Evidence of Avoiding Working Capital Deficits in Australia

31 Pages Posted: 17 Feb 2015

See all articles by Wei Jiang

Wei Jiang

Jinan University

Meiting Lu

Macquarie University - Faculty of Business and Economics; Macquarie University, Macquarie Business School

Yaowen Shan

University of Technology Sydney; Financial Research Network (FIRN)

Tingting Zhu

East China Normal University (ECNU)

Date Written: January 15, 2015

Abstract

This study examines the incidence and behaviour of managerial interventions in Australian firms to avoid reporting working capital deficits. We document a significant discontinuity in the distribution of current ratios at 1.0. We also find that the propensity of Australian firms to avoid working capital deficits is largely determined by the costs and benefits of management interventions. Firms with short-term or long-term debt are less likely to engage in accounts manipulation, while firms paying dividends are more likely to do so. Further examination of the components of current assets and current liabilities reveals that, to avoid working capital deficits, Australian firms tend to undertake actions to overstate accounts receivable rather than overstate inventory or understate current liabilities. The results provide practical guidance and implications for shareholders, auditors and regulators in identifying accounting irregularities.

Keywords: Working capital, Current ratio, Benchmark beating, Accounting manipulation

JEL Classification: J33, M41

Suggested Citation

Jiang, Wei and Lu, Meiting and Shan, Yaowen and Zhu, Tingting, Evidence of Avoiding Working Capital Deficits in Australia (January 15, 2015). Available at SSRN: https://ssrn.com/abstract=2565462 or http://dx.doi.org/10.2139/ssrn.2565462

Wei Jiang

Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

Meiting Lu

Macquarie University - Faculty of Business and Economics ( email )

Sydney, New South Wales 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Yaowen Shan (Contact Author)

University of Technology Sydney ( email )

PO Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://profiles.uts.edu.au/Yaowen.Shan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Tingting Zhu

East China Normal University (ECNU) ( email )

North Zhongshan Road Campus
3663 N. Zhongshan Rd.
Shanghai, 200062
China

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