Acta Universitatis Bohemiae Meridionalis, Vol 26, No 2 (2023), DOI 10.32725/acta.2023.

009, ISSN 2336-4297 (online)

Accrual and Real Earnings Management: Firm Value Analysis

Saheed Akande Shittu, Hakeem Olayinka Onifade, Khairat Taiwo Ajibola, Sherifdeen Olatunji
Aminu

Abstract:
The study examines the effect of accrual and Real Earnings Management (REM) on firm value of
selected manufacturing firms in Nigeria. Tobin’s Q was employed to measure firm value, while
Larcker and Richardson's (2004) and Roychowdhury's (2006) models were used to proxy accrual-
based and REM respectively. Purposive sampling technique was employed to select thirty-seven
(37) listed manufacturing firms across conglomerates, health care, industrial goods, and consumer
goods sectors in Nigeria. Panel regression analysis employed to analyse secondary data gathered
for the study. The results reveal a negative and significant influence of accrual-based, while REM
has a positive and significant influence on firm value of selected listed manufacturing firms in
Nigeria. The study concludes that earnings management has a significant effect on firm value of
manufacturing firms in Nigeria. The study recommends that REM be used only when absolutely
necessary for the companies’ survival and success.

Keywords:
Accrual, real earnings management, manufacturing firms, firm value, Nigeria
JEL Codes: R30, R39

_____________________________________

Saheed Akande Shittu, Department of Accuntancy, Federal Polytechnic Ayede, Oyo State, Nigeria,
e-mail: [email protected], ORCID ID: http://orcid.org/0000-0003-3382-5917
Hakeem Olayinka Onifade, Crescent University, Ogun State, Nigeria, e-mail: [email protected]
Khairat Taiwo Ajibola, Federal Polytechnic Ayede, Oyo State, Nigeria, e-mail: [email protected]
Sherifdeen Olatunji Aminu, Federal Polytechnic Ayede, Oyo State, Nigeria, e-mail: [email protected]

DOI: 10.32725/acta.2023.009
© Copyright by Faculty of Economics, University of South Bohemia in České Budějovice
S. A. Shittu, H. O. Onifade, K. T. Ajibola, S. O. Aminu 69

Introduction
Primary goals of business is to increase its earnings and the wealth of its stakeholders. Any
organization’s performance affects not just how much money it is worth as a whole, but also
how well the sector as a whole is doing and how well the economy as a whole is doing. To
achieve business owners’ objectives in this regard, effective financial management, including
initiatives to increase earnings should always be initiated (Kumar, 2020). According to
Hernawati, Ghozali, Yuyetta and Prastiwi (2021), manufacturing sector is crucial to the nation’s
economy because it inspires the whole nation. They are crucial to the global economy because
of how closely they are related to other sectors of the economy. The ability of resulting earnings
to gauge a company’s value. Investors are more concerned about firms with high value than
firms with low value. As a result, firms management both executive and non-executive directors
carry out their roles efficiently and effectively to improve firm’s value in order to increase firms
earnings. This is due to the sector’s role in the economy’s protection and restoration
mechanisms as well as the fact that an industry’s performance can influence other industries
and the growth of an economy (Kumar and Ayedee, 2018; Dakhlallh, Rashid, Abdullah,
Qawqzeh and Dakhlallh, 2020 Shittu, Taleat, Owojori and Aminu, 2023). More so,
manufacturing sectors make up two-thirds of global trade, they are significant companies.
According to the studies conducted by Kumar and Pandey (2018) and Kumar and Ayedee
(2019), it was revealed that SMEs face intense rivalry in the market as a result of their inability
to compete with the marketing and promotion strategies used by large multinational
corporations. Similarly, Kumar, Syed, and Pandey (2020), scaling up operations can be aided
by sustainable growth. Said that managers of firms should use internet resources and technology
since doing so will keep them current and also enable organizations to compete on a global
scale. In reality, a thriving and advanced manufacturing sector is essential for fostering
economic growth because it offers long-term financing for long-term investments in the nation
(Kumar and Pandey, 2018; Efuntade and Akinola, 2020).
Earnings Management (EM) is a type of management action that affects earnings,
typically for pragmatic purposes. The goal of this approach is to show large profits in a single
year by having managerial decisions appear as either periodic or yearly smooth earnings in the
company’s annual report (Shittu, Badmus and Onifade, 2022). EM can take the form of accrual-
based or, in which cost recognition is either deferred to a time in the near future or moved
forward to be recognized before it is due, or it can take the form of Real Earnings Management
(REM), which involves lowering the cost of sales by producing excess inventory and utilizing
less discretionary spending on things such as sales, marketing, as well as research and
development (Gill, Biger, Mand, Mathur 2013; Kumar and Aggarwal, 2018; Boachie and
Mensah, 2022). Literature have been conducted on EM and its influence on firm value (Mellado
and Soana, 2019; Ayisi, Wenfang, Adu-Gyamfi, Sampene and Charles, 2021; Rahaman and
Xiong, 2021). However, there have been conflicting and ambiguous findings regarding how
EM techniques affect firm value. The majority of studies on EM in manufacturing companies
particularly in Nigeria focused on firm performance and using accounting ratios such as
Earnings Per Share (EPS), Return on Equity (ROE), Return on Asset (ROA), and Net Profit
Margin for measurement while this current study considered Tobin’s Q (market-based measure)
to measure firm value. More so, the previous literature on accrual-based EM (Okafor, Ezeagbe
and Innocent 2018; Olaniyi and Abubakar, 2018; Olatunji and Juwon, 2020; Salome, Ironkwe
and Akani, 2021) measured accrual based using Dechow, Sloan and Sweeney (1995) model.
Therefore, this study filled the research gap by examining the influence of Accrual-based EM
and REM on firm value of selected manufacturing listed firms in Nigeria measuring accrual-
based EM using Larcker and Richardson (2004) model.
Accrual and Real Earnings Management: Firm Value Analysis

