IMPACT OF FIRM SIZE, FIRM AGE AND FAMILY CONTROL ON ACCRUAL EARNINGS MANAGEMENT OF PUBLICLY QUOTED NIGERIAN FIRMS

IMPACT OF FIRM SIZE, FIRM AGE AND FAMILY CONTROL ON ACCRUAL EARNINGS MANAGEMENT: EVIDENCE FROM NIGERIA

ABSTRACT

This study is an empirically investigation of firm attributes and earnings management, of publicly quoted Nigerian Firms for the period of 2020-2024 . The quoted firms used in the study are thirty (30) in number out of which a sample of ten (10) were used for the study. Firm attributes as the independent variable was proxy with firm size, leverage, Institutional ownership, profitability, liquidity and firm growth, while the residuals from the modified Jones model by Dechow et ‘al (1995) was used to proxy earnings management. The study adopted multiple panel regression techniques and data were collected from secondary source through the annual reports and accounts of the firms. The findings reveal that leverage, liquidity and firm growth has significant positive impacts on earnings management while firm size, institutional ownership and profitability have significant but negative influence on earnings management of listed oil and gas companies in Nigeria. It is recommended Precautionary measures should be taken over firm size, proportion of shares held by institutions, and also pursuance of higher profit at the expense of the quality of reported Earnings. This could be achieved through less regulation such as price control and reduced corporate tax in order for firms to disclose more detailed information in their annual reports and accounts.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

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 of a cover for true financial position of firms and status of a business performance that guide stakeholders on the know of their investment returns (Lawal, Nwanji, Opeyemi & Adama, 2018). All though managers often apply personal reasoning  in making the financial report look different from the reality then earnings management is said to exist According to Davidson and DaDalt (2003),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. When earnings are not properly accounted for, it can create serious problems during the interpretation of financial reports and makes the measurement of firm profitability become two ways assessing the firm’s economic reality while recognizing the needed adjustments that may have been made (Sincerre, Sampaio, Famá & Santos, 2015).

Decisions of firms are affected mainly by some attributes they have. These variables over the time influence firm’s decision both internally and externally. Firm characteristics includes variables such as firm size, firm age, firm growth, leverage, firm liquidity, and firm’s asset turnover. These variable mostly determine the way in which firms are run by the managers (Ibrahim, 2016). The reviewed literature identified firms attributes as key variables that enhanced managers desire to engage in earnings management practice (Iman & Nejad, 2015; Lazzem & Jilani, 2017; Shehu & Ahmad, 2013). There have being a renewed attention in Nigeria for the incorporation of earnings management practice by firms given increasing cases of business failure due to insiders manipulations of firms earning by shareholder to mislead the public into investing in such firms. We have the cases of 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. This sharp practice never ended in the manufacturing sector alone as the Nigeria banking sector was later discovered to be deepen in neck on the practice.  It was claimed in some quarter that most bank managers were involved in this serious financial crimes, doing window dressing of financial accounts, creative accounting reporting and embezzlement of public funds. Top among banks  mentioned are: Oceanic Bank International Nigeria Plc, Afribank Nigeria Plc, Equitorial Trust Bank Ltd, Finbank Plc, Intercontinental Bank Plc, and Bank PHB Plc just to mention but a few.

It is always surprising to observe that, firms that have been tag to be doing well based on the information face value of manipulated financial reports suddenly going down on issues of poor earnings and accounting manipulations. It was the case in Skye Banks plc in 2018.The alleged cases of falsification of audited financial statements by managers of the aforementioned bank provide need for this study “ the effect firms attributes on earnings management practices of selected firms in Nigeria. Several studies have being carried out on firm characteristic and Earnings management (Bassiouny, Soliman & Ragab, 2016; Obeidat, 2016; Echobu, Okika and Maliafa, 2017; Ilyas, Ahmad, Khan & Khan, 2018) but to the best knowledge of the researcher few studies had considered firm attributes effects on Earnings management especially in manufacturing  firms in Nigeria. Further, there are dearth of researches that have considered (non-current turnover) influence on the Earnings management of companies, bearing in mind the importance of this accounting ratio in revealing management performance indexes. Thus, this study empirically examine the effect of firm-specific attribute such as firm leverage, liquidity, firm age and noncurrent turnover on Earnings management of listed conglomerate firms in Nigeria from the 2007-2021. The rest of the thesis proceeds followed: by review of literature, methodology and model specification, results and discussion of findings and conclusions and recommendations. Globally several reasons have been attributed to the preparation of misleading financial statements among CEOs which often ranges from the demand for higher returns by shareholders on their investments, the insistent urge to show case giant corporate status in the eye of the business world or sporadic changes in competitiveness, the craze to satisfy the greed of company’s insiders among others (Shehu, 2012).

