Effects Of Earnings Management On Stock Returns Of Commercial Banks Listed At The Nairobi Securities Exchange

Abstract

The paper was commissioned to ascertain the tie-in between earnings administration and the stock returns of Kenya’s listed commercialized banks in the NSE. The dependent parameter is the stock returns while the independent parameter include earnings management, economic growth, inflation, interest rate and size of the company. The earnings management was measured using the modified Jones model of estimating non-discretionary accruals while the size of the company was gauged using the natural log of total assets. The economic growth, interest rate and inflation data were obtained from the KNBS statistical abstract. Financial data about the size of the company was gathered from the published, audited financial statements for a period of five years. Information about the stock return was obtained from the trading data that is available at the NSE. The data was collected from ten listed commercial banks as at 30 June 2019.The data covered five years from 2014 to 2018.A non-directional Pearson correlation revealed that stock returns of the listed commercialized banks is negatively tied-up with interest rate, inflation, earnings management and economic expansion rate. The model summary indicated that the selected predictors explains 27% of the changes in the variations of the stock returns. The ANOVA statistic shows that the selected independent variables collectively affect the dependent parameters. Ordinary least regression methodology was employed to assess the statistical tie-up between the independent parameters and the dependent parameters. The results confirm that there is a negative constant level of return which is not affected by the variables under consideration. The research found that the establishment’s size has a negative relationship with the stock returns which is attributable to the growth prospects of the small firms. Interest rate was also found to have a positive tie-in with earnings management. However, inflation, earnings management and economic growth are found not to have a statistically substantial link. These relationships were tested for statistical significance at 95% confidence level. These results validate the assertions of efficient market hypothesis which postulates that investors have the capacity to identify earnings management and include it in decision making. This means that investors are likely to adjust the financial statements figures to reflect the true figures after removing the discretionary accruals.