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

Management Level ◽

Accounting Accruals ◽

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.

Working Capital Management and Firms' Profitability in the Midst of an Economic Crisis

International Journal of Applied Management Sciences and Engineering ◽

10.4018/ijamse.2018070104 ◽

2018 ◽

Vol 5 (2) ◽

pp. 66-80

Author(s):

Dimitris Axiotis ◽

Alina Hyz ◽

Petros Kalantonis

Keyword(s):

Economic Crisis ◽

Financial Constraints ◽

Negative Relationship ◽

Capital Management ◽

Working Capital ◽

Cash Conversion Cycle ◽

Size Growth ◽

The Impact ◽

The purpose of this article is to identify the relationship between working capital management and corporate performance in adverse economic circumstances. The results show positive relationship between profitability and cash conversion cycle, firm's size, growth and leverage and negative relationship between profitability and components of cash conversion cycle. Analysing the impact of the crisis it can observe that the companies can increase their profitability by reducing the period of credit granted to customers. The significance of this study stems from the fact that it sheds light for the desirable firms' policy during the period of financial constraints. Prior research on this subject has looked into various issues related to the linkage between working capital management and profitability, however, none has examined what this relationship looks like following a prolonged economic crisis.

Working Capital Management and Its Impact on the Profitability of Pukar International Co.Ltd.

NCC Journal ◽

10.3126/nccj.v4i1.24747 ◽

2019 ◽

Vol 4 (1) ◽

pp. 141-147

Author(s):

Puspa Raj Ojha

Keyword(s):

Descriptive Analysis ◽

Negative Relationship ◽

Capital Management ◽

Working Capital ◽

Return On Assets ◽

Current Ratio ◽

International Trading ◽

Collection Period ◽

This paper aims to report the results of an investigation of the relative importance of working capital management, measured by the Return on Assets (ROA), and its components (Current ratio, average collection period and average payment period) to the profitability of Pukar International Trading. This paper analyzes the effect of working capital Management on firm’s profitability in Nepal for the period 2071 to 2072. For this Purpose, financial data of four year is used. Pearson’s correlation and Descriptive analysis were used to establish the relationship between working capital management and firm’s profitability and components of working capital like Average collection period, Average payment period and Current ratio. The study finds a negative relationship between profitability and average collection period and average payment period, but appositive relationship between profitability and current ratio. Moreover, current ratio and firm size also have significant effects on the firm’s profitability. Based on the key findings from this study it had been concluded that the management of a firm could create value for their shareholders by reducing the number of day’s accounts collection. Firms could also take long to pay their creditors in as far as they did not worry their relationships with these creditors.

Investigating the relationship between working capital management and business performance: evidence from the 2008 financial crisis of EU-28

International Journal of Managerial Finance ◽

10.1108/ijmf-08-2019-0294 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Cited By ~ 1

Author(s):

Ali İhsan Akgün ◽

Ayyüce Memiş Karataş

Keyword(s):

Financial Crisis ◽

Business Performance ◽

Negative Relationship ◽

Capital Management ◽

Working Capital ◽

2008 Financial Crisis ◽

Content Type ◽

The 2008 Financial Crisis ◽

PurposeThis study examines the relationship between working capital management and business performance.Design/methodology/approachThe relationship between the working capital management and business performance is examined using panel data analysis for a sample of EU-28 listed firms for the period from 2003 to 2012. To examine this relationship, an ordinary least squares (OLS) regression model is used to analyze the data obtained from the sample. The dependent variable consists of three measurements, namely return on asset (ROA), return on equity (ROE) and earnings before interest and taxes margin (EBITM), which are used as proxies for accounting-based measures of performance.FindingsThe authors examined the aforementioned relationship during the 2008 financial crisis. The OLS regression analysis suggests that there is a negative relationship between gross working capital and business performance for code law countries. The results also show that liquidity measures estimated by current ratio have a statistically significant impact on business performance indicated by ROA for all EU countries. The 2008 financial crisis had a significantly negative impact on ROA. Additionally, the findings regarding financial inclusion show a negative relationship between gross working capital and business performance among EU and other performer countries.Practical implicationsOverall, the empirical findings are consistent with Afrifa's (2016), who suggests that cash flow should increase investment in working capital to improve performance indicated by EBITM for old EU members.Originality/valueWhile many empirical studies investigate the relationship between working capital and firm profitability, most do not consider the impact of the 2008 financial crisis apart from Tsurate (2019). The authors examine whether legal origins are important determinants of working capital management policies and business performance. Thus, empirically, the code law countries have a negative relationship between gross working capital, business performance and EBITM.

