Effect of Working Capital on Earnings Management Practices in Sub-Sahara Africa

Abstract

The study examined the effect of Working Capital (WC) on Earnings Management Practices (EMP) among non-financial listed firms in Sub-Sahara Africa. Discretional Accruals (DA) and Real Earnings Management (REM) were proxies by Modified Jones model  (1995)and Rowchowdhury (2006) models respectively. Secondary data sourced from annual reports of 276 listed firms for eleven years (2010 to 2020) were used in the study. The model of the study was estimated using Generalized Method of Moments estimator and Dumistrescu and Hurlin Panel Causality test technique. The findings revealed that WC among firms in Kenya, Tanzania South Africa and Zimbabwe (β=0.007; 0.002; 0.073; 0.115; P>|t|=0.000; 0.000; 0.000; 0.000˂0.05 respectively) have positive and significant effects on DA. However, WC among firms in Nigeria and Ghana showed no significant effect on DA. More so, WC among firms in Nigeria, Kenya, South Africa and Zimbabwe (β=0.002; 0.049; 0.050; 0.215; P>|t|=0.000; 0.000; 0.005; 0.000, ˂0.05 respectively) revealed positive and significant effect on REM. The study concluded that WC have positive and significant effect on DA and REM among firms in Kenya, South Africa and Zimbabwe. More so, WC have positive and significant effect on DA in Tanzania as well as on REM in Nigeria. The study therefore recommended that firms in sub-Sahara Africa should reduce their operating cycles to avoid EMP.

Keywords:working capital, discretionary accruals, real earnings management, sub-Sahara Africa

DOI: 10.7176/EJBM/14-18-08

Publication date:September 30^th 2022