Firm attributes plays a significant role in explaining firms Earnings status. Attributes of the firm comprises of such incentive and variables often identified with the firms at firms’ level across time. Firm attributes has been identified to  mediate significant role in explaining firm level Earnings quality and managements. Firms attributes are variables that affect the firm’s decision both internally and externally (Shehu, 2012). Firms attribute variable ranges from ownership structures, firm size, leverage, profitability, Liquidity to firm growth. It is in view of the role firm attributes plays in restraining account information  and prevent (managers) from maneuvering the accounting figures which will eventually enhance the quality of reported accounting Earnings that motivates the researcher to   investigate the inconclusive findings and divergent view in extant literatures as to whether firm attributes have effect on earnings management.

1.2.  Statement of Problem

Despite the various attempts made by regulators of quoted firms in the Nigeria over the years, earnings management opportunistic tendencies of some managers and executive directors still abound. This to a large extent has undermined not just the credibility of reports presented by preparers of accounting information but also firm attributes (Veronica & Bachtiar, 2005). Justifiably, Algharaballi, (2013) opined that, managers are free in choosing  accounting and reporting models when preparing their financial statements but are often pressured to present to the market a manipulated reports that show successful image of the firm, by exploiting insufficiencies of accounting rules though may also be triggered by fluctuations in the reported incomes and expenses of companies (Sayari, Omri, Finet, & Harrathi, 2013).

In view of the above assertion, one of the major factors which motivated the researcher into undergoing this study is directed at ascertaining if truly fluctuations in the reported incomes and expenses of companies are consistent with the operations of a firm or not.

Thorough investigation into extant empirical studies clearly revealed that, most of the existing studies failed to incorporate institutional ownership and firm growth into the firm attributes and earnings management model. As such, most of the existing studies failed to look at the linkages among institutional ownership and firm growth on earnings management.  Consequently, most extant studies created a gap in existing body of knowledge which the current study is directed at addressing.

In the light of the above established pressing issues and gaps in extant studies, the present study seeks to investigate the influence of firm attributes on earnings management of quoted firms in Nigeria with specific focus on the Nigerian manufacturing industry.

1.3.  Research Questions

In light of the above research problem, some pertinent research questions that will be answered in the study are;

i. How does firm size impact on earnings management of selected oil and gas companies in Nigeria?

ii. How does leverage influence earnings management of selected oil and gas companies in Nigeria?

iii. How does institutional ownership impact on earnings management of selected oil and gas companies in Nigeria?

iv. To what extent has profitability affected earnings management of selected oil and gas companies in Nigeria?

v. To what degree has liquidity impact on earnings management of selected oil and gas companies in Nigeria?

vi. How determine the impact of firm growth on earnings management of selected oil and gas companies in Nigeria?

1.4  Objectives of the Study

The objective of this study was to determine the impact of firm size, form age and family control on accrual earnings management: evidence from Nigeria.  The specific objectives are:

i. To examine the effect of firm size on earnings management of selected oil and gas companies in Nigeria.

ii. To investigate the impact of leverage on earnings management of selected oil and gas companies in Nigeria.

iii. To ascertain the impact of institutional ownership on earnings management of selected oil and gas companies in Nigeria.

iv. To evaluate the contribution of firms Profitability on Earnings Management of selected oil and gas companies in Nigeria.

v. To examine the effect of Liquidity on earnings management of selected oil and gas companies in Nigeria.

vi. To determine the impact of firm growth on earnings management of selected oil and gas companies in Nigeria.

