Directors’ Loans, Directors’ Shareholdings and Earnings Management Practices: Evidence from Banks Listed on the Nigerian Exchange Group
Keywords:
directors’ loans, directors’ shareholdings, earnings management, listed banks, Nigeria Exchange Group
Abstract
The incidence of bank failures has led to different investigations in the banking sector. A major recurring issue has been that the books do not reflect the true and fair position as a result of earnings management (EM) practices which has misled stakeholders as to the position of the organisations. Anchored on the agency theory, the study investigated the role that directors’ loans and shareholdings play in the EM practices of banks listed on the Nigerian Exchange Group. Employing the ex-post facto research design, the study made use of the discretionary loan loss provision as a proxy to measure the EM practices in the eleven listed banks used as its sample. The Ordinary least square regression was used to determine the relationship that exists among the directors’ shareholdings, directors’ loans and EM practices in the banks while controlling for the effect of firm size and financial performance. The study found that directors’ shareholdings has a negative and significant relationship with EM practices while directors’ loans has a negative and significant relationship with EM practices. The study concluded that due to the significance of these relationships of the independent variables to EM practices, there should be stricter guidelines with regards to directors’ loans by the regulatory authorities.
References
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McAnally, M., Srivastava, A. and Weaver, C. (2008). Executive Stock Options, Missed Earnings Targets, and Earnings Management. The Accounting Review, 83(1), 185-216.
Meek, G.K., Rao, R.P. and Skousen, C.J. (2007). Evidence on factors affecting the relationship between CEO stock option compensation and earnings management. Review of Accounting and Finance, Emerald Group Publishing, 6(3), 304-323.
Mohammed, Y. (2020). Association between executive directors’ remuneration and earnings management among banks in Kenya. Unpublished Thesis, Strathmore University.
Moses, T., Ibanichuka, E. A. L., & Ofurum, P. C. O. (2020). Equity Incentives, Executive Compensation, and Real Activity Management : Panel Data Evidence from Quoted Nigerian Firms. International Journal of Innovative Finance and Economics Research, 8(1), 34-50
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Prihastomo, E.D. and Khafid, M. (2018). The Effect of Bonus Compensation and Leverage on Earnings Management with Financial Performance as Intervening Variable. Accounting Analysis Journal, 7(1), 52-60
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Saona, P., Muro, L. and Alvarado, M. (2020). How do the Ownership Structure and Board of Directors’ Features Impact Earnings Management? The Spanish Case. Journal of International Financial Management and Accounting
Sanoran, K. and Wong, L. (n.d.). Effects of Executive Compensation on Earnings Management and Cost of Equity Capital. Retrieved 3rd February 2022 from http://www.businessandeconomics.mq.edu.au/__data/assets/pdf_file/0011/363557/Effects_of_Executive_Compensation_Components.pdf
Shrieves, R.E. and Gao, P. (2002). Earnings Management and Executive Compensation: A Case of Overdose of Option and Underdose of Salary?. EFA 2002 Berlin Meetings Presented Paper. http://dx.doi.org/10.2139/ssrn.302843
Usman, S.H. and Abubakar, A. (2012). Corporate Governance, Earnings Management and Financial Performance: A Case of Nigerian Manufacturing Firms
Uygur, O. (2013). Earnings Management and Executive Compensation: Evidence from Banking Industry. Banking and Finance Review, 2, 33-54.
Vafeas, N. and Waegelein, J. (2007). The association between audit committees, compensation incentives, and corporate audit fees. Review of Quantitative Finance and Accounting, 28(3), 241-255.
Zouari, Z., Lakhal, F. and Nekhili, M. (2015). Do CEO characteristics affect earnings management? Evidence from France. International Journal of Innovation and Applied Studies, 12 (4), 801-819
Zhou, F., Wang, L., Zhang, Z. and An, Y. (2016). The impacts of accrual-based and real earnings management on executive compensation: evidence from Chinese public firms in the private sector. Asia-Pacific Journal of Accounting and Economics, 25(1-2), 128-144. DOI: 10.1080/16081625.2016.1222296
Zubair, I.A. and Abubakar, B. (2021). Executive Compensation and Earnings Management of Listed Industrial Goods Firms in Nigeria. International Journal of Advanced Research in Public Policy, Administration and Development Strategies (IJARPPADS), 5(1), 55-78
Al-Fayoumi, N., Abuzayed, B. and Yan, P. (2010). Ownership structure and earnings management in emerging markets: The case of Jordan. International Research Journal of Finance and Economics, 38, 29–45.
