Economic uncertainty and earnings management coupled with corruption in developing economies

Abstract

Purpose This study looks at the influence of economic uncertainty and corruption on accrual earnings management, taking into consideration the moderation of the board structure index. Design/methodology/approach This study used data from manufacturing companies listed on the Nigerian and Ghanaian stock exchanges for the period 2012–2022. Data extracted from the annual financial report, with some provided on the Wall Street Journal Database. The two countries have a total of 137 listed manufacturing companies. Companies with serious missing annual financial data were dropped, giving a total of 103 companies from both countries (Nigeria and Ghana), with a total observation for the study being 1,122. To assess the effect of corporate governance mechanisms on earnings management of various listed firms in Nigeria and Ghana, using the estimated residuals of accrual-based earnings management. Findings This study uses fixed effects and two-stage system GMM estimations to test hypotheses. The results of the analysis revealed that economic uncertainties and corruption increase and earnings management also increases. This is seen in most African economies; corruption is on the rise and is encountering a lot of political and economic uncertainties. We also discovered that board structure negatively moderates the economic uncertainty, corruption and earnings management relationship. Practical implications This study gives evidence that good corporate governance mechanisms (board structure) reduce earnings management practices by managers in a season of high economic uncertainty and corruption, enhancing operational efficiency, which will lead to the maximization of shareholders' wealth. Taking West Africa into consideration, it suggests intensified research in this area for corruption reduction at the country and firm levels. Originality/value This study provides interesting findings to policymakers in the full implementation of anti-corruption policy in addressing corruption in the country. It further informs investors of measures to put in place during high economic uncertainty, most especially pre- and post-election periods.