Purpose
This study aims to investigate the association between earnings management and the efficiency of cash management as well as the extent to which this relationship affects a firm’s financial well-being (FWB).
Design/methodology/approach
Using fixed-effects models and quarterly financial statements of 178 nonfinancial firms, this study analyzes 3,376 firm-quarter observations listed on the Egyptian stock market from 2005 to 2019.
Findings
The empirical findings suggest that optimal cash holdings and cash holding excess increase with lower real earnings management (REM) of operating activities or higher accrual earnings management (AEM). This relationship positively impacts firms’ FWB but is negatively influenced by REM.
Research limitations/implications
This study’s findings have two key implications for standards regulators and decision-makers. First, the study reveals the link between opportunistic earnings management and cash management, emphasizing the need for stricter oversight in corporate governance to prevent risky long-term decisions. Furthermore, these findings suggest that regulators, specifically in emerging markets, should proactively develop policies to limit earnings management. Second, this study demonstrates how accounting discretion affects both earnings management and short-term working capital management, underscoring the potential erosion of stakeholders’ confidence when financial statements are misleading.
Originality/value
This study examines the impact of sales manipulation and overproduction on cash holdings. To the best of the author’s knowledge, this is also the first study to explore how managerial discretion over both earnings and excess cash holdings influences a firm’s FWB. This study provides new empirical evidence of the joint effects of managerial opportunism in earnings and cash management on a firm’s financial health.