The Impact of Financial Constraints and Earnings Management on Working Capital Adjustment Speed: Evidence from Egypt

نوع المستند : المقالة الأصلية


1 کلية التجارة جامعة المنوفية

2 رئيس قسم المحاسبة - كلية التجارة - جامعة المنوفية


This study examines the target working capital level and the adjustment speed towards the target level in Egyptian firms. It also investigates the impact of financial constraints and earnings management on the speed of adjustment (SOA). The sample includes 45 non-financial EGX-100 firms from 2017-2022 with 270 balanced observations. The cash conversion cycle (CCC) is a dynamic measure used as a proxy for working capital management (WCM). A composite index for financial constraints is created using Exploratory Factor Analysis (EFA) from three measures, and Beneish M-Score is used as a proxy for earnings management. A two-step generalized method of moments (GMM) approach with partial adjustment models is used for data analysis.

Results show that firm characteristics and macroeconomic conditions affect the target working capital level, and the SOA toward the target working capital level is slow (33.1%). Results also found that financial constraints slow firms' SOA toward target working capital, decreasing from 33.1% to 27.3% with a 5.8% variance. Moreover, the negative impact of earnings management slowed working capital adjustment speed for manipulator firms from 33.1% to 27.6%, a 5.5% variance. The study results were further confirmed using alternative financial constraints and earnings management measures based on Altman's Z-score and Modified Jones Model. The study's findings strengthen an Egyptian working capital dynamics hypothesis.

Based on the existing literature, only a few studies have addressed optimal (or target) working capital levels. Further, limited attention was paid to how financial constraints and earnings management affect working capital adjustment speed, highlighting

الكلمات الرئيسية

الموضوعات الرئيسية