EARNINGS MANAGEMENT AND MARKET VALUE OF FIRMS IN NIGERIA
This study examined earnings management and market value of firms in Nigeria. In light of the empirical review and other discussions, a number of questions arose as to whether there is relationship between earnings management and market value of firms in Nigeria. Using the Ordinary Least Square (OLS) regression technique with the aid of computer software, the empirical findings revealed among other things that there is no significant relationship between board size has no significant impact on earnings management. Recommendations were however made by the researcher.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background of the Study
Statement of the Research Problems
Scope of the Study
Significance of the Study
Limitations of the Study
CHAPTER TWO: LITERATURE REVIEW
Earnings Management of Firms in Nigeria
Market Value of Firms in Nigeria
Earnings Management and Market Values of Firms in Nigeria
Measures of Earnings Management
CHAPTER THREE: METHODOLOGY
The Population and Sampling
Sources of Data
The Research Instrument
Operationalization of Variables
Model Specification and Analysis Plan
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.2 Descriptive Analysis
4.3 Correlation Analysis
Test of Hypotheses
4.5 Discussion of Findings
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
BACKGROUND OF THE STUDY
Capital market rely on credible financial accounting information. God quality in financial reporting helps investor to better assess firm value and performance and to make improved investment decision. Financial scandals in the United States and Europe (like Enron, Worldcom and Partmalat) have highlighted the importance of financial reporting quality, with a special emphasis on earning quality.
Due to the strong relationship between earnings quality and the finical scandals happened in the last ten years, earnings management has become a pressing issue in accounting academic debate and in practice. The corporate scandals of the late 1990s and the early 2005, in United States and in Europe, were arguably the result of some extreme form of earnings management activities.
Previous researchers have shown that managers engage in earnings management for various reasons and the periodicity of management to manipulate earnings information has increased overtime (Brown, 2001; Lopez and Rees, 2001; Barton, J. and Simkoip 2002). Several evidences indicate that earnings manipulation has become widespread. Graham, Harvey and Rajgopal (2004).
The reasons for earnings management are different and range from the intention to satisfy analysts expectations, to realize bonuses (so, reasons related to compensation issue), to maintain competitive position within the financial market, or reasons related to a new company’s acquisition. Jensen in 2005 theoretically introduced hypothesis about the over valued companies in Jensen’s argument, managers of over valued companies face two options. First, the managers can communicate to the market that he can not diver the expected operating performance top justify the inflated stock price either by telling the market out right or by waiting the next reporting date then, they report a negative performance surprise. This option has potential to negative affect the manager’s compensation and career. The second option, instead, includes actions to inflate reported performance to try to justify the inflated stock price. Such actions could be over investing through acquisitions or expansions, commitment of frauds and managing earnings. By doing so, the managers hopes to delay the negative compensation and career consequences, destroying substantial shareholder value in the long run.
According to Jensen’s prediction, as a firm becomes more over valued the pressure to meet increasingly unrealistic earnings targets became greater, encouraging managers to act in a way that are detrimental in the long run value of their firms. Based on this theoretical framework, and on previous empirical studies done in this field, the present research is organized around the following questions, is there any relation between firms market valuation and earnings management? Do the managers of over valued (under valued) companies have strong incentive to continues overvaluation (under-valuation) engaging in earnings management?
Following Homes and Skantz (2010), we assume as basic idea that market price drives reported earnings opposed to the standard model where reported earnings drivers market price. We hypothesize that there will be a positive relation between firms market value and earnings management and in particular, that in case of increasing in firms market value managers have the incentive to engage in income-increasing earnings management.
STATEMENT OF THE RESEARCH PROBLEMS
When considering the earnings management practice, the agency theory elucidates the existence of the incentive for management to use earnings management. The agency problem will cause that managers are able to give a miss representation of the earnings figure without the opportunity of shareholders and others to see through (Salah, 2010).
Furthermore, management could use earnings management to mislead shareholders by showing a different image of the company’s earnings (Salah, 2010) because of the opportunistic behavior of agents, organizations will try to put in place mechanisms that have to align the interests of the agents and principles.
One of the important mechanisms is through the establishment of board of directors. In addition, to safeguard the interest of shareholders, board of directors is the agent to the shareholders in ensuring the transparent financial reporting that reflect the real financial position of the companies.
Consequently, an attempt is made in this work to proffer solutions to the following research questions:
What is the relationship between earnings management and market value of firms in Nigeria?
What is the relationship between size and earnings management in Nigeria?
To examine whether there is relationship between earnings management and market value of firms in Nigeria.
To find out if size of firm has significant relationship with earnings management in Nigeria.
Based on the objective on the study, the following hypothesis would be tested.
There is a positive relationship between earnings management and market value of firms in Nigeria.
There is a positive relationship between size of firm and earnings management in Nigeria.
SCOPE OF THE STUDY
This research work is an empirical study on earnings management and market value of firms in Nigeria. The population of the study is the 260 quoted companies quoted in the Nigeria Stock Exchange. The sample size is selected quoted companies operating in Nigeria.
The length of period covered by the study was five years (2007 – 2011).
Geographically, the study will be conducted in Benin City, Edo State.
SIGNIFICANCE OF THE STUDY
This study will contribute to the existing literature by providing evidence on the impact of companies and board characteristics on earnings management practices and market value of firms in Nigeria.
The benefits to be derived from earnings management and market value of firms in Nigeria cannot be overemphasized and thus, this study could serve as a suggestions to Nigeria companies that they can prove their performance through optimal effort to improve their earnings and market value in Nigeria.
This study will afford the general public an insight into the importance of earnings management and market value of firms in Nigeria, thereby increasing and improving the awareness and knowledge of the students.
LIMITATIONS OF THE STUDY
Some of the restrictions and constraints, that was experienced by the researcher during the course are:
Insufficient materials and journals to conduct the literature review.
Lack of funds and some other important facilities, that will hinder the mobility of the researchers in the course of obtaining relevant information.
Lack of funds to register in professional sites on the internet to get articles and journals.
Barton, J. and Simko, P. (2002), The Balance Sheet as an Earnings Management Constraint, The Accounting Review, Vol. 77: 1-27.
Graham, J. R.; Harvey, C. R. and Rajgopal, S. (2004), The Economic Implications of Corporate Financial Reporting, Social Science Research Network.
Houmes, E. R., and Skantz, T. R. (2010), Highly Value Equity and Discretionary Accruals, Journals of Business Finance and Accounting, 37(1), 60 – 92.
Jensen, M. C. (2004), The Agency Cost of Over Valued Equity and the Current State of Corporate Finance, European Financial Management, 10(4), 540 – 565.
Salah, A. (2010), “Earnings Management in the Years following the Integrated Corporate Tax Within Dutch Housing Association”, Unpublished Masters Thesis, Erasmus University Rotterdam.
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