Armstrong, C.S., Jagolinzer, A.D. and Larcker, D.F. (2010). Chief Executive Officer Equity Incentives and Accounting Irregularities. Journal of Accounting Research, 48(2), 225-271. DOI: 10.1111/j.1475-679X.2009.00361.x
Bao, S., Yanxi, L. and Wenchen, D. (2008). Supervision of Board of Directors’, Management Compensations and Earnings Management: The Empirical Evidences from China.” 2008 International Conference on Wireless Communications, Networking and Mobile Computing, WiCOM 2008 1–5. doi: 10.1109/WiCom.2008.2264.
Beaver, W. H. and Engel, E. E. (1996). Discretionary Behavior with Respect to Allowances for Loan Losses and the Behavior of Security Prices. Journal of Accounting & Economics, 22, 177-206.
Bebchuk, L.A., Fried, J.M. and Walker, D.I. (2002). Managerial power and rent extraction in the design of executive compensation. The University of Chicago Law Review, 69(3), 751-846.
Bergstresser, D. and Philippon, T. (2006). CEO Incentives and Earnings Management. Journal of Financial Economics, 80 (3), 511-529.
Bouaziz, D., Salhi, B. and Jarboui, A. (2019). CEO characteristics and earnings management: Empirical evidence from France
Brennan, N. M. (2021). Connecting earnings management to the real world: What happens in the black box of the boardroom? The British Accounting Review, 53(6), 1-15. https://doi.org/10.1016/j.bar.2021.101036
Burns, N. and Kedia, S. (2008). Executive Option Exercises and Financial Misreporting. Journal of Banking and Finance, 32(5), 845–857. DOI: 10.1016/j.jbankfin.2007.06.004
Chen, C. and Li, M. (2011). Executive Equity Compensation and Earnings Management: A Quantile Regression Approach. Annual Conference on Pacific Basin Economics, Finance, Accounting, and Management. Research Collection School of Accountancy.
Cheng, Q. and Warfield, T. (2005). Equity incentives and earnings management. Accounting
Review, 80(2), 441-476.
Cho, S. and Chung, C. (2022). Board Characteristics and Earnings Management: Evidence from the Vietnamese Market. Journal of Risk and Financial Management, 15 (9),
Chou, Y.Y., and Chan, M.L. (2018). The impact of CEO characteristics on real earnings management: Evidence from the US banking industry. Journal of Applied Finance & Banking, 8(2), 17-44.
Cohen, D., Dey, A. and Lys, T. (2008). Real and accrual based earnings management in the pre –and post- Sarbenes Oxley periods. The Accounting Review, 83, 757-787
Efendi, J., Srivastava, A. and Swanson, E.P. (2007). Why do corporate managers misstate financial statements? The role of option compensation and other factors. Journal of Financial Economics, 85 (3), 667-708
Francis, J., Lafond, R., Olsson, M. and Schipper, K. (2004). Costs of equity and earnings attributes. The Accounting Review, 79, 967-1010.
Hassen, R.B. (2014). Executive compensation and earning mmanagement. International Journal of Accounting and Financial Reporting, 4(1), 84-105. DOI: 10.5296/ijafr.v4i1.5453
Healy, P. M. and Wahlen, J. M. (1999). A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizons, 13(4), 365-383
Jensen, M. C. (2001). Value Maximisation, Stakeholder Theory, and the Corporate Objective Function. European Financial Management, 7, 297-317.
Jensen, M. C. and Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360
Khan, M.A., Khidmat, W., Ullah, F. and Khan, N.U. (2019). Corporate governance and earnings management: the role of the board of directors’
Kjerland, F., Haugdal, A.T., Sondergaard, A. and Vagslid, A. (2020). Corporate Governance and Earnings Management in a Nordic Perspective: Evidence from the Oslo Stock Exchange. Journal of Risk and Financial Management, 13(11), 1-18
Kristanti, F.T., Riyadh, H.A., Ahmed, M.G., Alfaiza, S.A., Steelyana, E.W., Lutfi, A. and Beshr, B.A.H. (2024). Ownership shares and directors’ proportion as majority shareholders on earnings management moderated by board activity, Cogent Business & Management, 11(1), 1-21. DOI: 10.1080/23311975.2024.2331099
Laux, C. and Laux, V. (2009). Board Committees, CEO Compensation and Earnings Management. Accounting Review, 84 (3), 869-891
Liu, J., Harris, K. and Omar, N. (2013).Board Committees and Earnings Management. Corporate Board: Role, Duties & Composition, 9(1), 6-17
Marilyn, H. T. (2014). Earnings management and CEO compensation. Erasmus University Rotterdam, Netherlands.
