CORPORATE GOVERNANCE AND EARNINGS QUALITY EFFECT:EVIDENCE FROM NIGERIAN MANUFACTURING INDUSTRY

Abstract

The study examined the effect of corporate governance mechanisms on
earnings quality of manufacturing companies in Nigeria. The study
specifically examined the effect of board composition, audit committee
independence, institutional ownershipand executive compensation on
earnings quality of manufacturing companies in Nigeria. The study
adopted the Agency theory as the anchor theory whilepanel data was
extracted from the annual financial statements of the companies for the
period 2012 to 2022. Regression analysis was used for test of hypotheses.
The study found that: board composition significantly and positively affect
earnings quality of manufacturing companies in Nigeria (β=0.38, z=2.42,
and p=0.005); there is no significant effect of audit committee
independence on earnings quality of manufacturing companies in Nigeria
as results revealed β=-0.32, z=-0.84, and p=0.402; institutional
ownership has no significant effect on earnings quality of manufacturing
companies in Nigeria (β=0.42, z=1.02, and p=0.310); and there is
significant positive effect of executive compensation on earnings quality of
manufacturing companies in Nigeria (β=0.42, z=3.96, and p=0.000). The
study concluded that good corporate governance practice has a significant
effect in reducing earnings manipulations which by extension improves on
quality of earnings. Companies that have more non-executive directors in
their board composition and high executive compensation in terms of
shareholding and remuneration would have quality financial reports than
firms whose boards of directors do not contain reasonable number of
independent and directors their executive do not enjoy executive
compensation. It recommended thatmanufacturing companies in Nigeria
should ensure that more non-executive directors are included in their
board composition in order to enhance effective monitoring, and that;
managers of manufacturing and other companies should be encouraged to
own shares in the companies they are managing as managers with shares
are less susceptible to manipulative accounting practices.