Jung Hoon Kim & Richard G. Sloan, 2012. "Detecting Earnings Management: A New Approach," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 275-334, May.
    21. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
    22. Aktas, Nihat & Croci, Ettore & Petmezas, Dimitris, 2015. "Is working capital management value-enhancing? Evidence from firm performance and investments," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 98-113.
    23. Ali, A, 1994. "The Incremental Information-Content Of Earnings, Working Capital From Operations, And Cash Flows," Journal of Accounting Research, Wiley Blackwell, vol. 32(1), pages 61-74.
    24. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zijin Wang & Jitao Guo & Gengyan Luo, 2022. "The Impact of Chinese Carbon Emissions Trading System on Efficiency of Enterprise Capital Allocation: Effect Identification and Mechanism Test," Sustainability, MDPI, vol. 14(20), pages 1-20, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Broxterman & Tingyu Zhou, 2023. "Information Frictions in Real Estate Markets: Recent Evidence and Issues," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 203-298, February.
    2. Barclay, Michael J. & Fu, Fangjian & Smith, Clifford W., 2021. "Seasoned equity offerings and corporate financial management," Journal of Corporate Finance, Elsevier, vol. 66(C).
    3. Diana Bonfim & Paula Antão, 2012. "The dynamics of capital structure decisions," Working Papers w201206, Banco de Portugal, Economics and Research Department.
    4. Pinnuck, Matt & Shekhar, Chander, 2013. "The profit versus loss heuristic and firm financing decisions," Accounting, Organizations and Society, Elsevier, vol. 38(6), pages 420-439.
    5. Kim, Sang-Joon & Bae, John & Oh, Hannah, 2019. "Financing strategically: The moderation effect of marketing activities on the bifurcated relationship between debt level and firm valuation of small and medium enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 663-681.
    6. Etumudon Ndidi ASIEN, 2017. "Financial structure signalling to auditors` pricing," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 15(146), pages 207-207.
    7. Leary, Mark T. & Roberts, Michael R., 2010. "The pecking order, debt capacity, and information asymmetry," Journal of Financial Economics, Elsevier, vol. 95(3), pages 332-355, March.
    8. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    9. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    10. A.O. Olakunle & P.L. Jones, 2014. "Assessing the Impact of Size on the Capital Structure Choice for Listed Nigeria Firms," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 4(7), pages 184-202, July.
    11. Quratulain Zafar & Winai Wongsurawat & David Camino, 2019. "The determinants of leverage decisions: Evidence from Asian emerging markets," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1598836-159, January.
    12. Carmen Cotei & Joseph Farhat, 2011. "An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions," Review of Quantitative Finance and Accounting, Springer, vol. 37(3), pages 363-380, October.
    13. Ettore Croci & John A. Doukas & Halit Gonenc, 2011. "Family Control and Financing Decisions," European Financial Management, European Financial Management Association, vol. 17(5), pages 860-897, November.
    14. Tatiana Didier & Ross Levine & Sergio L. Schmukler, 2015. "Capital Market Financing, Firm Growth, and Firm Size Distribution," Working Papers 172015, Hong Kong Institute for Monetary Research.
    15. Valeriya Valer’evna Metel’skaya, 2021. "Correlation-and-regression analysis of the influence of macroeconomic factors on capital structure of Russian corporations under crisis conditions," Journal of Innovation and Entrepreneurship, Springer, vol. 10(1), pages 1-34, December.
    16. Silvia Bacci & Alessandro Cirillo & Donata Mussolino & Simone Terzani, 2018. "The influence of family ownership dispersion on debt level in privately held firms," Small Business Economics, Springer, vol. 51(3), pages 557-576, October.
    17. Viet Anh Dang, 2013. "Testing capital structure theories using error correction models: evidence from the UK, France and Germany," Applied Economics, Taylor & Francis Journals, vol. 45(2), pages 171-190, January.
    18. Niluthpaul Sarker & Roushanara Islam, 2021. "Issues on Bank’s Capital Structure and Profitability: A Developing Country Context," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 86-104.
    19. Li, Jay Y. & Mauer, David C., 2016. "Financing uncertain growth," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 241-261.
    20. Coricelli, Fabrizio & Driffield, Nigel & Pal, Sarmistha & Roland, Isabelle, 2012. "When does leverage hurt productivity growth? A firm-level analysis," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1674-1694.

    More about this item

    Keywords

    Working capital management; Earnings management; Manufacturing.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spt:fininv:v:9:y:2020:i:3:f:9_3_5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Eleftherios Spyromitros-Xioufis (email available below). General contact details of provider: http://www.scienpress.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.