Discretionary Accrual Earnings Management in a Sub-Saharan African Economy

Abstract

This paper investigates the existence of discretionary total accrual earnings management and working capital accrual earnings management in Nigeria which is Sub-Saharan Africa's largest economy. Unlike previous studies that use the Ordinary Least Squares (OLS) technique that does not control for endogeneity that can invalidate results, our empirical methodology implements the maximum likelihood estimation that controls for endogeneity to estimate economically plausible levels of discretionary accrual earnings management. Our results find that discretionary accrual earnings management in Nigeria is characterized by statistically significant, tax-induced income-reducing discretionary accruals. This study contributes to the literature as it is the first emerging market, African and Sub-Saharan African economy study to the best of the researchers’ knowledge that estimates discretionary accrual earnings management for listed non-financial firms using various models based on the maximum likelihood estimation technique to control for endogeneity. The findings inform the political economy of economic development in Sub-Saharan Africa, particularly as it relates to how firms, especially multinationals, are motivated to extract rents from African economies. The results have policy implications for accounting regulatory interventions by policy and standard setting bodies that mitigate and/or eliminate capital flight, tax evasion, aggressive tax avoidance and financial corruption practices in Sub-Saharan African economies.