Abstract
This study investigates the effect of earnings management and corporate governance on the capital structure decision of firms. We utilized data of non-financial firms from selected sub-Saharan African countries over the period 2008 to 2018. Both fixed and random effect regressions were the methods of analysis employed. Our findings indicate that earnings management is associated with low equity usage and by implication, high leverage levels among firms. Importantly, the presence of corporate governance was found to mitigate the high leverage implication of earnings management. We therefore recommend an improvement in corporate governance practices to minimize the occurrence of earnings management.
1 INTRODUCTION
In the wake of the collapse of high-profile entities such as Enron, WorldCom, Royal Ahold, Parmalat among others, the need for firms' reported earnings to depict their economic reality and not merely desired earnings is of much relevance (Amidu & Kuipo, 2015). It is believed that the collapse of these organizations stemmed from the absence of quality and reliable financial information required for their smooth running (Idialu, 2008; Jiraporn, Miller, Yoon, & Kim, 2008). In essence, the scandal surrounding these entities can be regarded as the aftermath of the doctoring or manipulation of their financial statements. According to Shen, Luo, and Huang (2015), the practice of using innovative ways within the confines of the financial reporting framework to characterize or report assets, incomes, and liabilities in a way that misleads stakeholders about the actual performance of the entity is referred to as earnings management. Depending on the target to be achieved, management manipulates or misrepresents reported financials through, but not limited to, the deferment or untimely recognition of transactions to influence earnings (Nwaobia, Kwarbai, & Fregene, 2019). The practice of earnings management therefore fails to give a true reflection of firms' performance thereby compromising on the capacity of financial reports in serving as a guide to optimal corporate decisions (Amidu, Coffie, & Acquah, 2019; McNichols & Stubben, 2008).
6 CONCLUSION
The study set out to examine the effect of earnings management on the capital structure decision of non-financial listed organizations from selected sub-Saharan African countries. It also sought to ascertain whether corporate governance, specifically the board size, board composition, and board gender diversity indicators, play any mitigating or reinforcing role as far as the effect of earnings management on capital structure decision is concerned.
