AN EMPIRICAL RELATIONSHIP BETWEEN EARNINGS MANAGEMENT AND MARKET VALUE: EVIDENCE FROM NIGERIAN QUOTED FIRMS

ABSTRACT

This study empirically investigated the effect of earnings management on market value of firms quoted in the Nigerian consumer goods sector.  The study covered a study period of ten (10) years spanning from 2012 to 2021. The independent variable is earnings management measured by Real Earnings Management (ABN_REM), Abnormal Cash-Flow Operating activities (ABN_CFO), Abnormal selling, general, and administrative expenses (ABN_SG&A), and Abnormal Production Costs (ABN_PROD). Meanwhile, the dependent variable is market value measured by Tobin’s Q. More so, the study controlled for leverage, firm size, and asset tangibility.  Data for the study were sourced from the annual reports of the 11 firms quoted in the Nigerian consumer goods sector from 2012-2021. To ensure that the model is feasible for prediction, the study subjected the model to series of diagnostic test such as Normality test, Variance inflation factors, cross-sectional dependence test, Heteroskedascity test, and Hausman Test. Specifically; the Hausman test revealed that the Random Effect model is the most suitable model for the study. The Random effect panel data variant reported that, Real Earnings Management (ABN_REM) and Abnormal Cash-Flow Operating activities (ABN_CFO) have negative significant effect on market value (TBQ) of firms quoted in the Nigerian consumer goods sector. However, Abnormal selling, general, and administrative expenses (ABN_SG&A) exerted positive significant effect on market value (TBQ) of firms quoted in the Nigerian consumer goods sector. Meanwhile, Abnormal Production Costs (ABN_PROD) exerted negative insignificant effect on market value (TBQ) of firms quoted in the Nigerian consumer goods sector. Hence, the study concludes that, provided that, leverage, firm size, and asset tangibility is controlled for, manager’s opportunistic behaviour occasioned by real earnings management and abnormal cash flow from operations (CFO) reduces the market value of firms quoted in the Nigerian consumer goods sector. As such, the study recommends that: regulators of firms quoted in the Nigerian consumer goods sector should increase the regulations in order to keep these firms from applying real earnings management. In like manner, auditors should be more skeptical when auditing a firm that faces high industry competition and financial distress as it is likely that the firm applies real earnings management.

TABLE OF CONTENTS

TITLE PAGE              -           -           -           -           -           -           -   ii

DECLARATION        -           -           -           -           -           -           -   -           iii

