ABSTRACT
The type of association between earnings quality management and financial performance of listed manufacturing firms in Nigeria has been a concern in corporate governance literature recently. From financial uses’ standpoint, earnings quality management is an essential tool to the users of financial information because earnings of companies are generally important information components that must be presented in financial statements. The study examined the effect of earnings quality management on the financial performance of listed manufacturing firms in Nigeria. The specific objectives of the study are; to examine the extent to which earnings quality management affect return on equity of listed manufacturing firms in Nigeria, to determine the effect of earnings quality management on return on asset of listed manufacturing firms in Nigeria, to determine the effect of earnings quality management on profit after tax listed manufacturing firms in Nigeria and to determine the effect of earnings quality management on return on asset of listed manufacturing firms in Nigeria. Hence the study employed secondary data which is based on ex-post facto research design and made use of panel data set collected for forty (40) listed manufacturing firms listed on the Nigerian Stock Exchange for the period of 2014- 2018. The data was analyzed using simple regression analysis technique. The study found out that earnings quality management has no significant effect on return on equity of listed manufacturing firms in Nigeria; earnings quality management has no significant effect on return on asset of listed manufacturing firms in Nigeria; earnings quality management has a significant effect on profit after tax of listed manufacturing firms in Nigeria; earnings quality management has a significant effect on return on capital employed of listed manufacturing firms in Nigeria. The study recommends that stakeholders, especially managers and employees must endeavor to apply due diligence especially in corporate financial reporting and other day-to-day organizational activities which should never be detrimental to the real owners of the business (the shareholders); Investors and their advisers should understand the dynamics of earnings quality proxies as a guide in making informed investment decisions and portfolio diversifications strategies particularly in time of investment uncertainties; drafting a well-structured framework of accounting regulation; appropriate and proper measure should put in place for adequate evaluation, examination and scrutinisation of manufacturing firms financial statement.
TABLE OF CONTENTS
Title
page i
Declaration
page ii
Dedication
iii
Certification
iv
Acknowledgement
v
List
of tables ix
Abstract
x
CHAPTER 1: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of Problem 4
1.3 Objectives of the Study 5
1.4 Research Questions 5
1.5 Hypotheses 6
1.6 Scope of the Study 6
1.7 Significance of the Study 7
1.8 Operational definition of Terms 8
1.9 Limitations of the Study 8
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1 Conceptual Review 10
2.1.1 Concept, nature and scope of corporate
reporting 11
2.1.2 Goals and objectives of corporate reporting 12
2.1.3 Importance of corporate reporting 13
2.1.4 Corporate reporting quality 13
2.1.5 Influences on corporate reporting quality 14
2.1.6 Firm performance 15
2.1.7 Measurement of financial performance 17
2.1.8 Concept of earnings quality 18
2.1.9 Earnings quality measures 20
2.1.9.1 Accrual quality 20
2.1.9.2 Persistence 21
2.1.9.3 Predictability 22
2.1.9.4 Earnings smoothness 23
2.1.9.5 Value relevance 25
2.1.9.6 Timeliness 26
2.1.9.7 Conservatism 28
2.1.10 Qualitative evidence on the concept of
earnings quality 29
2.2 Theoretical Framework 29
2.2.1 Stakeholders theory 29
2.3 Empirical Review 30
2.4 Summary of Literature Review 42
2.5 Gap in Literature 46
CHAPTER 3: METHODOLOGY
3.1 Research Design 48
3.2 Population of the Study 48
3.3 Sample Size and Sampling Technique 48
3.4 Sources of data 49
3.5 Method of Data Analysis 50
3.6 Model Specification 50
3.7 Measurement of Variables 50
3.8 Decision
rule 50
CHAPTER 4: DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS
4.1
Data Presentation 52
4.2 Pre-estimation Tests 52
4.2.1 Stationarity/ Unit Root Tests 52
4.3 Test of hypotheses 55
4.3.1
Hypothesis one 55
4.3.2
Hypothesis two 58
4.3.2
Hypothesis three 61
4.3.4 Hypothesis
four 64
4.5
Discussion on Results 66
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1
Summary of Findings 69
5.2
Conclusion 69
5.3
Recommendations 70
5.4
Contribution to Knowledge 71
5.5
Areas of Further Research 71
References
73
Appendixes 78
LIST OF TABLES
2.1
Summary of literature review 42
3.3
List of selected manufacturing firms 48
4.1
Augmented
Dickey Fuller (ADF) Test 52
4.2 Descriptive
Statistics of the Variables 53
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
The importance of delivering high-quality
financial reports has received lots of attention recently all over the world.
It is vital to include high-quality financial reporting evidence because it can
favourably impact capital suppliers and other customers while making
acquisition, credit, and other resource allocation decisions, thus improving
overall business performance (International Accounting Standards Board, 2013).
Relevance, faithful description, comparability, verifiability, timeliness, and
understandability are examples of qualitative characteristics that make
financial data useful. Relevance and transparency, which make knowledge
valuable for policy makers, are the key metrics of financial information
accuracy, according to the authors of accounting Standards (Nwaobia, Kwarbai,
Kwarbai, and Ajibade, 2016).
