Amount: $23.81 |

Format: Ms Word |

1-5 chapters |


Bank Name: FCMB Bank

Account Type: Savings
Account number: 7749601025

Bank Name: Access Bank

Account Type: Current
Account number: 0107807602



This study examines the verify of corporate governance mechanisms in cubing corporate mangers discretionary behavior and this how it helps in providing credible financial reports to stakeholders managers have been to manipulate financial information presented to interested parties of the various tools employed by mangers, accruals were considered more preferable and easily manipulated by the managers. Specifically, the impact of the separate roles for chief executive officer and board chairman, proportion of non executive directors, the composition of audit committee (as stipulated by the companies and Allied Matter Act 2004) and role of institutional of shareholder were examined in curbing discretionary accruals. A cross-sectional sample of 20 quoted companies on the Nigeria Stock Exchange (NSE)  was used as the base study with data drawn from their financial reports.     
           CHAPTER ONE


Corporate governance is seen as the system or processes of controlling and directing the activities or operations of an organization. It is usually seen as a means of ensuring that business organizations are controlled and directed to align with the interest and well-being of the owners of business organization (corporate bodies). It aims of ensuring that trust response on them by whom resources are entrusted do not betray this trust response on them by the resources owners.

The modern nature of corporations separate resource owners (Shareholders) form control of day to day running of the business activities of such corporations. Consequently, resources owners vest the control of the corporations to corporate managers while appointing a board to oversee the activities of the corporate managers. It is on this premise that overnight function of board of directors is established corporate managers. Therefore work towards maximizing the wealth of their shareholders. However, as a consequence of the separation of resource owners from control of corporation, periodic reports are required to update resources owners concerning how resources have been employed and the wealth generated from there. This places corporate managers as steward requiring them to give what is termed stewardship reports.

The report in modern day are made through the presentation of financial statements. However, it must be stated that there are other parties interested in the corporations. This pushes the responsibilities of corporations beyond the focus  of shareholder alone to include other interested parties giving rise to the stakeholders theory. The financial statements thus, represent the only means by which stakeholders can provides corporate managers with opportunity of presenting their performance, usually on the bases of earning, in an “impressive” light.

Corporate managers, as a result of their day to day involvement in the control of corporations, have access to information which stakeholders (except inside directors) do not have access to and as such employ the use of financial statement to communicate  these information which stakeholders. The concern lies in the credibility of such information presented  especially considering that corporate managers are aware of the informative content of such reports. This fact is much more of concern because investors, representing a component of the stakeholders, attach importance on the reported earnings of corporations. To them a corporation with less earning is seem as a poor performing corporation  while one with huge reported earning is seen in better light. This scenario creates incentive for corporate managers to manage reported earnings.

The management for earnings connotes manipulation of income (profit) to create an impressive or favorable perception on stakeholders. Corporate managers indulge in several  acts of managing earnings. This impairs on the quality of financial reporting, betrays the trust of stake holders and negates the concept of social responsibilities of corporations. Stolowy and Breton (2002) buttress this by stating that in a perspective where firm exists to generat and disseminate wealth in a society, cheating with accounts cheating with society in general. It is for this rease corporate governance has received enormous attention as the concepts is viewed as having the panacea to the excesses of corporate managers. Chen, Elder and Itsieh (2007: 23) state that the corporate governance mechanisms are viewed as a response to agency problems that gives rise `to e3arnings management. Mr. Sopo Sasore, cited by Charles Kumolu (2007:46) point that the major thrust of corporate governance lies in accountability. Adedipe (2005) also provides that the essence of corporate governance is to ensure that corporations respect the rule of law play by the rules guiding their business and hold ethics and professionalism in the highest esteem.

The attention on corporate governance as a tool to curb earnings management owes from the impact of earnings on economy. The underlying effects of earnings management is its unavoidable consequence of corporate failure and discouragement of foreign investors. Thus, the regulatory authorities (Corporate Affairs Commission and Securities and Exchange Commission) developed a code of corporate governance for all corporations in the country, especially corporation listed on the stock market. This is informed on the premise that healthy, viable and well regulated business environment with credible financial information reporting system is a catalyst for economic development. Importantly, for a country which is putting much effort to woe foreign Direct investment (FDIS) into the country and working towards  becoming among the top 20 developed economics in the world year to come.


The credibility of reported financials statements by corporate entities  has become the cause of concern for regulators investors, analysts and other stakeholders. The Nigeria stock market annual (2004:200) points that corporate managers indulge in several despicable acts such as understanding losses, over stating profits, covering bad debts and other wrongful acts. These have become a regular feature in the Nigeria corporate register and has tainted the corporate image of the nation.

Weak corporate governance and other reasons have been identified as reasons for the demise of corporations (chen et  al; 2007:6)  this has lead me to ask the following;

  • Are corporations with separate offices for their chief executive officer and chairman of board engaged in earnings management?
  • Do corporations having more non executive directors/external directors on their board compared to executive directors/ineternal directors involved in earning management?
  • Do corporations which have audit committee membership as stipulated by the companies and allied matters Act, 1990 (as amended to date) engaged in earnings management?
  • Are corporations having institutional share holder associated with earning management?

This study seeks to examine the relationship between the code of corporate governance best practices introduced by the securities and exchange commission (SEC) and the corporate Affai9rs commission (CAC)in 2003, and earning management behavior of corporate managers. It seeks to establish the effect of the corporate managerial discretionary accrual behavior, and gain an understanding of the response of corporations in implementing the code.

