Effects of Leverage Incentive on Earnings Management Strategies of the Nigerian Listed Manufacturing Firms

Description

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Abstract

This study assesses the effects of leverage incentives on the three identified earnings management strategies of the Nigerian listed manufacturing firms.

To achieve this, the study formulates three hypotheses and uses cross-sectional OLS to estimate accrual and real earnings management using Dechow et al (2002) and Roychowdhury (2006) models, respectively; as well as Panel OLS and panel logistic regressions to test for the impact of leverage on accrual earnings management.

The hypotheses test models were also subjected to fixed and random effect tests, in which for all the three models, the Hausman specification tests indicate that some of the firms’ unobserved specific characteristics are constant over time but vary among panels.

While some of these unobserved characteristics vary over time but are fixed within panels as such, we analyzed the result we controlled for random effects. The study found that while a significant positive relationship exists between leverage and accrual earnings management, the relationships are in a negative direction for both real and deferred tax strategies.

Introduction

Accounting earnings as is being reported in the published annual reports of firms are expected to serve as a timely and reliable input to various stakeholders (shareholders, potential investors, employees, suppliers, creditors, financial analysts, stockbrokers, and government agencies) useful in making prudent, effective and efficient decisions.

The quality of firms’ earnings as is being reported, varies from company to company and also from country to country (Ali, Ahmed & Henry, 2004). Literature posits that the level of reliability of reported earnings in particular and financial information in general, by quoted firms in developing countries lags behind that of their counterparts in developed countries.

Government regulatory institutions are ineffectual in not only driving the enforcement of the existing accounting standards but also in providing adequately enabling regulations that may enhance the practice of reporting quality accounting earnings (Ali, et al., 2004).

Notwithstanding, the practice of reporting managed earnings (which is of low value-relevance) is famous not only in developing countries but also in developed countries. This could be evidenced by the genesis of the collapse of giant corporations like Enron, Worldcom, Parmalat, and so on, which triggered a series of calls.

And enactment of tighter regulations by various study committees from different countries, such as the famous Sarbanes-Oxley Act of 2002.

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