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EARNING MANAGEMENT AND FIRM VALUE OF LISTED CONGLOMERATE COMPANIES IN NIGERIA


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Abstract

Though earnings management is permitted within the financial reporting framework in many jurisdictions, its practices depending on the intention and aggressiveness may dovetail into fraudulent financial reporting and thus may have implications not only on entity’s share price but also on its going concern and ultimate survival. This study examined earning management and firm value of listed conglomerate companies in Nigeria. The study adopts the survey research design of which primary source of data was used and extracted from the selected conglomerates firms listed on the Nigerian Stock Exchange. The result revealed that leverage and firm age have negative significant effect on earnings management, while liquidity and firm non-current assets turnover have positive significant effect on earnings management of listed conglomerate firms in Nigeria. The study concludes that higher leverage provide management of conglomerate firms in Nigeria with less incentive to manipulate earnings. Higher non-current assets turnover and Excess liquidity provides managers high incentive to behave opportunistically.

CHAPTER ONE

INTRODUCTION

Background of the study

Earnings management has been a huge and consistent issue among regulators and practitioners and has gain significant attention in the field of accounting. Several reasons and techniques exist for earnings management practice and most of which are the aims of the management’s (Bassiouny, 2016). Earnings management and earnings manipulation remained a great concern for the published financial statement reliability. Academic literature indicated that the earnings management practice is widely conducted within publicly listed firms (Rudra & Bhattacharjee, 2012). In emerging markets, like Nigeria because of their relatively feeble legal administration capabilities, earnings management issue is more commonly practiced. According to Cohen and Zarowin (2010) and Roychowdhury (2006), they provide evidence and discuss that corporate managers shifted their focus from accrual based earnings management to the real activities manipulation (real earnings management). Real activities manipulation occurs when management deliberately manipulates the real operational activities. This includes given out a discount to customers to improve sales, timing of profitable investment and reduction of expenditure to increase the profit level. In another argument, Graham, Harvey and Rajgopal (2005), they indicate that as a result of the disadvantage related with the accrual earnings management, the earnings manipulations are most likely to be realized through the real operational practices. The first assumption is the effort of auditors and regulatory organization to detect the accruals earnings activities have shifted the focus of managers from the accrual-based practices to the real activities manipulation, such as those associated to production, expenditures on research, product pricing and development as well as advertising. The second assumption is that, it is risky focusing on accrual manipulation alone. The deficit between the uncontrollable earnings and the anticipated level can surpass the stated amount through which it is feasible to exploit accruals following the fiscal year ending. If the revenue reported drops beneath the level and all the strategies accrual-based to encounter it are drained, corporate managers do not have an alternatives since the real activities manipulation cannot be amended at or following the end of the financial year (Inaam, Khmoussi, & Fatma, 2012). In Nigeria, the well-publicized corporate failures which include big corporations like Lever Brothers Plc, the Cadbury Nigerian Plc and African petroleum (Ajibolade, 2008). The insolvency of these big companies, internationally and locally, curtailed from manipulating earnings, as a result of fraudulent practices by the executives as well as ineffective Corporate Governance Mechanism (Fodio, Ibikunle, & Oba, 2013). The Nigerian corporations are tremendously involved in this threat that led to the failure of several institutions (Mustapha, Rashid, Ado, & Ademola, 2019). This incidence has weakened the public confidence, most particularly those within the accounting circle. Furthermore, it has also brought to attention the issues regarding weak internal control systems and the financial reporting quality among firms (Uwuigbe, 2014). The corporate failures of this large companies in Nigeria have emphasised the deliberate transgression of managers in a broader spectrum. Moreover, there are worries about the vulnerability of corporate governance in the past, as it was not efficient enough to protect potential and existing investors from expropriation (Patrick, Paulinus, & Nympha, 2015). Decisions of firms are affected mainly by some attributes they have. These variablesover the time influence firm’s decision both internally and externally. The firm attributes contain the variables such as firm size, firm growth, leverage, firm age, firm liquidity, and firm’s asset turnover among others. This variable mostly determine the way in which business are run by the managers (Ibrahim, 2016). Argument from literature exist that the variable influences managers desire to engage in earnings management practice (Iman &Nejad ,2015;Lazzem & Jilani, 2017; Shehu &Ahmad, 2013). There have being a greater attention In Nigeria on earnings management since the Cadbury Nigeria Plc scandal in 2006. In the Cadbury’s case, it was announced that there was detection of overstatements in their published financial statement for a period of four years 2002 to 2005.Furthermore, In the Nigeria banking sector, it was alleged that some managers were involved in serious financial crimes such as window dressing of accounts, creative accounting and embezzlement. The banks are Oceanic Bank International Nigeria Plc, Afribank Nigeria Plc, Equitorial Trust Bank Ltd, Finbank Plc, Intercontinental Bank Plc, and Bank PHB Plc.It is always surprising when firms that have been tag to be doing well based on the information provided in financial report suddenly collapse on issues of poor earnings and accounting manipulation such as Skye Banks plc in 2018.The alleged cases of falsification of audited financial statements by managers of the aforementioned companies provide need for the study of earnings management practices in Nigeria.

