EARNINGS MANIPULATION AND BANKRUPTCY RISK
ABSTRACT
    This study assessed the effects of earnings manipulation on bankruptcy risk   of listed companies in Nigeria.
To achieve the objective of this study, a total of 30 listed firms in the Nigerian Stock Exchange were selected and analyzed for this study using random sampling techniques. The corporate annual reports for the period 2011-2015 were used for the study. In testing the research hypothesis, the study adopted the use of both descriptive statistics and econometric analysis using panel least square regression for the listed sampled firms.
 Findings from the study revealed that creative accounting have a negative and insignificant relationship with bankruptcy risk, executive compensation has a positive and significant relationship with bankruptcy risk while stock price has a positive and insignificant relationship with bankruptcy risk. Thus, this study concludes that certain management incentives could lead to earnings manipulation which could affect the long-term existence of the company.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1     Background to the Study    .    .    .    .    .    
1.2     Statement of Research Problem    .    .    .
1.3     Objective of the Study    .    .    .    .    .    .    
1.4     Research Hypotheses    .    .    .    .    .    .
1.5     Scope of the Study    .    .    .    .    .    .    
1.6     Significance of the Study    .    .    .    .    .
CHAPTER TWO: LITERATURE REVIEW
2.1     Introduction    .    .    .    .    .    .    .    
2.2     Conceptual Framework    .    .    .    .    .    .
2.3     Empirical Framework    .    .    .    .    .    .
2.4     Review of Theories    .    .    .    .    .    .    
CHAPTER THREE: METHODOLOGY
3.1     Introduction    .    .    .    .    .    .    .    
3.2     Research Design    .    .    .    .    .    .    .
3.3     Population and Sampling    .    .    .    .    .    .
3.4     Sources of Data    .    .    .    .    .    .    .    .    
3.5     Model Specification and Data Analysis Method    .    .
3.6     Operationalization of Variables    .    .    .    .    .
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1     Introduction    .    .    .    .    .    .    .    
4.2     Presentation of Results    .    .    .    .    .    .    .
4.3     Regression Diagnostic Tests    .    .    .    .    .    .
4.4     Estimation Results    .    .    .    .    .    .    .    
4.5     Test of Hypothesis    .    .    .    .    .    .    .
4.6     Discussion of Findings    .    .    .    .    .    .    .    
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1    Introduction    .    .    .    .    .    .    .    .    
5.2    Summary of Findings    .    .    .    .    .    .    .
5.3    Conclusion    .    .    .    .    .    .    .
5.4    Recommendation    .    .    .    .    .    .    .    
BIBLIOGRAPHY    .    .    .    .    .    .    .    
APPENDICES    .    .    .    .
LIST OF TABLES
PAGES
Table 2.1   Major scandals of the twenty-first century    .    .    
Table 3.1    Measure of Variables    .    .    .    .    
Table 4.1   Descriptive Statistics    .    .    .    .    .
Table 4.2   Normality Test    .    .    .    .    .    .
Table 4.3   Variance Inflation Factors    .    .    .    .
Table 4.4    Result of the Arch Heteroskedasticity Test    .    .
Table 4.5   Breusch-Godfrey Serial Correlation LM Test    .    .    
Table 4.6    Correlation Analysis    .    .    .    .    .
Table 4.7    Hausman Test    .    .    .    .    .    .    .    
Table 4.8    Fixed Effect Regression Result    .    .    .    .
CHAPTER ONE
INTRODUCTION
1.1    Background to the Study
An organisation’s earning is one of the most important item that is contained in financial statements. It shows the extent to which the company/management has managed the resources of shareholders/owners and it indicates the value that has been added to shareholders wealth.
According to Fang (n.d.) earnings play two roles: (1) the informative and (2) the stewardship role. The informative role arises from investors demand for information to predict future cash flows and assess their risk while the stewardship role comes from the separation of ownership and management in public firms which puts the manager in a position of a steward to shareholders.
Earnings manipulation is the use of accounting techniques to produce financial reports that present a positive view of the company’s business activities and financial position. It involves the application of accounting rules to create financial statements that inflates earnings, revenue or total assets. Companies also use earnings manipulations to smooth out fluctuations in earnings and present more consistent profit each year.