CERTIFICATION      -           -           -           -           -           -           -   -           iv

DEDICATION           -           -           -           -           -           -           -   -           v

ACKNOWLEDGEMENTS    -           -           -           -           -           -   vi

CHAPTER ONE

INTRODUCTION

1.1.      Background of the Study

1.2.    Statement of the Research Problem

1.3.    Objective of the Study

1.4.    Research Questions

1.5.    Research Hypotheses

1.6.    Scope of the Study.

1.7     Significance of the Study

1.8.      Limitations of the Study

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.0.    Introduction

2.1.    Conceptual Review

2.1.1  Concept of Earnings Management

2.1.2  Forms of Earnings Management

2.1.3  Concept of Market Value

2.1.4  Measures of Market Value

2.2.    Theoretical Framework

2.2.1  Agency Theory

2.3.    Empirical Review

2.3.1  Extant Empirical Studies Conducted In the Nigerian Context

2.3.2  Extant Empirical Studies Conducted Outside In the Nigerian Context

2.4.    Literature Gap

CHAPTER THREE

RESERCH METHODOLOGY

3.1.    Introduction

3.2.    Research Design

3.3.    Population and Sample Size

3.4.    Sampling Techniques

3.5.    Method of Data Collection

3.6.    Techniques for Data Analysis

3.7.    Model Specification

CHAPTER FOUR

RESULTS AND DISCUSISONS

4.1.    Introduction

4.2.    Data Analysis

4.2.1. Descriptive Statistics

4.2.2. Correlation Analysis

4.2.3  Diagnostic Test

4.2.3.1 Normality Test

4.2.3.2 Variance Inflation Factors

4.2.3.3 Cross-Sectional Dependence test

4.2.3.4. Heteroskedasticity Test: Breusch-Pagan-Godfrey

4.2.3.5. Correlated Random Effects - Hausman Test

4.3.    Regression Result

4.6.    Test of Hypotheses

4.5.    Discussion of Regression Results

4.5.    Real Earnings Management (ABN_REM) and Market Value (TBQ)

4.5.2  Abnormal Cash-flows from Operations (ABN_CFO) and Market Value (TBQ)

4.5.3  Abnormal Selling, General, And Administrative Expenses (ABN_SG&A) and Market Value (TBQ)

4.5.4  Abnormal Production Costs (ABN_PROD) and Market Value (TBQ)

4.5.5  Control Variables

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1.    Introduction

5.2     Summary Findings

5.3.    Conclusion

5.4.    Recommendations

5.5.    Contribution to Knowledge

5.6.    Suggestions for Further Studies

References

Appendix 1: Sourced Data

Appendix 2: Regression Results

Appendix 3: Descriptive Statistics

Appendix 4: Normality Test

Appendix 5: Correlation Analysis

Appendix 6: Panel Least Square Result

Appendix 7: Random Effect Model

Appendix 8: Hausman Test

Appendix 9: Fixed Effect Model

LIST OF TABLES

Table 2.1: Summary of Empirical Literature

Table 3.1: Sampled Firms

Table 4.1: Summary of Descriptive Statistics for the 120 Observations

Table 4.2: Correlation Matrix for all variables

Table 4.3: Variance Inflation Factors

Table 4.4: Residual Cross-Section Dependence Test

Table 4.5: Heteroskedasticity Test: Breusch-Pagan-Godfrey

Table 4.6: Correlated Random Effects - Hausman Test

Table 4.7: Cross-section random effects test equation

Table 4.8:       Summary of Hypothesis Testing

List of figures

Figure 2.3: Description of Real Earnings Management

Figure 4.1- Normality Test

CHAPTER ONE

INTRODUCTION

1.1         BACKGROUND OF THE STUDY

Generally, it is believed that the financial statement of a firm gives a snapshot of the financial health of the firm. As such, information gotten from the firm’s financial statement should provide shareholders, corporate investors, financial analysts, managers, as well as other stakeholders with a clear picture of a firm’s financial prowess (performance) and market value overtime (Farouk & Isa, 2018). However, the information gotten from a firm’s financial statement depends solely on accounting information. Again, given that accounting information must be relevant, objective and measurable, current accounting practices allow an extent of choice of policies and professional judgment in ascertaining the method of measurement, basis for recognition, and even the definition of accounting entity.  This therefore suggests that, preparers of accounting information may sometime use their accounting knowledge to smooth accounting figures within the ambit of accounting rules and conventions  such that instead of given a fair of the state of affairs of a firm, they may decide to show what the management wants the stakeholders perceive about their company. This act within the accounting parlance is termed earnings management.

Earnings management according to Ceccobelli and Giosi (2019) is a deliberate non-disclosure of information and manipulation of accounting figures, thereby making the firm to appear to either be highly profitable or less profitable. In other words, .Earnings management, in accounting context, can be defined as the act of intentionally influencing the process of financial reporting process with a view to obtain some form of personal/corporate gains.  Amake and Akogo (2021) stressed that it is not inconceivable to a have accounting systems that are totally rule based without room for occasional judgment. As such, the concept of earnings management is a critical construct within the accounting parlance. 

Kuang (2021) stressed that efficient earnings management increases the quality of the firm, creates a stable financial scenario, and reflects the fundamental value of the firm through improved information and enhanced private communication, which generate a positive relationship between real earnings management and market value (Tobin’s Q denoted by TBS). However, if discretion is used opportunistically, it may deteriorate Firm value or modify resource allocation by reporting earnings to gain personal benefits. Moreover, the markets might not replicate the real value of the firm, given the distortion of financial information, which also engenders a negative relationship between real earnings management and Firm value.

Arising from the foregoing, the study investigated the effect of earnings management on market value of quoted firms in the Nigerian consumer goods sector.