According to the IASB (2013), conformity to
the qualitative characteristics of financial reporting information is a key
requirement quality in financial reporting for corporate information to be
beneficial. Many financial and accounting analysts have reported the advantages
and role of financial reporting quality (Jaballah, Yousfi, and Ali, 2014;
Chan-Jane and Chae-Jung, 2015). They have also stated that poor financial
reporting quality will negatively impact business quality and economic
decisions (Jaballah, Yousfi, and Ali, 2014; Chan-Jane and Chae-Jung, 2015).
This means that the consistency of financial reporting can affect managers'
willingness to participate in inefficient practices. It will also help
investors have greater leverage of their investment decisions. As a result,
high-quality financial reporting is supposed to minimize unnecessary and wasteful
expenditures (Biddle, Hilary, Rodrigo, and Verdi, 2009).
Several financial crises such as the Enron
and WorldCom global scandals have drawn the attention of Analysts, Academics,
and those concerned about the accuracy of financial data and published earnings.
Studies have started to look at the conditions that influence the profits of
publicly traded firms. Since the earnings of businesses are usually expected to
be an essential information aspect offered in financial statements, previous
scholars have indicated that earnings consistency is highly important to
financial information consumers, practitioners and regulators, as well as
accounting researchers (Boonlert-U-Thai, Meek, and Nabar (2006)). Users of
financial statements may suffer negative consequences if earnings quality is
too bad, so poor earnings quality may encourage investors to misallocate their
assets, resulting in poor investment outcomes (Schipper and Vincent, 2003).
Strong earnings quality, according to
Boonlert-U-Thai et al. (2006), is advantageous
to investors. They discovered that countries with better structural
characteristics for investor protection have more favourable earnings quality
(higher recorded earning quality) than countries with poorer investor
protection. Furthermore, higher earnings quality is thought to lead to better
company performance. Companies with low performance are likely to post
irregular profits more often than ones with high success, due to managers'
relentless pressure to fulfil stakeholder demands to keep their company's stock
price up. Companies with higher earnings quality, on the other hand, would do
well on the long run. Various studies have found a positive relationship
between earnings quality and corporate performance, while Gaio and Raposo
(2011) offer statistical evidence of a positive relationship between earnings
quality and corporate market valuation. These claims have contributed to the
conclusion that earnings quality is critical in assessing the life cycle of a
company and optimizing its output.
Previous research (Francis, LaFond, Olsson,
& Schipper 2004; Boonlert-U-Thai et
al., 2006; Laksmana & Yang, 2009) has hypothesized that certain
characteristics of earnings quality are advantageous in the sense that they
reduce knowledge risk and produce an obvious capital market advantage. Corporate reporting is an important component of a
company's value and a key factor in improving quality. It works as a tool to
reduce buyer anxiety and increase marketing quality and customer loyalty. Prior
study has shown that the level of earnings has a favorable relationship with
corporate success. Nonetheless, they primarily use the generalized linear model
to investigate this interaction, which measures the impact of earnings quality
on the conditional mean of corporate output. The different influencing ratios
at different points of the conditional distribution of organizational output
levels can be ignored by the generalized linear model. In a more sophisticated
method—value relevance—it is possible to discover the relationship between
earnings quality and corporate success.
Earnings quality, as previously said, is a cause of
better corporate success. Furthermore, it is possible that the impact of
corporate image on corporate performance is mediated by earnings quality.
However, to the best of our understanding, the mediating effect of a company's
earnings quality in the relationship between its credibility level and its performance
has already been investigated in previous studies. This will help them improve the quality with
which they manage their image and the consistency with which they produce
financial performance. As a result, their businesses will be able to boost
their performance.
1.2 STATEMENT OF PROBLEM
Financial
reporting scandals such as HealthSouth, Adelphia, Enron, and WorldCom have
raised concerns about the quality of accounting data and the impact of such
manipulations on firm performance, according to Nichols and Wahlen (2010). The
failure of banks in Nigeria, as well as the stock market crash and depression
that resulted in huge investment losses for investors raises serious questions
about financial reporting and whets the appetite of researchers to investigate
managers' actions and reported effects on firm performance. Internal and
external stresses are two reasons why management would choose to control
earnings. The cost of doing business is reduced by enhancing the accuracy of
documents in financial accounts, improved accounting practices, and ethical
behaviour.
Financial
statement fraud and subsequent business failures are a common occurrence around
the world. Okafor (2012) cites the case of Cadbury Nigeria PLC, where the
financial reporting was overstated by nearly N13 billion. In developing markets,
where many market imperfections persist, these concerns are seen as more
severe. This is particularly true in Nigeria, where cases of misappropriation
of funds and report manipulation to suit management interests continue amid all
government attempts, as demonstrated by the issuance of corporate governance
codes in 2003, 2011, and 2015, respectively. Furthermore, there is a paucity of
empirical literature on evaluating the impact of earnings quality management on
financial performance of manufacturing firms, as only a few studies have been
conducted, especially in Nigeria, where this research is based. The study's aim
is to close this scientific void.
