The Effect of Earnings Management on Reported Financial Performance of Firms Listed at Nairobi Securities Exchange

Abstract

The objective of the research sought to ascertain the effect of earnings management on reported financial performance of firms listed at NSE in Kenya. This research used earnings management to represent the independent variable whereas financial performance was used to represent dependent variable. Stock price, financial leverage and firm size were used as the control variables. Study used descriptive research design which helped to explain the characteristic behavior of one variable because of another variable. The study selected all the 65 listed firms at the NSE. This study adopted census approach and thus all the listed firms formed the study sample frame. From regression results earning management, stock price, financial leverage and firm size explain 73.00% of the difference in the dependent variable which is financial performance. In addition, there was a positive and notable correlation between earnings management, stock price and firm size and financial performance. However, financial leverage had a positive and insignificant result on the reported financial performance. Hence this study deduced that earning management, stock price and firm size indicated a positive significant impact on the reported financial performance of listed firms at NSE. However, financial leverage does not indicate notable impact on reported financial performance of firms listed at NSE. The study advocates the users of financial statements especially those who wish to make decision basing on them should first evaluate whether the related firms engage in earnings management so that the decisions made can be correct ones. The study also advocates that the governance structures of the listed firms at NSE should ensure they maintain high stock prices so as to boost the financial performance of their respective firms. Furthermore, the study advocates that the management of the listed firms at NSE firms should ensure they hold adequate level of financial leverage to ensure that they do not affect other functions of the firm. The study recommends that top management of listed firms should set up strategies of growth and expansion in sizes for example growth in market segments and shares. One way of achieving growth may be through mergers and acquisition where a small firm in a small industry can decide to merge with another larger firm resulting into one large firm that commands the entire large market. This will help to boost the performance of the listed firms.