Management Project Topics

Effect of Corporate Governance on Earnings Management Practices of Nigeria Quoted Companies (2010-2015)

Effect of Corporate Governance on Earnings Management Practices of Nigeria Quoted Companies (2010-2015)

Effect of Corporate Governance on Earnings Management Practices of Nigeria Quoted Companies (2010-2015)

Chapter One

Objectives of the study

The main objective of the study is to examine the effect of Corporate Governance on Earnings management of quoted companies in Nigeria. The specific objectives include:

  1. To determine the effect of Board Composition on the Earnings management of quoted companies in Nigeria.
  2. To determines the effect of Institutional Ownership on the Earnings management of quoted companies in Nigeria.
  3. iii. To determine the effect of Audit Committee on the Earnings management of quoted companies in Nigeria.
  4. iv. To determine the effect of Managerial Ownership on the Earnings management of quoted companies in Nigeria.




This chapter review relevant literature related to Corporate Governance (CG) and Earnings management (EQ). The review focuses on conceptual and empirical literature related to CG and EQ. The chapter also presents review of relevant CG models and methods of measuring EQ.

Historic back ground of Corporate Governance

Corporate governance (CG) has a very long history, according to Berle and Means (1932) CG issues have been around since the eighteenth century as the precedence for modern corporate governance. Francis, (1997) in McCabe (2002) suggested that the corporate form of business enterprise, with multiple owners of structured entity can trace its origin from the Romans times at least. Hence, the problem of CG is expected to have long been addressed.

However, earlier in the sixteenth century, the British East India Company received its charter from the queen Elizabeth 1, (Monks and Minor 2008). Then two years later the Dutch East India Company received their royal charter with permanent capital and shares of unlimited duration. And in the seventh century the first joint stock company was said to emerge from Britain and Holland.

Gradually the need to enhance the efficiency of CG became paramount, as in the 19th century, the state corporation laws enhanced the rights of corporate boards to govern without the concept of shareholders in exchange for statutory benefits like appraisal right. And as a result of shareholders complain over administrative pay back and stock losses, the need for CG reform became necessary, at this period, the term CG became an established field of literature (McCabe 2002).

Suddenly, the rights of owners and shareholders became increasingly dissipated as a result of the administrative friendly Delaware law, and then most publicly traded companies in the United States wealth have been increasingly scrutinized. And in the twentieth century the need to change the role of Modern Corporation in the society became pounding following the aftermath of Wall Street of 1929, (Barle and Means 1932). Monks and Minor (2008) asserted that the term CG was not in literature until 1985. While  Zingales (1997), believed that the term CG came into existence twenty years ago, and Beasley 1996 asserted that CG seem to have been used first by Richard Ell 1960 to denote the structure and function of the corporate polity.

Consequently, in the early 90‟s the issues of CG received considerable  press attention in the united states as a result of the wave of CEO dismissal while in 1997, the Asian financial crises saw the down fall of various Asian countries as a result of exit of foreign capital after property assets collapsed.

Later, in the 2000‟s the massive bankruptcies and criminal malfeasance of Enron and WorldCom as well as the lesser corporate debacles, led to increased shareholder and government interest in CG. However, many moves were made to address the issues of CG, like the establishment of the Cadbury committee in the early 90‟s and later the passage of Sarbanes-Oxley Act of 2002. From then many countries begin to develop their codes of best practice.

In Nigeria the codes of CG was issued by SEC and CBN in 2003, and has address the issue of BOD, shareholder and the audit committee. For the BOD the code recommends a board size of not more than 15 and not less than 5 including executive and non-executive directors. The minority shareholders are also fully represented by at least one director on the board.  The code was explicit in prescribing the power of separation between the chairperson and the chief executive.





This study examines the effect of corporate governance on earnings management practices of Nigeria quoted companies (2010-2015). In accordance with this objective, this chapter discusses the research design, methods of data collection, population and sampling, techniques of data analysis employed in the research and measurement of variables.

 Research Design

For this study, correlational research design is used. A correlational research design is used to describe the statistical association between two or more variables. It is therefore, most appropriate for this study because it allows for testing of expected relationships between and among the variables and the making of predictions regarding these relationships. This study involves the measurement of four independent variables and one dependent variable as well as assessment of the relationship between them.   

Population and Sample of the Study

The population of the study comprises of all 56 quoted manufacturing firms in the Nigerian Stock Exchange as at 31st December 2011 which are classified into 4 subsectors namely the foods and beverages, Building Materials, chemicals and paints and Conglomerates. In view of the nature of the model used in the study, a filter is employed to eliminate some of the firms that have no complete records of all the data needed for measuring the variables of the study within the period (20062011). Consequently, 31 firms are eliminated leaving 25 firms representing 45% of the population.




