The relationship between selected macroeconomic variables and earnings management for companies quoted at the NSE

Abstract

This study examines whether a relationship exists between macroeconomic variables and earnings management. The study considers the macroeconomic environment of companies quoted at the NSE along the line suggested by Oxelhelm and Wihlborm (1987) as a set of four price variable; inflation rate, interest rate, money supply and foreign exchange rate. The management attempt to defer income (manage earnings) is quantified/stated in terms of firm's current accruals obtained from the balance sheet and the income statement.

Data for fifteen firms over a period of five years (2005 to 2009) is used.The purpose of the study is to investigate whether a relationship exists between specific macroeconomic variables and earnings management.

Current accrual (earnings management tool) is regressed against the four macroeconomic indicators correlation analysis and analysis of variances is also used for the analysis. The study documents a weak relationship between macroeconomic variables and earnings management. The observed correlation coefficient (R) is 0.211 or 21.1 % indicating that only 21.1 % of variations in earnings management can be accounted for by macroeconomic variables. The implication is that management would not achieve much through earning management in an effort to shield their firms against volatility in macroeconomic environment