Review of Literature
This paper reviews the accrual-based earnings management and firm value, real earnings
management and firm value as well as signaling theory.
Accrual based earnings management and firm value
In order to accurately reflect the company's many activities, accrual control includes selecting
accounting methods rather than changing the company's core business operations. As a result,
managers have a lot of control over how to calculate earnings throughout the course of a year.
The existence of accrual-based EM and its various associations with firm value have been
reported in numerous studies (Sadiq, Othman and Keong, 2019; Edesiri and Confidence, 2020;
Ayisi, Wenfang, Adu-Gyamfi, Sampene and Charles, 2022; Onaolapo and Shittu, 2022). There
have been claims made that firm performance may be impacted by the extent of DA.
Additionally, previous studies such as (Abdelkarim and Zuriqi, 2019; Jessica, 2020; Shittu,
Oyedeji and Onifade, 2022) have shown that performance can affect the change in the amount
of earnings management since firms may choose to manage earnings in response to lower or
higher earnings. Contrary to enterprises with extraordinary performance, which engage in
negative earnings reporting by generating a large loss, businesses travail economic challenges
are more motivated to adjust earnings upward in order to get attention of invetsors. More so,
according to Suprianto and Setiawan (2020), accrual-based EM is efficient as opposed to
opportunistic. Dakhlallh et al. (2020) also provided evidence of poor performance as a result of
accrual-based EM, a developing nation with significant political unpredictability and a shoddy
regulatory structure, has already been mentioned. It was anticipated that lax regulations and
oversight will affect firm value. As a result, the following hypothesis was formulated:
H01: The higher Accrual-based earnings management the lower the firm value
Real earnings management and firm value
The system of adapting business operations to boost profitability in the current period in
business operations is known as Real Earnings Management (REM). It can take many different
forms, which include increasing production or overproducing to reduce cost of production and
some overhead cost in order to boost present earnings. The findings of earlier studies on the
influence of REM on firms’ value (Ghaleb, Kamardin and Tabash, 2020; Tulcanaza-Prieto, Lee
and Koo, 2020; Zimon, Appolloni, Tarighi, Shahmohammadi and Daneshpou, 2021; Ahmed,
2021; Salome, Ironkwe and Akani, 2021) are incongruent with one another. REM, however,
affects firm value in one of two ways, depending on whether it is deemed efficient or
opportunistic. According to the empirical evidence cited by (Ayisi et al., 2021), organizations
use REM to increase current earnings and efficiency. Their findings were compatible with the
previous empirical studies of (Jiang, Habib and Wang, 2018; Khuong, Ha and Thu, 2019;
Dakhlallh et al., 2020). In contrast, REM were discovered to be inversely correlated with firm
value by Shittu and Amao (2022).
In a study conducted by Onifade, Shittu, Aminu, Ajibola, (2023) into the effect of cloud
accounting characteristics on performance of twenty-three (23) listed food and beverage firms
in Nigeria. it was revealed that the firm's value is not much influenced by return on equity or
firm growth. The study came to the conclusion that the performance of food and beverage
enterprises in Nigeria is significantly impacted by the cost of software and the cost of training.
Also, Shittu, Onifade, Aminu, and Ajibola, (2023) evaluated how REM affected the value of
the company. The findings demonstrate that while irregular operating cash flow and abnormal
production costs did not significantly affect company value, abnormal discretionary expenses
did. Investors and analysts may anticipate strong results from profitable companies. As a result,
these companies would probably employ opportunistic EM in order to satisfy investors' and
S. A. Shittu, H. O. Onifade, K. T. Ajibola, S. O. Aminu 71

