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

This study critically reviewed literature on the relationship between working capitalmanagement and earnings management. The specific objectives of the studyincluded determination of documented evidence on; the relationship betweenworking capital management and earnings management, the existence of targetworking capital management level and target earnings management level andknowledge gaps between the two study variables. Findings on the first objectivewere conflicting with some researchers establishing a positive relationship, others anegative relationship whereas others were non-conclusive. Findings on the secondobjective were also conflicting. The divergence in findings were attributed todifferences in conceptual, methodological and contextual setups withinconsistencies in operationalization of the study variables playing a pivotal role.The study revealed a biased inclination towards usage of accounting accruals asproxies for earnings management with no consideration for non-accounting accrualslike real earnings managements. The study also identified lack of related studies infrontier economies as a potential research gap paving way for future related studieswith expanded scope. The study further recommended future research ondetermination of an optimal working capital level that minimizes real earningsmanagement.