According to Osisioma and Enahoro (2006), accounting processes and choice of policies resulting from many judgments at the same time are capable of manipulations, which have resulted in creative accounting.
Management can manipulate the company’s accounting practices, delay disclosure of bad news, manage their financial report to convey a more positive image of the firm in order to meet financial expectations and keep the company’s stock price up. Many executives receive bonuses based on earnings performance and others may be eligible to stock options that generate a profit when stock price increases.
Bankruptcy risk is the possibility that an individual or a company may be unable to service its debt obligation. Bankruptcy risk is greater when the individual or firm’s assets are poorly managed. This is when earrings manipulation come in, due to the fact that management is different from the owners, the opportunistic behaviour of managers in order to seek their own interest rather than shareholders’ interest can pose a risk of bankruptcy to the firm.   
1.2    Statement of the Research Problem
Over the years the issues of earnings manipulation has been examined extensively in the literature. Despite the increasing interest of researchers in examining earnings manipulation activities, few studies have examined its effects on bankruptcy risk in Nigeria, most studies focus on corporate governances related issues (Adenikinju & Ayorinde, 2001; Dabor & Adeyemi, 2009; Isenmila & Afensimi, 2012; Odia & Ogiedu, 2013; Olayinka, 2012).
Current global trend indicates that anxiety for the examination into the practice of earnings manoeuvre becomes even more salient following the current global trend of corporate failures that have bedevilled large organisation such as Health South Global Crossing, Parmalat, Hollinge, Adacco, TV Azteca, Enron, Worldcom and Tyco (Uwuigbe, 2013). Their demise led to the United State Congress to passing the Sarbenes Oxley Act in 2002 to remedy perceived deficiencies in financial reporting. In Nigeria there were some cases of earnings manipulation in some Nigeria firms which were reported in relation to Cadbury Nigeria Plc, Finbank, African Petroleum Plc, Spring Bank, NAMPAK, Savannah Bank and African international Bank. This captured the attention of investors and regulatory agencies which led to the formation of the corporate governance code in 2003 and 2011 respectively. Despite the formation of regulations on earnings manipulation, cases of misappropriation of fund and falsification of reports to suit management interest has continued unabatedly. It is for this reason that this research is designed to address the following research questions:
1.    Is there a significant relationship between earnings management and bankruptcy risk?
2.    What effect does executive compensation have on bankruptcy risk?
3.          Is there a significant relationship between stock price and bankruptcy risk?
1.3    Objective of the Study
The general objective of this study is to add to existing knowledge by assessing the relationship between earnings manipulation and bankruptcy risk of quoted companies in Nigeria. While the specific objectives are as follows:
1.    To determine the influence of earnings management on bankruptcy risk.
2.    To assess the effect of executive compensation on bankruptcy risk.
3.       To determine the impact of stock price on bankruptcy risk.
1.4    Statement of Research Hypotheses
1.    Ho1:    There is no significant relationship between earnings management and bankruptcy risk.
2.    Ho2:    There is no significant relationship between executive compensation and bankruptcy risk.   
3.    Ho3:    There is no significant relationship between stock price and bankruptcy risk.
1.5    Scope of the Study
This study examines the relationship between earnings manipulation and bankruptcy risk quoted companies in Nigeria. The study used 30 selected quoted companies in Nigeria Stock Exchange that consistently audited their annual financial reports between 2011 and 2015.
1.6    Significance of the Study
The study provides additional insight into the relationship between earnings manipulation and bankruptcy risk. The need for a study of this kind is very important in an environment like Nigeria, which is characterised by unethical accounting practices and high rate of corporate failure, especially public limited liability companies.
Furthermore, this study will enlighten investors on the issues of earnings manipulation and how it could erode the value of their investment in the firm. This study will enables managers have an in-debt understanding of the effects and costs of earnings manipulation on the financial statements. This study will also help tax authorities to identify quoted companies that provide false earnings to take advantages of tax payment.
Finally, this study will serve as a references point for future researchers who will want to research more on the topic.

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