The Relationship between Working Capital Management and Profitability: Evidence from Pakistan

International Letters of Social and Humanistic Sciences ◽

10.18052/www.scipress.com/ilshs.20.14 ◽

2014 ◽

Vol 20 ◽

pp. 14-25 ◽

Cited By ~ 1

Author(s):

Nadeem Iqbal ◽

Naveed Ahmad ◽

Zeeshan Riaz

Keyword(s):

Positive Relationship ◽

Stock Exchange ◽

Negative Relationship ◽

Theoretical Research ◽

Capital Management ◽

Working Capital ◽

Cash Conversion Cycle ◽

Collection Period ◽

In this paper secondary data is used for analysis of working capital on profitability. In this research paper we take working capital as independent variable and net operating profit as dependent variable. We have found a significant negative relationship between net operating profitability and the average collection period, inventory turnover in days, average payment period and cash conversion cycle for a sample of Pakistani firms listed on Karachi stock exchange. Previous theoretical research predicts negative relationship between cash conversion cycle and corporate profitability. The results of regression indicate that the coefficient of account receivable is negative; that is, the increase or decrease in average collection period wills significantly affect the profitability of the firm. According to inter-item correlation matrix the relationship of account receivables, account payables and inventory with profit shows positive relationship but cash conversion cycle, financial debt and financial assets shows negative relationship with profitability. Inventory shows the positive relationship with dependent variable which proves that working capital management has a positive effect on firm’s probability.

Investigating the Relationship between Working Capital Management and Stock Price Crash Risk

UKH Journal of Social Sciences ◽

10.25079/ukhjss.v3n1y2019.pp28-35 ◽

2019 ◽

Vol 3 (1) ◽

pp. 28-35

Author(s):

Ebrahim Mansoori ◽

Masood Elyasi ◽

Rahim Mohammadi

Keyword(s):

Stock Price ◽

Stock Exchange ◽

Panel Data Analysis ◽

Negative Relationship ◽

Crash Risk ◽

Capital Management ◽

Working Capital ◽

Cash Conversion Cycle ◽

The main purpose of this study is to investigate the effect of working capital management on stock price crash risk. The sample includes 103 Iranian firms listed on the Tehran Stock Exchange from 2013 to 2017. Panel data analysis with fixed effect estimation has been used to analyze the relationship between working capital management and stock price crash risk. Cash conversion cycle, working capital requirement, current, and quick ratios were applied as comprehensive measures for working capital management, and Hutton’s model was applied as a measure for stock price crash risk. The results indicate that there is a negative relationship between working capital indicators and stock price crash risk. Therefore, managers can use working capital strategies to decrease the risk of the stock price crash. Furthermore, asymmetry information may, in fact, increase a manager’s incentive to use working capital strategies to reduce the stock price crash risk.

The Impact of Working Capital Management on Profitability: The Case of Small and Medium-Sized Export Companies in Tunisia

Management international ◽

10.7202/1005434ar ◽

2011 ◽

Vol 15 (3) ◽

pp. 71-88 ◽

Cited By ~ 7

Author(s):

Meryem Bellouma

Keyword(s):

Negative Relationship ◽

Capital Management ◽

Working Capital ◽

Random Effects Models ◽

Accounts Receivable ◽

Cash Conversion Cycle ◽

Fixed And Random Effects ◽

Financial Decision ◽

The Impact

Working capital is an important component in the financial decision of the company. An optimal working capital management is reached through a trade off between profitability and liquidity. This study aims to provide empirical evidence about the effects of working capital management on the profitability of 386 Tunisian export SMEs observed from 2001 to 2008. The results of fixed and random effects models show a negative relationship between corporate profitability and the different working capital components. This reveals that Tunisian export SMEs should shorten their cash conversion cycle by reducing the number of days of accounts receivable and inventories to increase their profitability.

