Executive compensation, share ownership, and earnings management of banks in Nigeria

• Authors: Musa Adeiza Farouk , Zik-Rullahi Abubakar Ahmed

Abstracts

EN

Aim/purpose – Higher compensation and increased share ownership are believed to drive fewer earnings management. Therefore, the study examines the moderating impact of share ownership on the relationship between executive compensation and earnings management of listed Deposit Money Banks in Nigeria. Design/methodology/approach – Panel Least Square regression and Stata 13 were used for the estimation. The secondary data source was employed and extracted from the banks’ published financial statements covering the period from 2007-2018. Postestimation tests, including normality tests of standard error, heteroscedasticity, and multicollinearity, were carried out to validate the outcome. Executive compensation variable is represented by Chief Executive Officer Pay (CEO Pay), Board Chairman’s compensation, and the highestpaid director, while executive share ownership represents the mod-erator variable. Chang et al. (2008) model was used to proxy earnings management. Findings – The findings revealed that CEO Pay increases the banks’ level of earnings management, while after moderation with executive share ownership; CEO pay decreases the possibilities of earnings management by banks. Compensation to Chairmen of the banks decreases the level of earnings management of banks. However, an increase in share ownership of the board with an increase in compensation to chairmen of banks’ boards increases the earnings management practices of the management of the banks. Research implications/limitations – The findings imply that the executive ownership interest should be made to align with that of the minority shareholders following an increase in their stake so that they can act in the overall best interest of the owners. The study is limited to only the banking sector and some specific executive compensation variables. Originality/value/contribution – The utilization of the highest paid director variable and use of share ownership as a moderator between executive compensations and earnings management.

Keywords

EN

earnings management; executive; share ownership; compensation and expectancy theory

• Publisher: Uniwersytet Ekonomiczny w Katowicach
• Journal: Journal of Economics and Management
• Year: 2023
• Volume: 45
• Pages: 26-43

Dates

published

2023

Contributors

author

Musa Adeiza Farouk

• Department of Management Accounting College of Private Sector Accounting ANAN University, Kwall, Plateau State, Nigeria

author

Zik-Rullahi Abubakar Ahmed

• Department of Accounting Faculty of Management Sciences University of Abuja, Abuja, Nigeria