Specifically, the objectives of this study include;

  1. To determine whether corporations with separate roles for board chairman and chief executive officer are associated with earnings management.
  2. To determine if corporations with a higher proportion of non-executive directors indulge in earnings management.
  3. To establish whether corporations with audit committee membership as stipulated by the companies Act (CAMA, 1990 5.359 (4)) are associated with earnings management.
  4. To ascertain whether corporation with institutional share holders are associated with earnings management.

This study shall be restricted to public limited companies listed the Nigeria Stock Exchange (NSE) as at January 2007. These companies shall be of manufacturing concern this, excluding service corporations (financial institutions and other service providing corporations). This exclusion is as a result of the modified joies model which shall be used in expanding the discretionary accrual behavior of corporate managers.

Data relating to 20 quoted companies purposely selected and covering the industrial materials, food/beverage and tabacco, breweries, agricultural agro allied; health care, chemical and paints, automobile and tyre, and the conglomerate sub-sectors of the manufacturing sector.

The choice limiting the study to 20 quoted companies  and the above sub-sectors is to permit a manageable size for the study rather than focusing on a wide scope which may prove to be a great task considering the time and other resources necessary to effectively carryout this study with a large size.


The need for credible or quality financial statements in any economy cannot be emphasized. Its relevance lies in the efficient and effective allocating of economic resources. More  importantly, for a developing country such as Nigeria which requires the inflow of foreign direct investment (FDIS) into her financial system, a transparent, credible, accountable and reliable financial reporting system  which would be base on trust must be put in place to enable this dream materialize.

This study will also help in enlighten us on:

  1. Learning how to maintain good corporate values and safe business environments which allows for healthy competition amongst corporations;
  2. Creating a healthy business environment for corporations where corporations play according to the legal and regulatory guidelines;
  • Boosting the confidence of the investing public as a consequence of credible financial reports made by the concerned corporations;
  1. Enabling the regulatory authorities director a align their effectors properly in curbing the discretionary behaviours of corporate managers.
  2. How can excess cost can be cut on the part of the investors (financial report scruting cost) flow to
  3. Ultimately, prevent the collapse of corporations in the future.

It is a general consensus that there is no research study without a limitation. This study is not on exception. However, a conscious effort would be made to minimize error that could be inherent in this study, especially errors in the measurement of variable. Thus, the limitations of this study includes;

  1. Non disclosure of full corporate governance practice by some corporations in their annual reports. Some corporations did not state explicitly in their annual reports, the status of its directors (i.e. either executive or non-executive).
  2. The smallness of the sample size i.e 20 companies as against 127 companies in the population of interest. The assumption of a normally distributed population with equal variances.
  • The precision of the measurement scale used, i.e. ratio scaling, in the generation of data cannot be guarantee.
  1. The qualitative nature of some variables in the model such as auditors report this, causing the use of dummy variables such as o and I.

As stated earlier, this study shall consider companies quoted on the Nigerian Stock Exchange (NSE) and they shall be of a manufacturing concern, thereby excluding companies which are services oriented. The sample size shall be restricted to 20 quoted companies as at January 15, 2007 and spreading across the food/beverage and tobacco, building materials, agriculture, chemical  and points, and the conglomerates sub-sectors of the manufacturing sector. These samples shall be selected purposely for the purpose of study.

  1. Corporate Governance: The term refers to all the influences affecting the institutional processes of an organization, including the appointments of directors and corporate mangers, operational activities of corporations articles and memorandum of associations, legal, ethical and professional demand son corporations, responsiveness to the rights and wishes of stakeholders, and the social responsibilities of transparency, accountability, and truth fullness.
  2. Earning management: Defined for the purpose of this study as the acts of managers to artificially, manipulate earnings in order to achieve pre-concerned self interests.
  • Stakeholders: stakeholders as used in this study refers to those groups or individuals who can significantly affect or be affected by a company’s activities e.g creditors, suppliers, employees, management, shareholders, community, government, bankers, bond holders, competitors etc.
  1. Accrual Basis: Is the basis used in accounting where revenue and expense are recognized in the accounting period to which they related and in which they are earned and incurred, and not when they are received or paid.
  2. Cash Basis: This is the base used in accounting where only revenue actually received and expenses actually paid during an accounting period are recognized in that period.
  3. Compound Board: This is used to describe the existence of two or more control centres or boards for corporations. It may be required by the companies law of concerned country, companies article of association or created by relationship external to companies. It is prevalent in some European and Asia countries where family ownership of public companies is common.
  • Opportunistic Behavior: This is a term used to describe a situation where corporate managers take advantage of their privy to organizational information to achieve their self interest.
  • Information Asymmetry: This means a situation where economic information is available to stakeholders or concerned parties in different degrees. Such information are essential for contracting and decision making.
  1. Institutional Investors: An institution investors is an investor such as bank, insurance, company, pension or retirement fund, hedge in very large part port folios of investments. For the purpose of this study, institutional shareholders shall include shareholders with a minimum of 5% shareholding exchanging individuals and governments.
  2. Earnings Per share: Is a performance indicator primarily of interest to existing and potential investors. It refers to the earnings available to equitable holders per share held by them.
  3. Corporate managerial strategies: Are these charged with the responsibility of performing managerial functions such as planning, controlling, directing, organizing and coordinating. They are officials at the top cadre of an organization.
  • Managerial Discretion any Behavior: Are the actions of corporate managers which does not align with the expectations of stakeholders e.g. corporate window dressing.