EFFECTS OF LEVERAGE INCENTIVE ON EARNINGS MANAGEMENT STRATEGIES OF THE NIGERIAN LISTED MANUFACTURING FIRMS
EFFECTS OF LEVERAGE INCENTIVE ON EARNINGS MANAGEMENT STRATEGIES OF THE NIGERIAN LISTED MANUFACTURING FIRMS
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Date
2012-05
Authors
YERO, JIBRIL IBRAHIM
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Abstract
This study assesses the effects of leverage incentive on the three identified earnings management
strategies of the Nigerian listed manufacturing firms. To achieve this, the study formulates three
hypotheses and uses cross-sectional OLS to estimate accrual and real earnings management using
Dechow et’al (2002) and Roychowdhury (2006) models, respectively; as well as Panel OLS and
panel logistic regressions to test for the impact of leverage on acrual earnings management, real
earnings management and deferred tax earnings management. The hypotheses test models were
also subjected to fixed and random effect tests, in which for all the three models, the Hausman
specification tests indicate that some of the firms’ unobserved specific characteristics are constant
over time but varies among panels, while some of these unobserved characteristics varies over time
but fixed within panels as such, we analysed the result we controlled for random effects. The study
found that while significant positive relationship exists between leverage and accrual earnings
management, the relationships are in negative direction for both real and deferred tax strategies.
Also, for the last two (real and deferred tax earnings management), the result is robust for two
measures of leverage. However, the Andrew and Hosmer-Lameshow test for goodness-of-fit
indicates that the models require additional data. As such, the study employed Quadratic-Hill-
Climbing test for omitted variables, using three additional variables (return on equity, financial
burden and firm size). Despite the documented impact of these three additional variables on
earnings management by previous studies, the tests show that these three additional variables are
jointly without any significant contribution to our models. We hence discard them and recommend
for users to consider leverage in assessing the reliability of earnings and cash-flows. In light of the
lack of fitness of our three models, we suggest for further studies on the impact of leverage on
earnings management strategies, while controlling for public/private debts and tightness of the
debt covenants.
Description
Being a Thesis submitted to the Post-graduate school, Ahmadu Bello
University Zaria, in partial fulfillment of the requirement for the
award of M.Sc. Accounting & Finance
(May, 2012).
Keywords
EFFECTS,, LEVERAGE,, INCENTIVE,, EARNINGS,, MANAGEMENT,, STRATEGIES,, NIGERIAN,, LISTED,, MANUFACTURING,, FIRMS.