As a
result, the aim of this research is to assess the effect of earnings quality
management on the financial performance of Nigerian manufacturing firms. The performance
of this report will be examined to see if they are consistent with those of
developing economies, and policy conclusions will be taken as a result.
1.3 OBJECTIVES OF STUDY
The broad objective of the study is to assess
the effect of earnings quality management on the financial performance of listed
manufacturing firms in Nigeria. The specific
objectives are:
1.
To
ascertain the effect of earnings quality management on the Return on Equity of
listed manufacturing firms in Nigeria.
2.
To
ascertain the effect of earnings quality management on the Return on Asset of
listed manufacturing firms in Nigeria.
3.
To
examine the effect of earnings quality management on the Profit after Tax of
listed manufacturing firms in Nigeria.
4.
To
evaluate the effect of earnings quality management on the Return on Capital
Employed of listed manufacturing firms in Nigeria.
1.4 RESEARCH QUESTIONS
The research questions are thus:
1.
To what
extent does earnings quality management affect Return on Equity of listed
manufacturing firms in Nigeria?
2.
To what
extent does earnings quality management affect Return on Asset of listed
manufacturing firms in Nigeria?
3.
To what
extent does earnings quality management affect Profit after Tax of listed
manufacturing firms in Nigeria?
4.
To what
extent does earnings quality management affect Return on Capital Employed of
listed manufacturing firms in Nigeria?
1.5 RESEARCH HYPOTHESES
In line with the research objectives and research
questions, the research hypotheses are thus:
HO1: Earnings
quality management has no significant effect on Return on Equity of listed
manufacturing firms in Nigeria.
HO2: Earnings
quality management has no significant effect on Return on Asset of listed
manufacturing firms in Nigeria.
HO3: Earnings
quality management has no significant effect on Profit after Tax of listed
manufacturing firms in Nigeria.
HO4: Earnings
quality management has no significant effect on Return on Capital Employed of
listed manufacturing firms in Nigeria.
1.6
SCOPE OF THE STUDY
The report will be limited to forty (40) publicly traded manufacturing
companies in Nigeria, from all industries that are listed on the Nigeria Stock
Exchange. The research will last for five years, from 2014 to 2018. The reason for
restricting the study to the forty (40) listed manufacturing firms and also the
use of five (5) years is due to the availability of data as presented in annual
reports of the selected firms. Manufacturing
firms are drawing investors from all directions as a result of the new
government strategy of redirecting investment into local manufacturing to
support the economy.
1.7 SIGNIFICANCE OF STUDY
The following are some of the implications of the research:
Users of financial services Observation: The analysis is important because it can
provide consumers of financial data with more detail on the profitability,
solvency, investment performance of the firm, enabling them to build confidence
in financial reporting. It's also important because it'll provide insight into
some of the regulatory provisions placed in place by related statutory bodies
to improve the standard of financial reporting in Nigeria's publicly traded
firms. The report would also provide investors with useful insights that will
assist them in making an informed investment decision.
Investigators: It is also significant because it will act
as a repository of information and a supplement to current literature and
experience. The research is also important because it will provide management
with data that will aid in the reduction of inaccurate financial statements.
Internal Audiences: Accounting officers, auditors, accounting
practitioners, and senior managers in the studied firms and related
organisations would benefit significantly from the performance of this report.
This will provide them with a good view of the company's business place in
terms of financial and non-financial success indicators.
1.8 OPERATIONAL
DEFINITION OF TERMS
Corporate reporting: This is the key instrument for disclosure of
financial and non-financial information creating value for shareholders.
Quality: This is the
standard of something as measured against other things of a similar kind; the
degree of excellence of something.
Financial Performance: Financial performance is a subjective measure
of how well a firm can use assets from its primary mode of business and
generate revenues. The term is also used as a general measure of a firm's
overall financial health over a given period.
Earning quality: This is the extent to which a firm's reported
earnings accurately reflect income for
that period. Firms
using conservative accounting practices tend
to penalize current earnings and are
said to have high
earnings quality.
Profitability (Return on Asset): This variable is used to measure the financial performance of an
entity. In the scenarios of banks, it is usually derived by dividing the net
income to the total assets of the banks at a time which is called Return on
Asset (ROA).
1.9 LIMITATIONS
OF THE STUDY
Although this study was
scientifically carried out, there are still potential limitations of the study
that should be taken into consideration.
The current research is
restricted only to the listed manufacturing firms in Nigeria. Furthermore, this
research was mainly conducted based on the secondary data collection. The other
data collection method like survey had not been considered. As a result they
may not be 100% accurate. In addition to these, data representing the period of
2014 to 2018 were used for the study which are data prepared on historical
basis.
More so, the data
prepared on a historical basis is one of fundamental problem associated with
presenting accounting information. This thus makes it impossible for current
causation to be inferred.
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