Effect of Working Capital Management on Earnings Management Among Manufacturing Firms in Kenya

Abstract

The connection between working capital management and earnings management has long been a source of debate in academic circles, and it continues to be so. Previous empirical research on the topic has produced a wide range of results, both in terms of content and presentation. There has been no agreement among the researchers that have studied the topic. Specifically, the purpose of this research was to determine the relationship between working capital and earnings management in manufacturing companies in Kenya. The study's sample included all 230 major manufacturing companies in Nairobi and its surroundings as well as their employees. A number of factors were considered as independent variables in the study: working capital management (measured by the current ratio), leverage (measured by the debt ratio), profitability (measured by the return on equity), and company size (measured by the natural logarithm of total assets). Earnings management was the dependent variable, and discretionary accruals were used to represent this variable. Secondary data was collected on an annual basis over a period of five years (from January 2016 to December 2020). Using a descriptive cross-sectional approach, this research investigated the connection between the variables. Multiple linear regression was used to determine the link between the variables. The data was analyzed with the help of the SPPS software package. The results of the analysis produced an R-square value of 0.245, which, in other words, indicates that the independent variables studied can explain 24.5 percent of the changes in the earnings management of manufacturing firms in Kenya, while the remaining 75.5 percent of the changes in earnings management is associated with other variables that are outside the scope of this study. In addition, it was discovered that the independent factors of this research were only weakly associated with the profitability management (R=0.495). The results of the ANOVA showed that the F statistic was statistically significant at the 5 percent level with a p0.05. As a result, the model was adequate for explaining the relationship between the selected variables. The results also revealed that leverage and company size were associated with the generation of favorable and statistically significant outcomes. When it comes to earnings management, WCM produced good, but non-statistically significant results in this research, while profitability had a negative but non-statistically significant impact on earnings management. According to the findings of this research, policymakers and directors of manufacturing companies in Kenya should keep an eye on their debt and asset levels, since they have a substantial beneficial impact on earnings management practices. The research also suggests that future studies should concentrate on additional variables that affect the management of profits among manufacturing companies in Kenya, as shown in the findings..