Earnings Management and Financial Performance: The Moderating Role of CEO Competency
DOI:
https://doi.org/10.37134/jcit.vol13.1.1.2023Keywords:
Earnings management, CEO competency, Financial performance, Agency theoryAbstract
This study examines the influence of earnings management on the financial performance of financial listed firms. It also investigates the moderating role of CEO competency on the relationship between earnings management and financial performance. The study argues that the competencies of CEOs are important to reduce the discretionary accruals of firms. Using a sample of deposit money banks in Nigeria, the study adopts the panel regression estimator to analyze the testable hypotheses of the paper. In support of the agency theory, the study finds evidence that earnings management reduces financial performance. On the contrary, the interaction of CEO competency and earnings management negatively reduce financial performance, indicating that CEOs use their competencies to entrench themselves for their personal interests more than the interests of shareholders. The magnitude of the combined CEO competency and earnings management affecting financial performance is less than the sole effect of earnings management. Thus, while we find support for the agency theory on earnings management, our study establishes little support for CEO competency to erode earnings management. Hence, we call for a broader CEO monitoring and resource mechanisms such as CEO compensation and CEO social capital to reduce the negative impact of earnings management on financial performance of financial institutions.
Downloads
References
Abed, S., Al-Attar, A., & Suwaidan, M. (2012). Corporate governance and earnings management: Jordanian evidence. International Business Research, 5(1), 216-225.
Adeneye, Y., & Chu, E.Y. (2020). Managerial aversion and capital structure: Evidence from Southeast Asia. Asian Academy of Management Journal of Accounting and Finance, 16(1), 155-183.
Al‐Matari, E.M. (2021). The determinants of bank profitability of GCC: The role of bank liquidity as moderating variable-Further analysis. International Journal of Finance & Economics.
Al-Shatnawi, H.M., Hamawandy, N.M., Mahammad Sharif, R.J., & Al-Kake, F. (2021). The role of the size and growth rate of the bank in determining the effect of financial leverage on the profitability of Jordanian commercial banks. Journal of Contemporary Issues in Business and Government, 27(1), 1962-1978.
Altuwaijri, B.M., & Kalyanaraman, L. (2020). CEO education-performance relationship: Evidence from Saudi Arabia. The Journal of Asian Finance, Economics, and Business, 7(8), 259-268.
Amedu, S., & Dulewicz, V. (2018). The relationship between CEO personal power, CEO competencies, and company performance. Journal of General Management, 43(4), 188-198.
Arowoshegbe, A.O., & Emeni, F.K. (2014). Shareholders' wealth and debt-equity mix of quoted companies in Nigeria. International Journal of Financial Research, 5(1), 107-113.
Bassiouny, S.W. (2016). The impact of firm characteristics on earnings management: an empirical study on the listed firms in Egypt. Journal of Business and Retail Management Research, 10(3), 34-45.
Bouaziz, S.S., Fakhfakh, I.B.A., & Jarboui, A. (2020). Shareholder activism, earnings management and Market performance consequences: French case. International Journal of Law and Management, 62(5), 395-415.
Bukit, R.B., & Iskandar, T.M. (2009). Surplus free cash flow, earnings management and audit committee. International Journal of Economics and Management, 3(1), 204-223.
Chalak, S.L., & Mohammadnezhad, S. (2012). Investigation of the relationship between earnings management and free cash flows in firms with high free cash flows and low growth listed in Tehran securities exchange. World Applied Sciences Journal, 20(3), 429-437.
Chinaemerem, O.C., & Anthony, O. (2012). Impact of capital structure on the financial performance of Nigerian firms. Arabian Journal of Business and Management Review (OMAN Chapter), 1(12), 43-61.
Ching, C.P., Teh, B.H., San, O.T., & Hoe, H.Y. (2015). The relationship among audit quality, earnings management, and financial performance of Malaysian public listed companies. International Journal of Economics & Management, 9(1).
Chiu, P.C., Teoh, S.H., & Tian, F. (2013). Board interlocks and earnings management contagion. The Accounting Review, 88(3), 915-944.
Dakhlallh, M.M., Rashid, N., Abdullah, W.A.W., Qawqzeh, H.K., & Dakhlallh, A.M. (2020). Accrual-based earnings management, real earnings management and firm performance: Evidence from public shareholders listed firms on Jordanian's stock market. Jour of Adv Research in Dynamical & Control Systems, 12(1).
Dechow, P.M., Sloan, R.G., & Sweeney, A.P. (1995). Detecting earnings management. Accounting Review, 193-225.
DeFond, M.L., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1-2), 145-176.
Fung, S.Y., & Goodwin, J. (2013). Short-term debt maturity, monitoring and accruals-based earnings management. Journal of Contemporary Accounting & Economics, 9(1), 67-82.
González, J.S., & García-Meca, E. (2014). Does corporate governance influence earnings management in Latin American markets? Journal of Business Ethics, 121(3), 419-440.
Gulzar, M.A. (2011). Corporate governance characteristics and earnings management: Empirical evidence from Chinese listed firms. International Journal of Accounting and Financial Reporting, 1(1), 133-151.
Hair, J.F., Sarstedt, M., Ringle, C.M., & Mena, J.A. (2012). An assessment of the use of partial least squares structural equation modeling in marketing research. Journal of the Academy of Marketing Science, 40(3), 414-433.
Hassan, S.U., & Ahmed, A. (2012). Corporate governance, earnings management and financial performance: A case of Nigerian manufacturing firms. American International Journal of Contemporary Research, 2(7), 214-226.
Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
Johari, N.H., Saleh, N.M., Jaffar, R., & Hassan, M.S. (2009). The influence of board independence, competency and ownership on earnings management in Malaysia. International Journal of Economics and Management, 2(2), 281-306.
Kumar, M., Madhu, V., & Goswami, R. (2020). Effect of real earnings management on firm performance: Evidence from India. Vision, 1-11. DOI: 10.1177/09722629211007577
Lindorff, M., & Jonson, E.P. (2013). CEO business education and firm financial performance: a case for humility rather than hubris. Education + Training, 55(4/5), 461-477. https://doi.org/10.1108/00400911311326072
Moradi, J., Valipour, H., & Pahlavan, Z. (2012). Earnings management, board independence and audit fees considering the firm's profitability level. Asian Economic and Financial Review, 2(2), 358-366.
Osemene, O.F., Adeyele, J.S., & Adinnu, P. (2018). The impact of the ownership structure and board characteristics on earnings management in Nigeria’s listed deposit money banks. Ekonomski Horizonti, 20(3), 215-227.
Sekaran, U., & Bougie, R. (2016). Research methods for business: A skill building approach. USA: John Wiley & Sons.
Tabassum, N., Kaleem, A., & Nazir, M.S. (2015). Real earnings management and future performance. Global Business Review, 16(1), 21-34.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 UPSI Press
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
