Original Research Article | OPEN ACCESS
Moderating Effect of Free Cash Flow and Managerial Ownership on Earnings Management of Listed Conglomerate Firms in Nigeria

Suleiman Kargi Hamisu1 Zakariya Musa2

1Department of Accounting, ABU Business School, Ahmadu Bello University, Zaria – Nigeria; 2Department of Accounting, Kaduna Polytechnic, Kaduna – Nigeria.

For correspondence:-  Suleiman Hamisu   Email: hskargi@abu.edu.ng

Received: June 3, 2021        Accepted: June 29, 2021        Published: June 30, 2021

Citation: Hamisu SK.Musa Z. Moderating Effect of Free Cash Flow and Managerial Ownership on Earnings Management of Listed Conglomerate Firms in Nigeria. Account Tax Rev 2021; 5(2):30-52 doi:

© 2021 The authors.
This is an Open Access article that uses a funding model which does not charge readers or their institutions for access and distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0) and the Budapest Open Access Initiative (http://www.budapestopenaccessinitiative.org/read), which permit unrestricted use, distribution, and reproduction in any medium, provided the original work is properly credited..

Abstract

Financial reports, which ordinarily should provide a true and fair view of the firm's performance and financial status as of the reporting date, are manipulated due to the opportunistic behaviour of some managers. The separation of ownership and control forms the basis of divergent motivation between stockholders and management, resulting in a conflict of interest and agency costs. The management tends to abuse their trust in the presence of excess cash flow in a firm to pursue personal interest while reporting good financial performance. Managerial ownership is considered an important component of ownership structures to mitigate the conflict between managers and shareholders. This study examined the moderating effect of managerial ownership on the relationship between free cash flow and earnings management of conglomerate firms listed on the Nigerian Stock Exchange as at December 31 2017. The study was conducted on all 6 conglomerate firms listed on the Nigerian stock exchange from the period 2005 to 2017. The study used a correlational research design and secondary data from the firms' annual reports and accounted for the periods. Multiple regression was employed in analysing the data. The results showed that free cash flow has a positive and significant effect on earnings management. Managerial ownership has a negative and significant effect on earnings management. In comparison, managerial ownership interaction with free cash flow on earning management has an insignificant negative effect. The study concludes that managerial ownership may likely reduce earnings management in the presence of free cash flow in listed conglomerate firms in Nigeria. Based on the study's findings, it is recommended that managers be encouraged to increase their shareholdings in the firms to better align their interests with that of other shareholders and reduce their opportunistic tendencies. Also, shareholders and management should exercise good governance practices to identify viable investment projects into which excess cash flow may be channelled to reduce the managers' motivation for opportunistic behaviours. Financial reports, which ordinarily should provide a true and fair view of the firm's performance and financial status as of the reporting date, are manipulated due to the opportunistic behaviour of some managers. The separation of ownership and control forms the basis of divergent motivation between stockholders and management, resulting in a conflict of interest and agency costs. The management tends to abuse their trust in the presence of excess cash flow in a firm to pursue personal interest while reporting good financial performance. Managerial ownership is considered an important component of ownership structures to mitigate the conflict between managers and shareholders. This study examined the moderating effect of managerial ownership on the relationship between free cash flow and earnings management of conglomerate firms listed on the Nigerian Stock Exchange as at December 31 2017. The study was conducted on all 6 conglomerate firms listed on the Nigerian stock exchange from the period 2005 to 2017. The study used a correlational research design and secondary data from the firms' annual reports and accounted for the periods. Multiple regression was employed in analysing the data. The results showed that free cash flow has a positive and significant effect on earnings management. Managerial ownership has a negative and significant effect on earnings management. In comparison, managerial ownership interaction with free cash flow on earning management has an insignificant negative effect. The study concludes that managerial ownership may likely reduce earnings management in the presence of free cash flow in listed conglomerate firms in Nigeria. Based on the study's findings, it is recommended that managers be encouraged to increase their shareholdings in the firms to better align their interests with that of other shareholders and reduce their opportunistic tendencies. Also, shareholders and management should exercise good governance practices to identify viable investment projects into which excess cash flow may be channelled to reduce the managers' motivation for opportunistic behaviours.

Keywords: Free Cash Flow, Earnings Management, Managerial Ownership, Conflict of Interest.


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