Nexus of Earnings Management and Financial Performance of Manufacturing Firms in Nigeria

Abstract: The goal of the study was to examine the long run impact of Earning management on performance of manufacturing firms in Nigeria for the period 2013 t0 2022. The study adopted cross sectional ex-post facto design and census sampling method. Earnings management was proxied as Real and accrual earnings management divided into Discretional Accruals, Related party transactions, and Real earnings management while performance was measured using returns on asset, net profit margin and price earnings ratio. The dynamic panel data estimation framework was used and Haausman test for selection of model. The study found that discretional Accruals, Related party transactions, and Real Earnings management all have significant effects on Returns on Asset. The effect of discretionary accrual is however positive while that of real earnings management is negative highlighting the trade-off effect of real and accrual earnings management on accounting performance. Earnings management exert significant impacts on Net profit margin. Discretional Accruals, Related party transactions, and Real earnings management exert significant effects on market performance using Price earnings ratio. Based on findings we recommend that business owners should adopt policies that will improve quality of earnings and deter aggressive manipulation behavior by limiting Managers ability to indulge in aggressive accrual management. Firms that seek to improve their market performance do not need to overemphasize the need to manipulate earnings through accruals in order to influence investors’ decisions but can as well employ real earnings management to generate the same outcome with less harmful effect on the survival of the firm

Keywords: Earnings Management, Returns on Asset, Price Earnings Ratio, Net profit Margin