References

• Alzoubi, E. S. S. (2016). Ownership structure and earnings management: Evidence from Jordan. International Journal of Accounting & Information Management, 24(2), 135-161. https://doi.org/10.1108/IJAIM-06-2015-0031
• Bartov, E. (1993). The timing of assets sales and earnings manipulation. The Accounting Review, 68, 840-855. https://www.jstor.org/stable/248507
• Ben Hassen, R. (2014). Executive compensation and earning management. International Journal of Accounting and Financial Reporting, 4(1), 84-105. https://doi.org/10.5296/ijafr.v4i1.5453
• Byun, S., Lee, Y., & Kwon, O. (2016). The effect of abnormal pay dispersion on earnings management. The Journal of Applied Business Research, 32(2), 687-702. https://doi.org/10.19030/jabr.v32i2.9604
• Casey, K. M., Anderson, D. C., Mesak, H. I., & Dickens, R. N. (1999). Examining the impact of the 1986 Tax Reform Act on corporate dividend policy: A new methodology. Journal of Financial Review, 34(3), 33-46. https://doi.org/10.1111/j.1540-6288.1999.tb00461.x
• Chang, R.-D., Shen, W.-H., & Fang, C.-J. (2008). Discretionary loan loss provisions and earnings management for the banking industry. International Business and Economics Research Journal, 7(3), 9-20. https://doi.org/10.19030/iber.v7i3.3230
• Chou, Y.-Y., & Chan, M. L. (2018). The impact of CEO characteristics on real earnings management: Evidence from the US banking industry. Journal of Applied Finance and Banking, 8(2), 17-44. https://www.scienpress.com/Upload/JAFB/Vol%208_2_2.pdf
• Dong, M., & Ozkan, A. (2008).Institutional investors and director pay: An empirical study of UK companies. Journal of Multinational Financial Management, 18, 16-29. https://doi.org/10.1016/j.mulfin.2007.06.001
• Fakhfakh, I. (2010). Impact of CEO compensation on earnings management. https://doi.org/10.2139/ssrn.1621807
• Farouk, M. A. (2018). Board diversity, audit committee and earnings management of listed deposit money banks in Nigeria [Unpublished Doctoral Dissertation]. Bayero University Kano.
• Farouk, M. A., & Isa, M. A. (2018). Earnings management of listed deposit banks (DMBs) in Nigeria: A test of Chang, Shen and Fang (2008) model. International Journal of Finance and Accounting, 7(2), 49-55. http://article.sapub.org/10.5923.j.ijfa.20180702.04.html
• Farouk, M. A., & Shehu, U. H. (2014). Board of director’s characteristics and performance of listed deposit money banks in Nigeria. Journal of Finance and Bank Management, 2(1), 89-105. https://jfbmnet.com/journals/jfbm/Vol_2_No_1_March_2014/6.pdf
• Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which factors are reliably important? Financial Management, 38(1), 1-37. https://doi.org/10.1111/j.1755-053X.2009.01026.x
• Harris, O., Karl, J. B., & Lawrence, E. (2017). CEO compensation and earnings management: Does gender really matters? Academy of Management Proceedings, 1, 1-14. https://doi.org/10.1016/j.jbusres.2019.01.013
• Kazemian, S., & Sanusi, Z. M. (2015). Earnings management and ownership structure. Procedia Economics and Finance, 31, 618-624. https://doi.org/10.1016/S2212-5671(15)01149-1
• Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163-197. https://doi.org/10.1016/j.jacceco.2004.11.002
• Krauter, E., & de Sousa, A. F. (2013). Executive compensation and corporate financial performances: Empirical evidence in Brazilian industrial companies. Journal of Modern Accounting and Auditing, 9(5), 650-661.
• Laux, C., & Laux, V. (2009). Board committees, CEO compensation, and earnings management. The Accounting Review, 84(3), 869-891. https://doi.org/10.2308/accr.2009.84.3.869
• Lawler, E. E. III, & Suttle, J. L. (1973). Expectancy theory and job behaviour. Organizational Behavior and Human Performance, 9, 482-503. https://doi.org/10.1016/0030-5073(73)90066-4
• Lazzem, S., & Jilani, F. (2018). The impact of leverage on accrual-based earnings management: The case of listed French firms. Research in International Business and Finance, 44, 350-358. https://doi.org/10.1016/j.ribaf.2017.07.103
• Lee, M., & Hwang, I. T. (2019). The effect of the compensation system on earnings management and sustainability: Evidence from Korea banks. Sustainability, 11(11), 3165-3189. https://doi.org/10.3390/su11113165
• Moghaddam, A., & Abbaspour, N. (2017). The effect of leverage and liquidity ratios on earnings management and capital of banks listed on the Tehran Stock Exchange. International Review of Management and Marketing, 7(4), 99-107. https://econjournals.com/index.php/irmm/article/view/5595
• Muhammad, T. (2016). The association between earnings management and executive compensation – evidence from the FTSE350 Index of Companies [Doctoral dissertation, Kingston University]. EThOS, No. 724308. https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.724308
• Nalarreason, K. M., Sutrisno, T., & Mardiati, E. (2018). Impact of leverage and firm size on earnings management in Indonesia. International Journal of Multicultural and Multi-religious Understanding, 6(1), 19-24. https://doi.org/10.18415/ijmmu.v6i1.473
• Oba, V. C. (2014). Board dynamics and financial reporting quality in Nigeria. Review of International Comparative Management, 15(2), 226-237. https://rmci.ase.ro/no15vol2/07.pdf
• Oberholzer-Gee, F., & Wulf, J. (2012). Earnings management from the bottom-up: An analysis of managerial incentives below the CEO (Harvard Business School Working Paper, No. 12-056). https://www.hbs.edu/faculty/Pages/item.aspx?num=41982
• Olalekan, O. C., & Bodunde, O. O. (2015). Effect of CEO pay on bank performance in Nigeria: Evidence from a generalized method of moments. British of Economics, Management and Trade, 9(2), 1-12. https://doi.org/10.9734/BJEMT/2015/18824
• Ozkan, N. (2011). CEO compensation and firm performance: An empirical investigation of UK panel data. European Financial Management, 17, 260-285. https://doi.org/10.1111/j.1468-036X.2009.00511.x
• Park, K. (2019). Does peer firm executive compensation affect earnings management? Managerial Finance, 45(1), 54-71. https://doi.org/10.1108/MF-04-2018-0148
• Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. Journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
• Roodposhti, R. F., Haybati, F., Talebnia, G. H., & Chasmi, N. S. A. (2012). The presentation of the impact assessment pattern of corporate governance mechanisms on the earnings management in Tehran Stock Exchange (English abstract). Journal of Management Accounting, 5(12), 79-100. https://jma.srbiau.ac.ir/article_3021.html?lang=en
• Sarbanes-Oxley Act. (2002). https://sarbanes-oxley-act.com/
• Salawu, R. O., & Agboola, A. A. (2008). The determinant of capital structure of large non-financial listed firms in Nigeria. The International Journal of Business and Finance Research, 2(2), 75-84. https://www.theibfr.com/download/IJBFR/2008-ijbfr/ijbfr-v2n2-2008/IJBFR-V2N2-2008-6.pdf
• Sheikh, M. F., Inam Bhutta, A., Ali Shah, S. Z., & Sultan, J. (2018). Do executive compensation and corporate governance practices explain earnings management? Journal of Organizational Behaviour Research, 3(2), 92-114. https://odad.org/article/does-executive-compensation-and-corporate-governance-practices-explain-the-earnings-management
• Vroom, V. H. (1964). Work and motivation. Wiley.
• Watts, R. L., & Zimmerman, J. L. (1990). Positive accounting theory: A ten years perspective. The Accounting Review, 65(1), 131-156. https://www.jstor.org/stable/247880
• Wasimullah, Toor, I. U., & Abbas, Z. (2010). Can high leverage control the opportunistic behavior of managers: Case analysis of textile sector of Pakistan. International Research Journal of Finance and Economics, 37, 134-142. https://www.researchgate.net/publication/287397802_Can_high_leverage_control_the_opportunistic_behavior_of_managers_Case_analysis_of_textile_sector_of_Pakistan
• Yan-Jun, X., & Yan-Xin, C. (2017). Executive compensation and real earnings management: Perspective of managerial power. International Journal of Advances in Management and Economics, 2(19), 19-37. https://www.managementjournal.info/index.php/IJAME/article/view/47
• Yoon, S. S., Kim, H. J., & Woodruff, G. S. (2012). On the models and estimation of discretionary accruals. The 167th Finance and Accounting Seminar, 1-24. http://www.kaa-edu.or.kr/online3/2014_1/2.%20Soon%20Suk%20Yoon.pdf
• Zhou, F., Wang, L., Zhang, Z., & An, Y. (2008). The impact of accrual-based and real earnings management on executive compensation: Evidence from Chinese public firms in the private sector. Asian-Pacific Journal of Accounting and Economics, 25(1/2), 128-144. https://doi.org/10.1080/16081625.2016.1222296

Identifiers

DOI

10.22367/jem.2023.45.02

Biblioteka Nauki

2185396