Leverage of Firms and Earnings Management Practices in Nigeria Pre and Post IFRS Adoption Periods

Abstract

It has been argued that taking on more leverage in firm’s capital structure will force managers to disclose more information in line with agency theory and theoretically, this is expected to increase in postIFRS periods. Whether, this theoretical assertion holds in the case of Nigeria is subject to academic debate. Thus, the paper examines the association between leverage and earnings manipulative practice of firms in Nigeria pre and postIFRS periods and attempt to test the assertion of agency theory that higher leverage will be beneficial to improved earnings quality dues to pressure on managers by bondholders. The study incorporated data for 87 listed firms on the floor of the Nigeria Stock Exchange for 10 years, 5 years preIFRS (2007 to 2011) and 5 years postI FRS (2012 to 2016) making 870 firm year observations. It disaggregated the periods into pre and postIFRS to enable the researcher test for the effect of adoption. The panel regressions estimate (Random effect model) was used to test the effect of the association between the independent and dependent variables. The results deviate from norms and show that although taking on leverage in the capital structure of firms could be beneficial to earnings quality in line with agency theory in preIFRS, this benefit had been eroded after Nigeria’s adoption of the global standards. In postIFRS, leverage has a positive association, indicating that more leverage resulted in increased manipulation. Performance of firms proved to be an important factor affecting earnings quality as the results showed that lower performance was likely associated with increased earnings management practice post IFRS. The study is original and deviate from norms, puncturing the beliefs that IFRS adoption would limit managers’ ability to manipulate earnings. It also found, against popular assertion, that increased leverage may not be associated with reduced earnings manipulative practices. Leverage is unlikely to prevent earnings management practices.

Growth in revenue and earnings management practices in Nigeria pre- and post-IFRS adoption periods

“…The paired sample t-test is used to test for statistical difference between the mean of growth in both periods of the study. The third model as adopted from Enakirerhi, Ewiwile, and Wobo (2022) and Enakirerhi et al (2020) is stated below Equation 3:…”

“…However, the empirical justification for this total adoption is embroiled in a heated debate. Enakirerhi, Ibanichuka, and Ofurum (2020) explained that the liability for detailed disclosure of activities undertaken by managers to shareholders has been conferred on managers by the IFRS' adoption. Since adoption would ensure that all activities undertaken are properly disclosed, it is expected that fluctuation in growth shouldn't cause manipulation of reported revenue, but managers and owners are pitched in an interest-diverse manner, especially when pay is attached to reported earnings.…”