A Study on Working capital Management in Hindustan Petroleum Corporation Limited

Asian Journal of Management ◽

10.52711/2321-5763.2021.00025 ◽

2021 ◽

pp. 164-168

Author(s):

Sruthi B ◽

Rashmi R

Keyword(s):

Annual Report ◽

Pearson Correlation ◽

Secondary Data ◽

Effective Management ◽

Capital Management ◽

Working Capital ◽

Short Term ◽

The Past ◽

Working capital management is important for every organization as it refers to the effective management of current assets and current liabilities. The aim is to make sure that the firm is capable to continue its operations and it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. In this paper, an attempt has been made to study the management of working capital in Hindustan Petroleum Corporation Limited, a leading public sector enterprise in India over a period of 10 years (That is from 2009-10 to 2018-19). The paper also attempts to study the components of working capital and analyze the relationship between liquidity and profitability of HPCL. The study is based on secondary data collected from annual report of HPCL for the past 10 years, Pearson correlation and regression model are used for this purpose. From the study it is found that there is a significant relationship between liquidity and profitability.

WORKING CAPITAL MANAGEMENT - IT’S IMPACT ON LIQUIDITY AND PROFITABILITY - A STUDY OF COAL INDIA LTD

International Journal of Research -GRANTHAALAYAH ◽

10.29121/granthaalayah.v4.i12.2016.2407 ◽

2016 ◽

Vol 4 (12) ◽

pp. 178-187

Author(s):

Shiva Kumar ◽

N Babitha Thimmaiah

Keyword(s):

Negative Relationship ◽

Ranking Method ◽

Statistical Techniques ◽

Capital Management ◽

Working Capital ◽

Weak Correlation ◽

Working Capital Management

The present paper makes an attempt to give a conceptual insight on working capital management and assess its impact on liquidity and profitability of Coal India Ltd. The liquidity and profitability tradeoff has become an important aspect for all the organizations. The attempt also has been made to test the liquidity and profitability position. For this correlation and spearman’s rank method has been applied. The correlation and spearman’s ranking method indicates weak correlation and negative relationship between liquidity and profitability. The Motaal’s test has also been applied to test the liquidity performance. It indicates liquidity position of the firm has improved over the study period. The study covers five year data from 2010-11 to 2014-15. For the analysis ratios indicating working capital performance and some statistical techniques are employed.

The impact of Working Capital Management on shareholders’ wealth and profitability: evidence from Colombo Stock Exchange

Investment Management and Financial Innovations ◽

10.21511/imfi.15(2).2018.10 ◽

2018 ◽

Vol 15 (2) ◽

pp. 104-115

Author(s):

Wasantha Perera ◽

Pradeep Priyashantha

Keyword(s):

Firm Size ◽

Regression Models ◽

Stock Exchange ◽

Negative Relationship ◽

Least Square ◽

Capital Management ◽

Working Capital ◽

Holding Period ◽

The Impact

The Working Capital Management (WCM) has an important role for the firm’s success or failure, because it directly affects the overall business health of the firm. This study examined the impact of WCM on profitability and shareholders’ wealth using 50 companies listed in different sectors on the Colombo Stock Exchange (CSE) for the period from 2010 to 2015. This sample represents 47% of the selected sectors of CSE. The profitability of the company is measured using gross operating profit (GOP) and shareholders wealth measured by Tobin’s Q (TQ) ratio. The WCM is measured using five independent variables namely stock holding period (SHP), debtors’ collection period (DCP), creditors’ settlement period (CSP), cash conversion circle (CCC) and current assets ratio (CAR). Further, three additional variables such as firm size (SIZE), leverage (LEV) and earning yield (EY) are employed as controlling variables to capture the impact of other performance of the companies.The data were analyzed using ordinary least square (OLS) and panel data regression models. These regression models reveal that there is a significant negative relationship between CCC and dependent variables (GOP &amp; TQ). Further, this relationship has been confirmed by the major components of CCC such as SHP, DCP. Firm size also positively and significantly effects on the firm GOP while negatively effects on the TQ. Further, they revealed that there is a significant positive relationship between LEV and TQ. The study finds that the shareholders’ wealth and profitability can be increased through the efficiency of WCM.