Examining the Moderating Effect of Earnings Management on the Association between Working Capital Management and Firm’s Financial Performance: Evidence from Egypt

Abstract

The objective of this research is to study the influence of Working Capital Management (WCM) and its components on a firm's Financial Performance (FP). In addition, it aims to examine the moderating consequence of Earnings management (EM) on the association between WCM and the firm's FP. For the five-year study period from 2014 to 2018, a sample of 61 companies registered on the Egyptian stock exchange EGX was employed. The study hypotheses are tested using the Panel Least Squares (PLS) and Estimated Generalized Least Square (EGLS) regression analyses. The findings showed that WCM as measured by Cash Conversion Cycle (CCC) had a considerable negative influence on the firm's FP as measured by Return on Assets (ROA), Return on Equity (ROE), and Earnings per Share (EPS). It is concluded that the efficient management of WC can be achieved through shortening Average Days of collecting Receivables (ADR) and Average Days of holding Inventory (ADI) and lengthening Average Days of payment of Payables (ADP) as possible which in turn will be reflected positively on overall firm's FP. Finally, the results indicated that the involvement of EM practices measured by the modified Jones model (1995) strengthens the association between WCM and ROA. Thus, managers use EM practices in the process of WCM to improve a firm's FP measured by ROA.