1.2.      STATEMENT OF THE RESEARCH PROBLEM

It is no longer strange to observe the widespread tendency for earnings management practices amongst companies all over the world since it is it is not inconceivable accounting standards to be devoid of occasional judgments. This therefore justifies the reason why the concept of earnings management remains one of the most debated issues within the accounting parlance. Consequent upon the corporate failures of the Enron, WorldCom amongst others in the international arena in early 2000, countries all over the world made deliberate efforts to address this situation with a view to guarantee the credibility of the financial statements by ensuring strong corporate mechanisms and strict compliance with accounting standards. Still, the issue of corporate scandal occasioned by deliberate misstatement of accounting figures remains a major global issue which corporate firms all over the world are faced with. This therefore became major factors which necessitated the study.

More so, the issue of earnings management seems to be highly prevalent in emerging countries like Nigeria considering the fact that emerging countries like Nigeria c are faced with myriads of policy inconsistency due to overriding market imperfections. Justifiably,  the cases of misappropriation of corporate funds, financial figures misstatement alongside the manipulations of financial reports   to suit management interest still persist despite all government efforts which are targeted at reducing fraud cases . More so, the issuance of corporate governance codes seems not to have also yielded much resulted over the years

Although, empirics have developed various models as measures of earnings management over the years yet they still have not come to a roundtable agreement as to a holistic measure of earnings management. For example, empirics like Vakilifard and Mortazavi (2016) criticized the discretionary loan loss provision model on the ground that the model may not be able to best fit studies centered on non-financial industry considering the fact non-financial industries do not carry out lending activities. Again, (Kuang, 2021) criticized the Beatty, Hong, and Adam (2002) model stating that the model failed to capture certain crucial market parameters in its computation. As such, the authors discouraged firms from using this model for measuring earnings management. Even the most renowned non-discretionary accruals measure of earnings management seems not to be flawless too. This therefore suggests the possibility of missing link in extant studies on the subject matter even till date.

Lastly, there seems to be dearth of empirical studies in relation to the nexus between earnings management and value of quoted firms in the Nigerian context. As such, it may be difficult to empirically trace the linkage between earnings management and market value of quoted firms in the Nigerian context. These observed gaps may therefore obfuscate better insight into the relationship between earnings management and firm value if not investigated. Hence, this current study is therefore germane.

Arising from the above stated missing links, the current studies empirically investigated the effects of earnings management on market value of quoted firms in the Nigerian consumer goods sector.

1.3.      OBJECTIVE OF THE STUDY

The main objective of this study is to explore the effect of Earnings Management on market value of quoted firms in the Nigerian consumer goods sector. Specifically, the study seeks:

      i.         To examine the extent to which Real Earnings Management (ABN_REM) affect Tobin’s Q of firms in the Nigerian consumer goods sector.

     ii.         To ascertain if abnormal Cash-Flow Operating activities (ABN_CFO) has significant effect on ear Tobin’s Q of quoted firms in the Nigerian consumer goods sector.

   iii.         To determine if Abnormal Selling, General, And Administrative Expenses (ABN_SG&A) have significant effect on Market value (TBQ) of quoted firms in Nigeria.

   iv.         To establish if Abnormal Production Costs (ABN_PROD) have significant effect on Market value (TBQ) of quoted firms in the Nigerian consumer goods sector.

1.4.      RESEARCH QUESTIONS

1.     To what extent has Real Earnings Management (ABN_REM) affected Market value (TBQ) of quoted firms in Nigeria?

2.     How has Abnormal Cash-Flow Operating Activities (ABN_CFO) affected Market value (TBQ) of quoted firms in the Nigerian consumer goods sector?

3.     To what extent has Abnormal Selling, General, and Administrative Expenses (ABN_SG&A) affected Market value (TBQ) of quoted firms in the Nigerian consumer goods sector?

4.     How has Abnormal Production Costs (ABN_PROD) affected on Market value (TBQ) of quoted firms in the Nigerian consumer goods sector?

1.5.      RESEARCH HYPOTHESES

H0₁:    Real Earnings Management (ABN_REM) has no significant effect on Market value (TBQ) of quoted firms in the Nigerian consumer goods sector.

H0₂:    Abnormal Cash-Flow Operating activities (ABN_CFO) have no significant effect on Market value (TBQ) of quoted firms in the Nigerian consumer goods sector.

H0₃:    Abnormal selling, general, and administrative expenses (ABN_SG&A) have no significant effect on Market value (TBQ) of quoted firms in the Nigerian consumer goods sector.

