Evidence of Manager Intervention to Avoid Working Capital Deficits

54 Pages Posted: 24 May 2012 Last revised: 13 Aug 2015

See all articles by Scott Dyreng

Scott Dyreng

Duke University - Accounting

William J. Mayew

Duke University - Fuqua School of Business

Katherine Schipper

Duke University - Fuqua School of Business

Date Written: April 20, 2015

Abstract

We study the managerial propensity to intervene in financial reporting by examining working capital deficits, measured as current ratios less than 1.0. Current ratios represent important balance sheet liquidity indicators to lenders and creditors, and have an identifiable and naturally occurring reference point at 1.0, analogous to the profit/loss income statement reference point. We find that distributions of reported current ratios exhibit a severe discontinuity at 1.0, that the discontinuity increases with exogenous increases in the cost of credit in the economy, and that determinants of a firm’s likelihood to achieve a given current ratio are diagnostic precisely at the 1.0 discontinuity location but not at other nearby locations in the current ratio distribution. Firms that avoid working capital deficits report lower proportions of inventory and higher proportions of accounts receivable and, when credit is tight, higher proportions of cash, consistent with managers increasing sales volume so as to capitalize profit margins and thereby increase current assets.

Keywords: reference points, financial reporting, working capital

JEL Classification: M41

Suggested Citation

Dyreng, Scott and Mayew, William J. and Schipper, Katherine, Evidence of Manager Intervention to Avoid Working Capital Deficits (April 20, 2015). Available at SSRN: https://ssrn.com/abstract=2065335 or http://dx.doi.org/10.2139/ssrn.2065335

Scott Dyreng

Duke University - Accounting ( email )

Box 90120, Fuqua School of Business
Durham, NC 27708-0120
United States

William J. Mayew (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

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