analysts' expectations. As previously mentioned, inadequate rules and political instability in

emerging nations contribute to their high propensity for income management. Against this
backdrop, a hypothesis was formulated as follows:
H02: The firm value decreases as real earnings management increases.
Signaling theory
The Signaling theory, which holds that not all economic agents share the same knowledge,
served as the study's theoretical foundation developed by Spence (1977), which looked at the
interaction between managers and investors in an environment of asymmetric information.
Therefore, a company sends some signals through earnings management to compare itself to
other companies or to the sector. The signaling hypothesis explains why businesses divulge
information to the capital market which will manipulate results to announce bad news to the
market while also proving their honesty, integrity, and confidence in their capacity to handle
the current issues (Osma, Conde and Valeiras, 2022). According Rusydi (2021), ‘’EM is a
deceptive signal since it encourages investors to take on more risk. Is also referred to as
management interference in external financial reports that emphasizes personal interests’’. Of
sure, this endeavor will be beneficial to management. On the other hand, because what is stated
therein does not reflect the actual conditions, other parties that use the information in the
financial statements may suffer.

METHOD
Problem Identification
The missing link between earnings management and firm value is crucial as earnings always
regulate the value of a company which will invariably affect shareholders wealth.

Identification of Gap
The review of literature has identified that EM in manufacturing companies particularly in
Nigeria has been affecting firm value. The current study considered Tobin’s Q (market-based
measure) to measure firm value instead of accounting-based measurement that is most
commonly used by previous study. More so, the previous literature on accrual-based EM
measured accrual based using Dechow et al. (1995) model. Thus, this study employed Larcker
and Richardson (2004) model in order to fill existing gap.
Objectives
The paper attempts to examine the influence of accrual-based earnings management and real
earnings management on firm value of manufacturing firms in Nigeria.
Sampling
The study employed ex-post facto research design while population of the study consist of one
hundred and thirteen (113) non-financial listed firms in Nigeria as of December 31, 2020.
Purposive sampling was used to select from conglomerates sectors (5), health care (6),
industrial goods (10), and consumer goods (16) for the study, for a total of thirty-seven (37)
selected firms for the study. The data used for empirical analysis were obtained from the
MachameRatios Database for study variables.
Accrual and Real Earnings Management: Firm Value Analysis

Table 1: Population and Sample selected for the Study

Sectors Population Sample Percentage
(%)
Conglomerates 5 5 100
Health Care 10 6 60
Industrial Goods 15 10 67
Consumer Goods 20 16 80
Total 113 37 33
Source: Authors’ compilation, (2023).

Table 2: Measurement of Variables

S/N Variable Symbol Type Measurement and Sources
Y1 Firm Value Tobin’s Dependent
Equity market value + Book Value (BV) of
Q Total Debt (TD) ⁒ Equity BV + BV of TD,
Darmawan, Sutrisno and Mardiati (2019).
X1 Real Earnings REM Independent Rowchowdhury (2006) model. Abnormal
Management Cash Flow from Operation *- plus Abnormal
Production Cost plus Abnormal
Discretionary Expenses *-1. Osman et al.
(2022).
X2 Accrual DA Independent Larcker and Richardson model (2004)
Earnings model. = Total accruals EM of firm in year
Management t., ⁒ Total Assets (TA) + Δ in income in
year t., - Δ in receivables in year t. ⁒ TA +
PPE which is firm Non-current asset + BV ⁒
TA + cash flow CFO in year t ⁒ TA.
(Callao, Jarne and Wróblewski, 2017).
X3 Leverage LEV Control Long-term debt divided by TA. Wenfang
and Ayisi, (2020),
X4 Firm Size FS Control Firm’s TA. Moradi et al., (2021)
X5 Firm Growth FG Control Firm’s revenue (Tulcanaza-Prieto et al.,
2020)
X6 Free Cash Flow FCF Control Net CFO ⁒ by total liabilities (Elkalla, 2017)
Source: Authors’ compilation, (2023).