H0₄:    Abnormal Production Costs (ABN_PROD) has no significant effect on Market value (TBQ) of quoted consumer goods firms in the Nigerian consumer goods sector.

1.6.      SCOPE OF THE STUDY.

This subject scope was limited to finding the effects of earnings management on market value of quoted firms with specific focus on the Nigerian consumer goods sector. Specifically, the independent variable is Earnings management operationalized and it will be measured using the Roychowdhury’s (2006) and Tulcanaza-Prieto, Belén, and Younghwan (2022) Model to assess modifications in Real Earnings Management as this model is the most recurrent and suitable method applied in several Real Earnings Management studies (Anagnostopoulou &Tsekrekos, 2017). The model covered Real Earnings Management (ABN_REM), Abnormal Cash-Flow Operating activities (ABN_CFO), Abnormal selling, general, and administrative expenses (ABN_SG&A), and Abnormal Production Costs (ABN_PROD) for firms near the zero earnings benchmark to perceive real manipulation to avoid losses. Meanwhile, the dependent variable is market value measured by Tobin’s Q. More so, the study controlled for leverage, firm size, and asset tangibility.

In terms of time scope, the study covered 110 firm observations since the study covered a study period of ten (10) years spanning through 2012-2021 and 11 cross-sectional units.

1.7       Significance of the Study

This study will be significant to the following stakeholders in the following ways:

1.     Accounting Bodies: The study would provide useful information that will enable Institute of Chartered Accountant of Nigeria (ICAN), Association of National Accountant (ANAN) in Nigeria to formulate policies that may be used to streamline the accounting profession and promote corporate governance in Nigeria.

2.     Capital Market Authorities: The findings would enable Capital Market Authorities (CMA) keep track of market reaction to earnings management reporting of listed companies in the capital market and develop rules and regulations to mitigate such practices.

3.     Investors: The study would provide investors with more information on earnings management practices which would enable them to make well informed investment decisions.

4.     Policy makers: This study will be of high significance to policy makers in that it will aid development of policies that are aligned with current developments in the exchange to promote effectiveness, transparency and efficiency. Again, the study will assist the Nigerian government to monitor the value of quoted firms in Nigeria. As a regulator, the study will help the Nigerian government to formulate policies on the effects of earnings management on the value of quoted firms in Nigeria.

5.     Managers: This study will thrive in enlightening managers of quoted firms in Nigeria on the latest progress in research on their earnings manipulation activities. More so, it will expose them on the extent to which their manipulation of the earnings really affects the companies and how easy it is for them to lose potential investors because of it.

6.     Lenders: This study will also be significant to lenders in that the outcome of this study will assist them to evaluate how earnings management affect s the market value of quoted firms before investing in such company.

7.     Shareholders: This study will provide more insight to these parties on the existence of earnings management. It will also enable future and potential investors to get into business with full knowledge about what they are really getting into.

8.     General Public: This study will afford the general public an insight into the importance of earnings management on market value of quoted firms in Nigeria. As such, its outcomes will increase and at the same time improve public awareness on the linkage between earnings management and firm value.

9.     Academic Community: This study will add value to them, as it will be of use to them as a reference and as a basis for further research in this field or in a related area. This study will help in the knowledge build up in this line of study, contribute to existing awareness and give more insight on earnings management level in financial companies.

1.9.      Limitations of the Study

1.     Geographical Scope: Initially, the study intends is to focus on the whole quoted firms in Nigeria. To overcome this challenge, the study focused only on the Nigerian consumer goods sector.

2.     Measurement Issues: One of the greatest challenges that the current study is faced with is measurement issue. This is owing to the fact that earnings management till date is yet to get a universal model that best fit earnings management. To overcome this, the study intends to adopt the Roychowdhury’s (2006) and Tulcanaza-Prieto, Belén, and Younghwan (2022) Model to assess modifications in Real Earnings Management as this model is the most recurrent and suitable method applied in several Real Earnings Management studies (Anagnostopoulou & Tsekrekos, 2017).

3.     Methodological Issues: Another salient challenge which may affect the outcome of this study. To overcome this challenge, the study adopted the panel data methodology alongside various diagnostic tests.

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