The chapter starts with the analysis of descriptive statistics. It is followed by the presentation of the results of the model estimations and the inferences drawn from the tests of the hypotheses. In addition, findings are analysed and policy implications are discussed. The chapter concludes with a discussion of the robustness of the results for variables of the study.  




The study investigates effect of corporate governance on the earnings management of quoted manufacturing firms in Nigeria from 2010 – 2015. It has developed a multiple regression model for the purpose of explaining and predicting empirically the earnings management behaviour as a result of changes in corporate governance. The developed model of the study estimates the relationship and effect of four explanatory variables – board composition, institutional shareholding, and managerial shareholding and audit committee on one explained variable – earnings management by means of the least square technique.

The study is predicated on the premise that managers of firms use their discretion by exercising unethical accounting to satisfy personal interest at the detriment of their firms. Therefore, the study reveals the role corporate governance play in determining the level of manipulative accounting by the managers.

The findings of this work are based on the balanced panel data collected for the period 2006 -2011 from a sample of 25out of 56 quoted manufacturing firms on the Nigerian Stock Exchange. The results of the study reveals that all the explanatory variables are negatively and strongly significant in explaining the earnings management of the sample firms. In addition, all the independent variables have significant aggregate effect at one percent level on the dependent variable of the study. Thus, corporate governance used in this study proved to be the major determinants of earnings management through monitoring management in checking unethical accounting.


Based on the findings of the research, the study concludes as follows:

Firstly, the study has provided both empirical as well as statistical evidence on the utility of four independent variables that constitute corporate governance board composition, institutional shareholding, managerial shareholding and audit committee in explaining and predicting earnings management of the sample firms.

Secondly, independent directors play a prominent role of monitoring management to reduce their opportunistic behavior in managing earnings. Therefore, the presence of higher proportion of independent members on corporate board is likely to enhance the earnings management reported by the firms. Thus, efficient monitoring from non-executive directors that are free from managerial influence is capable to improve the quality of financial information conveyed to the user of financial statement. As is the case with the upper limit of the size of the board of directors, there is also a maximum level of independence of the board, from which the virtues of independence no longer apply.

Thirdly, institutional investors as one of the factors that constrain managers‟ ability and influence their choice to manage earnings, their substantial institutional presence reduces the level of earnings management by inhibiting managers to use questionable accounting techniques to manage accruals. In this sense, institutional investors improve the quality of corporate governance and that of financial reporting.

Finally, the quantum of shares held by managers should be reduced in order to minimize unethical accounting and improve the quality of earnings. The presence of an elaborate audit committee will improve the overall quality of earnings as they play a vital role of internal control mechanism


The recommendations of this study are proffered as follows:

  • The board of directors in Nigerian manufacturing firms should be composed in such a way as to ensure diversity of experience without compromising, compatibility, integrity, availability and independence. The members of the board should be individuals with upright personal characteristics and relevant core competences, preferably with a record of tangible achievement, knowledge on board matters, a science of accountability, commitment to the task of corporate governance and institution building as well as having an entrepreneurial bias to enable them check made the unethical accounting of management.
  • To discourage shareholder activism weather by institutional shareholder or by organise shareholders group. Shareholders with larger holdings (institutional and non institutional) should act and influence the standard of corporate governance positively which optimises stakeholder value and improve earnings management, thus the institutional shareholders should be encouraged to invest. This will increase the monitoring capability of institutional shareholders toward unethical accounting of management and improve earnings management.
  • In the case of managerial shareholding, the shareholders should reduce the quantum of shares owned by managers and restrict them from buying more in order to reduce their overall ownership of their shares. This will go a long way in reducing unethical accounting and improving the quality of earnings in the Nigerian quoted manufacturing firms.
  • The composition of audit committee should be made in accordance with the provision of code of corporate governance; not more than six (6) members with at least one (1) financial expert. The committee should hold meetings at least three times in a year. In addition, the members of the audit committee should be people of integrity and experience and meet not less than four times per annum as provided by the code. All these will play a prominent role and strengthen the audit committee to enable them check mate the unethical accounting activities by the managers in preparing financial statements and improve the quality of accounting numbers.

 Limitations of the Study

Like any other research, the result of this study is subject to some limitations due to the following factors:

Due to the nature of the study which focuses on examining accruals, Firstly, the sample excluded companies from banking and insurance sector. Secondly the manufacturings companies were chosen on information availability basis rather than on random selection, this plays an important role in determining the generalisability of the results. The result is a reduction in the size of the sample and the ability to generalise the results across populations, settings and times enhances the external validity of the study.

Future Research

This research work examines corporate governance and Earnings management of Nigerian quoted manufacturing firms and has paved the way for further research in the following areas.

  1. The same research can be replicated using firms such as insurance firms, small and medium enterprise (SMEs).


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