Effect Of Earnings Management On Stock Returns Of Companies Listed At The Nairobi Securities Exchange

Abstract

The main objective of any firm is the maximization of the wealth of its shareholders. This means that every corporate event undertaken by the firm should be geared towards achieving this goal. Earnings management is a major corporate issue and is therefore no exception. Although most studies have reported on the negative side of earnings management, some studies still differ from the argument by suggesting that earnings management can be practised in a positive way. Reported earnings can be smoothed with earnings management practices to reduce unpredictability and thereby increasing firm value. The aim of this study was to ascertain the effect of earnings management on stock returns of firms quoted at the NSE. The population for the study was all the 63 companies quoted at the NSE. The independent variables for the study were earnings management as measured by discretionary accruals, capital structure as measured by debt ratio, liquidity measured by current ratio, firm size as measured by the natural logarithm of total assets and management efficiency as measured by the ratio of total revenue to total operating expenses. Stock return was the dependent variable and was measured by change in share price plus any dividend issued during the period. Secondary data was collected over a five year time frame (January 2014 to December 2018) annually. The descriptive cross-sectional research design was employed for the study and the relationship between variables established using multiple linear regression analysis. Data analysis was undertaken using the SPSS software. The results of the study produced R-square value of 0.245 which means that about 24.5 percent of the variation in stock returns of firms quoted at the NSE can be explained by the five selected independent variables while 75.5 percent in the variation in stock returns of firms listed at the NSE was associated with other factors not covered in this research. The study also found that the independent variables had a moderate correlation with stock returns of firms listed at the NSE (R=0.495). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the association between the selected variables. The findings also showed that liquidity and firm produced positive and statistically significant values for this study while capital structure produced negative and statistically significant values for this study. Earnings management and management efficiency produced positive but statistically insignificant values for this study. This study recommends that listed firms should enhance their liquidity and their asset levels as this has a significant positive effect on stock returns of listed firms.