Earnings Management of Quoted Corporate Firms: Detecting and Rethinking the Key Drivers in an Insensitive Capital Market as a Panacea for Investors’ Resource Abuse

Both mechanistic and positive accounting theories were postulated to explain the drivers of earnings management. Scholars postulated the theories perhaps under the belief that market would always be sensitive to firm performance reports. Since the emergence of these theories, many empirical researches have been based on such a framework. They found that positive relationship exists between capital market and earnings management. The key questions we want to address in this present study is whether the direction will remain unaltered if market goes insensitive. In addition, if it has altered, what key factors could determine earnings management in the turn of the market? Given that some developing economies capital markets are now insensitive to performance stimuli for over a long period, the reality of metrics constituting the real drivers of earnings management needs rethinking for avoidance of investors’ resource misallocation. In this study, we examined variables that could really constitute the key drivers using a cross-sectional survey research design in an insensitive market among the quoted firms in Nigeria. We analyzed data we obtained from survey using logistic regression model, which helped us to detect earnings management maximum likelihood in an insensitive stock market. The result revealed that market capitalization and compensation contracting based on share options negatively drive managers to engage in earnings management as opposed to mechanistic theories if market turns insensitive to performance. However, non- market based factors including debt covenant, compensation based on cash options, loss deletion and regulation positively drive managers to engage in earnings management practices whether market is sensitive or insensitive to performance report. Therefore, we found the key drivers of earnings management in an insensitive market to constitute non-market based compensation incentives. We recommend that in order to encourage earnings quality and eschew investors’ resource misallocation, earnings management containment based on the efficient, sensitive market premises should be reviewed, and emphasis should be placed on non-market based containment strategies. Key Words: Earnings; Earnings Management; Drivers, Market Capitalization; Market Sensitivity; Capital Market Insensitivit

Consolidations and Involuntary Huge Equity Alteration Duress: Exposing their Contemporaneous Dynamic Influence on Small Risk Asset Creating Propensity of Merged Banking firms

We investigated how bank consolidations, and sudden involuntary capital variations organically influenced small risk asset creation abilities of Nigerian banking firms based on the framework of Monti-Klein Theory for making effective lending policies. Within the past decade, banks in Nigeria have in many occasions been mandated to change their capital base within a limited time too short for such exercise. As a survival strategy, they resort to involuntary consolidations. We fear that this sudden mergers and involuntary alteration in equity level could blow banks to focus abnormally away from small risk asset creation thereby resulting in small business loans’ disequilibrium. The information regarding this likely effect has remained substantially asymmetrical constituting a real gap. In near future, if the gap remains, policy capable of pulling down the entire economy could emerge. While previous papers had attempted to solve this problem, data limitations must have made them derail from the target especially by engaging insufficient bank data, which can only capture the pre-merger implication. In this present paper, we surmounted this bottleneck by using up to 6 years post merger data. Unique to this paper, we selected 24 banks that involuntarily emerged and/or recapitalized after N25billion bank recapitalization-mandate for study using an Ex-Post Facto as a research design. Using data from Central Bank of Nigeria Bulletin and databases of banks we sampled for study, we found that bank consolidations under duress negatively and significantly influenced fully restructured banks’ propensity to create small risk assets. Moreover, we found that when change in equity was sudden, unplanned and involuntary, the effect on fully restructured banks propensity to make small loans was organically negative. Specifically, banks whose equity condition positively alters overnight due to involuntary consolidations break a significant proportion of their lending relationship with small business borrowers in the long-run. This means that involuntary consolidations and sudden equity change limit significantly the consolidated banks’ ability to create small risk assets. Based on these results, we recommendation that regulatory authority should not seek to increase lending to small businesses by encouraging sudden and involuntary bank capital adequacy through bank consolidations. Keywords: Mergers, Acquisitions, Consolidation, Small Businesses, Equity Condition, and consolidation dures

Creative Accounting around Contemporaneous Involuntary Bank Mergers and Acquisitions, and Non-Routine Board Changes

Thispaper examines the magnitude and direction of creative accounting following contemporaneousmergers and acquisitions consummated under duress, and abnormal corporate boardchanges taking evidence from Nigeria. But most importantly, the paper determineswhether any likely resultant abnormal accrual following corporate acquisitions canbe unconsciously normalized by ‘big bath’ accounting players following contemporaneousnon-routine board leader replacement. Evidence has shown that following acquisitions,mangers can engage in income-increasing management on one hand. On the other hand,new CEOs can give earnings a ‘big’ downward ‘bath’ blaming their predecessors forthe poor performance while pursuing personal contractual performance benefit. Hence,within extensive researches already carried out on the impacts of acquisitions andboard replacement on creative accounting, there remains unanswered question of theextent of accrual manipulation when the two events occur simultaneously. Drawingheavily from Jones and Dechow models in estimating normal accrual, normal cash flowfrom operations and both discretionary accrual and cash flow, we report consistentwith extant literatures, that under consolidation duress, the victim firms engagein a significant discretionary income-increasing manipulation. Our study also confirmsthat significant downward accrual management follows corporate board changes inNigeria. However, the board changes that follow consolidation restructuring limitthe persistence of the abnormal accrual in the end. We find that the ‘Big bath’accounting players reverse although unconsciously a significant proportion of theupward managed accrual from opportunistic perspective. The ratio of pre consolidationaccrual hiking to post-consolidation board changes reversal is 3:2, which indicates67% normalization for stock based acquisitions. For cash based acquisitions however,the reversal is much lower. Our findings suggest that where abnormal earnings ishighly suspected following involuntary acquisitions, board restructuring that willlead to new managers could help in correcting or reversing significant proportionof the accrual abnormality. Keywords: Discretionary Accounting,Consolidations, Earnings management, Mergers and acquisitions, Accrua