Model Specification
The model for this study is as follows in line with the study of Ikebuje et al. (2021).
FV= f (REM, DA, LEV, FS, FG, FCF) (3.1)
The model is further experessed as follows:
FV= β0 + β1 REMit + β2 DAit + β3 LEVit + β4 FSit + β5 FGit + β6 FCFit + ԑ (3.2)
Where: FV= Tobin’s Q
REM= Real Activities Earnings Management, DA= Discretionary Accruals, LEV= Leverage,
FS= Firm Size, FG= Firm Growth, FCF= Liquidity, ԑ= error term, i=ith firm, t=time period
Data Analysis
Data obtained were analysed using STATA 15. Data analysis involves descriptive analysis,
pearson correlation coefficient (correlation matrix) and panel regression analysis.
S. A. Shittu, H. O. Onifade, K. T. Ajibola, S. O. Aminu 73

RESULTS
This section considered the results of analysis of accrual and real earnings management on firm
value among listed manufacturing firms in Nigeria. Descriptive analysis of study variables was
discussed, followed by correlation matrix as well as panel regression results in order to
determine how accrual and real earnings management influence firm value.
Table 3: Descriptive Statistics
Variable Tobin’s Q REM DA LEV FS FG FCF
Mean 1.793 0.019 0.018 9.583 7.175 7.063 6.729
Standard 1.726 0.128 0.129 23.202 0.913 0.919 15.739
Dev.
Minimum -0.508 -0.605 -0.616 -26.441 5.093 4.935 -63.073
Maximum 14.987 7.523 7.424 87.529 2.313 2.238 70.319
Observation 407 407 407 407 407 407
Source: Authors’ computation, (2023).

Descriptive Statistics
Descriptive statistics of the study variables shown in Table 3. Tobin's Q had a mean of 1.793
and a SD of 1.726, suggesting that sampled firms with a mean greater than or equal to 1.793
perform well, while companies with a score less than 1.793 are under perform. Values for
minimum and maximum are -0.508 and 14.987, respectively. REM and DA have mean values
of 0.019 and 0.018, respectively, suggesting that sampled companies participate in upward EM.
With regards to control variables, leverage, firm size, firm growth, and free cash flow have
mean values of 9.583, 7.175, 7.063, and 6.729, respectively.

Table 4: Correlation Matrix

ariable Tobin’s Q REM DA LEV FS FG FCF
Tobin’s Q 1.000
REM 0.023 1.000
DA 0.021 0.008 1.000
LEV 0.034 0.036 0.002 1.000
FS 0.012 0.042 0.039 0.058 1.000
FG 0.019 0.033 0.007 0.009 0.015 1.000
FCF 0.097 0.065 0.062 0.002 0.007 0.003 1.000
Source: Authors’ computation, (2023).

Pearson Correlation Coefficient Matrix

Pearson correlation coefficient (correlation matrix) was employed in examining the association
among the variables under study as presented in Table 4. Tobin’s Q shows that there exists a
positive and moderate correlation between firm value and EM (Tobin’s Q/REM = 0.023;
Tobin’s Q/DA = 0.021). Similarly positive associations exist between control variable and firm
value and (Tobin’s Q/LEV = 0.034; Tobin’s Q /FS = 0.012; Tobin’s Q/FG = 0.019; Tobin’s
Q/FCF = 0.097).
Accrual and Real Earnings Management: Firm Value Analysis