  • STATEMENT OF THE PROBLEM

Financial report is meant to assist users of accounting information in making valuable decision. Shareholders, potential Investors, creditors and others users required that the financial report presented by firms to be credibility, free from error, misstatement and manipulation. However, it is not always true that management normally present the true picture of the financial position of the enterprise. Earnings management is used to conceal the true financial result and position of a business and makes the facts that stakeholders ought to know unclear (Lawal, Nwanji, Opeyemi & Adama, 2018).When Managers uses their discretion in making the financial report look different from the reality then earnings management is said to exist According to Davidson and DaDalt (2013),managers in to quest to engage in earnings management practice takes benefit of the flexibility in accounting rules and principles when incurring expenses and recognizing revenues. The chance of the presence of earnings management can create serious problems as the interpretation of financial reports and the measurement of firm profitability become a mixture between assessing the firm’s economic reality and recognizing the probable adjustments that may have been made (Sincerre, Sampaio,Famá & Santos, 2015). It is in view of this that the researcher intend to investigate the earning management and firms value of listed conglomerate companies in Nigeria.

  • OBJECTIVE OF THE STUDY

The study has one main objective which is broken down into general and specific objective; the general objective is to examine the earnings management and firm value of listed conglomerate companies in Nigeria; the specific objectives are:

  1. To examine the effect of earning management on firms financial value
  2. To ascertain if there is any relationship between earning management and firms profitability
  • To examine the effect of earning management on organizational growth
  1. To examine the impact of earning management on the credibility of financial statement of listed conglomerate
    • RESEARCH QUESTIONS

The following research question were formulated by the researcher to aid the completion of the study:

  1. Does earning management have any effect on firm’s financial value?
  2. Is there any significant relationship between earning management and firm’s profitability?
  • Does earning management have any effect on organizational growth?
  1. Does earning management have any impact on the credibility of financial statement of listed conglomerate?
    • RESEARCH HYPOTHESES

The following research hypotheses were formulated by the researcher to aid the completion of the study;

H0: There is no significant relationship between earning management and firm’s profitability

H1: There is a significant relationship between earning management and firm’s profitability

H0: Earning management does not have any effect on organizational growth

H2: Earning management does have an effect on organizational growth

  • SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance the management of selected conglomerate in the reporting of the true and fair view of the financial statement as this will boost the confidence of investors and potential investor on the true state of the firm’s financial position. The study will also be of great importance to researcher who intend to embark on a study in a similar topic as the findings of this study will serve as a pathfinder to further study. Finally, the study will be of importance to student, teachers, researchers, academia’s and the general public as the findings of this study will add to the pool of existing literature on the subject matter and also contribute to knowledge.

  • SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the earning management and firm value of listed conglomerate companies in Nigeria. But in the course of the study, there are some factors that limit the scope of the study;

AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study

TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

FINANCE: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.

  • OPERATIONAL DEFINITION OF TERMS

Earnings

A company's earnings are its after-tax net income. This is the company's bottom line or its profits

Earning management

Earnings management refers to a company's deliberate use of accounting techniques to make its financial reports look better.

Firm value

Firm value is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors and shareholders.

Conglomerate

A conglomerate is a combination of multiple business entities operating in entirely different industries under one corporate group, usually involving a parent company and many subsidiaries.

 

1.9 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.

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Author: SPROJECT NG