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

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.