Table 5: Panel Regression Results

Pooled OLS Fixed Effect Random Effect
C 2.32 3.56 2.71
(0.021)** (0.000)** (0.007)**
REM -0.25 11.26 10.99
(0.799) (0.000)** (0.000)**
DA 0.13 -11.25 -10.95
(0.897) (0.000)** (0.000)**
LEV 3.23 1.56 2.18
(0.001)** (0.119) (0.029)**
FS -2.07 -2.26 -2.93
(0.039)** (0.024)** (0.003)
FG 2.72 1.44 2.59
(0.007)** (0.152) (0.010)**
FCF 1.05 2.96 2.94
(0.293) (0.003)** (0.003)**
R-squared 0.265 0.317 0.299
Adj R-squared 0.252 0.290 0.190
F-Statistic 20.53 23.81 154.66
Prob.(F-statistic) 0.000 0.000 0.000
VIF 0.009
Heteroscedasticity 13.2(0.00)
Hausman 0.122
Source: Authors computation, (2023).
Note: ** means significant at 5%
Panel Regression Analysis
The study employed a panel regression analysis, as shown in Table 5 for the study model.
Ordinary least square pooled regression shows that the adj R-squared of 0.25. This suggests
that the Dependent Variable (DV) among the manufacturing firms in Nigeria cannot explain
100 percent by all the study variables, it is just 25% of the systematic variations in the firm
value in the pooled firms, that was jointly explained by the accrual based and REM. The OLS
pooled regression model is valid for statistical inference, as indicated by the F-statistic value of
20.53 and its corresponding p-value of 0.000. Also, the VIF of 0.009, which is lower than the
benchmark value of 10, suggests that multicollinearity is absent, and as a result, no Independent
Variable (IV) has to be removed from the model. More so, The Hausman test was also used to
distinguish between random and fixed effects. The study adopted a random effect model to
describe the impact of EM on the firm value of chosen firms in Nigeria based on the hausman
statistics (p = 0.122 > 0.05). The firm value as an IV (Tobin's Q) appears to be positively and
significantly influenced by REM (=10.99, p>|t|=0.000˂0.05). Contrarily, DA significantly and
negatively affects company value (=-10.95, p >|t|=0.000˂0.05). In the case of the control
variables, LEV, FG, and FCF each revealed positive and significant influence on firm value
(=2.18=0.029˂0.05, =2.59=0.010˂0.05, and =2.94=0.003˂0.05), whereas FS (=-2.93,
p>|t|=0.003˂0.05) exhibited negative and significant influence on FV.
Findings, discussion and suggestion for further studies
The positive and significant impact of REM on firm value of selected listed manufacturing
firms implies that manufacturing firm changes in activities and earnings have a direct influence
on firm value of Nigerian listed manufacturing firms. Also, it suggests that management of
S. A. Shittu, H. O. Onifade, K. T. Ajibola, S. O. Aminu 75

selected firms manipulate reported earnings through REM in income statement in order to
increase firm value. It supports the hypothesis formulated that firms value increase as the REM
increase. This outcome is consistent with earlier empirical findings (Olaniyi & Abubakar, 2018;
Khuong et al., 2019; Salome et al., 2021). However, the results differ from previous findings
of various researchers that revealed negative influence of REM on firm value (Al-Zahrani,
2019; Rahman & Xiong, 2021). However, the negative and significant influence of DA on firm
value submits that profitable firms engage in income-decreasing EM which implies that,
managers of manufacturing firms in Nigeria does not partake in EM to improve firms value. It
negate the hypothesis formulated that firms value increase as DA increases. The negative effect
corroborate with previous empirical findings of (Dakhlallh et al., 2020; Edesiri & Confidence,
2020). The result refutes the research findings of (Olotu et al., 2019; Ayisi et al., 2021). This
means that managers of sampled firms tend to undertake more REM than DA to improve their
value. In terms of control variables, the positive significant influence of leverage, firm growth,
and free cash flow indicates that an increase in leverage as firms grow, as well as an increase
in free cash flow, will be accompanied by an increase in firm performance as measured by
Tobin's Q. However, it could be perceived that firm size establishing a negative link with firm
value implies that firms did not make use of their total assets held to earn an expected return
measured on a market basis.
Suggestion for further studies
Nevertheless, this research succeeded in answering the stated study objectives. Future studies
can collect data across other sectors instead of four sectors (manufacturing companies)
considered in this study. More so, this study only based its empirical findings on secondary
data. However, future study can consider using primary data to seek opinion of concern
stakeholders on how earnings management influence firm value.
CONCLUSION
The study examined the influence of DA and REM on firm value measured by Tobin’s Q.
Larcker and Richardson (2004) and Rowchowdhury (2006) models were employed to measure
DA and REM respectively. More so, leverage, firm size, firm growth and free cash flow were
considered as control variables. Four sectors which include conglomerates, health care,
industrial goods and consumer goods. The study concluded that REM had a positive and
significant effect, while DA had a negative and significant influence on the firm value of
selected listed manufacturing firms in Nigeria. More so, firm size had negative and significant
influence while free cash flow had positive and significant influence on firm value. It is
recommended that REM only be implemented when it is absolutely necessary for the continued
existence and profitability of businesses. To prevent false outcomes and limit managers'
discretion, regulators like the securities and exchange commissions should enact regulations
requiring clear financial information. Also, accounting standards should be used to minimize
standard flexibility and limit opportunistic management discretion in handling financial reports
and firms engaging in the practice should also face harsher sanctions.
Disclosure statement
N potential conflict of interest was reported by the author.
Accrual and Real Earnings Management: Firm Value Analysis

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