1.5 Hypotheses

 The following hypotheses were tested to guide the study. The hypotheses were formulated in null forms:

Ho_1: Firm size has no significant impact on earnings management of selected oil and gas companies in Nigeria.

Ho_2: Leverage has no significant impact on earnings management of selected oil and gas companies in Nigeria.

Ho_3: Institutional ownership has no significant effect on earnings management of selected oil and gas companies in Nigeria.

Ho_4: Profitability has no significant effects on earnings management of selected oil and gas companies in Nigeria

Ho_5: Liquidity has no significant effect on earnings management of selected oil and gas companies in Nigeria.

Ho_6: Firm growth has no significant impact on earnings management of selected oil and gas companies in Nigeria

1.6 Significance of the Study

The study would be significant to different stakeholders in the Nigerian economy in the following ways. For manufacturing companies, it is expected this research results can give an idea that practices affect the earnings quality that can cause unexpected things for the company. As such, firms in the Nigerian manufacturing industry will be more thorough and tighten rules for employee even its top, middle and bottom to minimize the probability to do the harmful actions or behavior in the future.

For auditor, it is expected that this research results can be a special concern so auditor can increase their level of independency and quality of their audit. Auditor should increase their integrity so they can limits the practices for internal auditor and for external auditor it is expected that they can successfully detect the practices that can influence the quality of Earnings of the client's financial statement so they can give correct and complete information for their client and not influence by the other parties even they paid for high audit fee.

For external parties, such as shareholder and investors, it’s better to not simply believe that audited company can limit the practice of . Investor control should also be increased so as to minimize the practice of Earnings management so cannot effect or manipulate the quality of the resulting Earnings.

Furthermore, the results of this study would provide some valuable ideas of giving feedback which can enhance the assessment of recent implementation of good firms attributes, and the findings may also help to offer some ideas for those companies who should enhance their  and company’s performance.

Lastly, the outcome of this study would be significant to the academic community as it will contribute to existing body of knowledge and at the same time serve as an input to others desiring to replicate the findings and conclusions reached in this study.

1.7    Scope of the Study

The conceptual scope of this study was to examine the impact of firm size, form age and family control on accrual earnings management: evidence from Nigeria Exchange Group. The study assessed the impact of firm size, leverage, and institutional ownership, profitability, liquidity and firm growth on earnings management as the dependent variable.

The geographical coverage of this work is delimited to quoted manufacturing firms in Nigeria between 2020-2024  is due to availability of data and the fact that the researcher can conveniently  access annual report of selected firms within these current years.

1.8 Limitation of the Study

The originality and reliability of any study or research work is based on the quantity and quality of available data. Though it is the duty and intention of any researcher to bring out and show everything the study is to entailed, but there are constraints in this study which include time, finance, difficulty in getting data, reaching out to broad numbers of corporate firms etc.

1. The problem of limited materials and the difficult means of getting these needed materials.

2. Difficulties of getting data is another challenge to the researcher mostly to investors who offers primary sources of data to this research

3. Finance was a general issue to many researchers, but the researcher tries to exhaust to his last resort.

4. Reaching out to broad members of corporate firms is very difficult and also a problem to the researcher.

1.9. Operational Definitions of Terms

Firm Attributes: These are specific variables that contribute towards the  changeson firm value. Company attributes are divided into firm performance characteristics and firm structural characteristics.

Firm Size: This is a measure of the natural logarithm of the total asset of the manufacturing companies in Nigeria.

Leverage: This involves using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment.

Institutional Ownership: This involves ownership stake in a company that is held by large financial organizations, pension funds, or endowments.

Profitability: This accounts for the extent to which a firm is able to meet up its corporate goals.

Liquidity: This accounts for the extent to which a firm is able to meet up all maturing obligations as they fall due.

Firm Growth:  This describes the way a business develops and expands over a period of time. 

Earnings Management: This is a practice followed by the management of a company to influence the earnings reported in financial statements. It is executed to match a set target and is different from managing the underlying business of the company. An earnings management strategy uses accounting methods to present an excessively positive view of a company’s financial positions, inflating earnings.

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