This study investigated the effect of working capital management on estimated discretionary accruals and discussed the implications of this effect for future research on earnings management. Generally, a firm adjusts its working capital investment when a discrepancy exists between working capital and actual operational needs. This type of working capital management is regarded as a normal operating strategy, which means that the accruals resulting from using this strategy should be normal accruals, not discretionary accruals. This study measured the level of working capital management by the growth rate of the number of employees. Based on the level of working capital management, this study divided the entire sample into four equal-sized groups. Our results indicate that the discretionary accruals of first (fourth) quartile firms are significantly greater (smaller) than those of other firms. The results of simulation tests in which the null hypothesis of zero abnormal accruals was rejected were beyond normal rejection rate, indicating that estimation bias existed in the discretionary accruals of the sample firms. The estimation bias in discretionary accruals affected the results of further empirical study on whether firms that issued seasoned equity offerings or reduced capital to settle accumulated losses manipulated earnings.
All Science Journal Classification (ASJC) codes
- Business, Management and Accounting(all)