McAnally, M., Srivastava, A. and Weaver, C. (2008). Executive Stock Options, Missed Earnings Targets, and Earnings Management. The Accounting Review, 83(1), 185-216.
Meek, G.K., Rao, R.P. and Skousen, C.J. (2007). Evidence on factors affecting the relationship between CEO stock option compensation and earnings management. Review of Accounting and Finance, Emerald Group Publishing, 6(3), 304-323.
Mohammed, Y. (2020). Association between executive directors’ remuneration and earnings management among banks in Kenya. Unpublished Thesis, Strathmore University.
Moses, T., Ibanichuka, E. A. L., & Ofurum, P. C. O. (2020). Equity Incentives, Executive Compensation, and Real Activity Management : Panel Data Evidence from Quoted Nigerian Firms. International Journal of Innovative Finance and Economics Research, 8(1), 34-50
Mgbame, C.O. (2017). Corporate social responsibility reporting and executive compensation in Nigeria. ICAN Journal of Accounting and Finance, 2(1), 15-25
Prihastomo, E.D. and Khafid, M. (2018). The Effect of Bonus Compensation and Leverage on Earnings Management with Financial Performance as Intervening Variable. Accounting Analysis Journal, 7(1), 52-60
Salawu, M.W., Adeyemi, S.B. and Obigbemi, I.F. (2024). Directors’ compensation and earnings management practices: Evidence from the Nigerian Banking Sector. International Journal of Business and Technopreneurship, 14(1), 63-78
Saona, P., Muro, L. and Alvarado, M. (2020). How do the Ownership Structure and Board of Directors’ Features Impact Earnings Management? The Spanish Case. Journal of International Financial Management and Accounting
Sanoran, K. and Wong, L. (n.d.). Effects of Executive Compensation on Earnings Management and Cost of Equity Capital. Retrieved 3rd February 2022 from http://www.businessandeconomics.mq.edu.au/__data/assets/pdf_file/0011/363557/Effects_of_Executive_Compensation_Components.pdf
Shrieves, R.E. and Gao, P. (2002). Earnings Management and Executive Compensation: A Case of Overdose of Option and Underdose of Salary?. EFA 2002 Berlin Meetings Presented Paper. http://dx.doi.org/10.2139/ssrn.302843
Usman, S.H. and Abubakar, A. (2012). Corporate Governance, Earnings Management and Financial Performance: A Case of Nigerian Manufacturing Firms
Uygur, O. (2013). Earnings Management and Executive Compensation: Evidence from Banking Industry. Banking and Finance Review, 2, 33-54.
Vafeas, N. and Waegelein, J. (2007). The association between audit committees, compensation incentives, and corporate audit fees. Review of Quantitative Finance and Accounting, 28(3), 241-255.
Zouari, Z., Lakhal, F. and Nekhili, M. (2015). Do CEO characteristics affect earnings management? Evidence from France. International Journal of Innovation and Applied Studies, 12 (4), 801-819
Zhou, F., Wang, L., Zhang, Z. and An, Y. (2016). The impacts of accrual-based and real earnings management on executive compensation: evidence from Chinese public firms in the private sector. Asia-Pacific Journal of Accounting and Economics, 25(1-2), 128-144. DOI: 10.1080/16081625.2016.1222296
Zubair, I.A. and Abubakar, B. (2021). Executive Compensation and Earnings Management of Listed Industrial Goods Firms in Nigeria. International Journal of Advanced Research in Public Policy, Administration and Development Strategies (IJARPPADS), 5(1), 55-78
Published
2024-11-01
How to Cite
Salawu, M. W., & Salawu , M. A. (2024). Directors’ Loans, Directors’ Shareholdings and Earnings Management Practices: Evidence from Banks Listed on the Nigerian Exchange Group . Global Journal of Accounting, 10(1), 1-10. Retrieved from http://gja.unilag.edu.ng/article/view/2270
Section
Articles
