The Effect of Stock Returns Volatilities on Working Capital Accruals: Considering the Moderating Effect of Financial Distress

Abstract

Objective:Despite the fact that accruals have a central role in preparing financial reports and are viewed as a dynamic research domain, the studies on accruals have not provided a profound understanding of how firm level economic factors affect accruals. In this study, the firms’ working capital is regarded as a form of investment. Also, using theoretical predictions from a real option-based investment framework, the present study aims to examine the effects of stock returns volatilities on changes in firm working capital accruals. In addition, the moderating effect of financial distress on the relationship between stock return volatilities and working capital accruals is studied. Method: The statistical sample of this research consists of 111 firms listed in the Tehran Stock Exchange from 2005 to 2016. The research hypotheses are also tested by Generalized Least Squares (GLS) regression analysis, using the pooled data. Results:The results show that there is a significant negative relationship between volatilities of stock return and changes of working capital accruals of firms in general. On the other hand, the results indicate a firm’s financial distress does not decrease the negative effect of stock return volatilities on working capital accruals. Furthermore, another finding suggests that stock returns volatilities have a positive effect on the items of capital liabilities and negatively affect items of working capital in accruals; however, the firms’ inventories, here, are considered as exceptions and returns volatilities have positively impacted the firms’ inventories.

Keywords

• stock returns volatility
• accruals
• working capital
• financial distress