Ownership Structure and Earnings Management:evidence From the Listed Non-financial Companies in Kenya

Abstract

The quality of financial reporting is an important matter to both regulators and investors. The purpose of preparing general purpose financial statements is to enhance objective decision making. Empirical evidence shows that investors rely on the earnings of a company to make decisions on whether to invest in the company or not, they also rely on the earnings of a company to decide if they will hold their investment or sell their stake in the company. Earnings also influence the stock prices and bonus earnings for internal management. Because of over reliance on this metric, most organizations have found reason to manipulate this number in order to influence the decision makers. Empirically the impact of ownership structure and earnings management has yielded conflicting results, with some studies concluding that there is a negative relationship whiles other studies indicating that there is a positive relationship. Moreover, most of these studies have not been done in Kenya. Therefore, the intent of the research was to demonstrate the relation between ownership structure and earnings management. Other supplementary objectives included establishing the connection existing between earnings management and enterprise size, age of the enterprise, profitability of the enterprise and capital structure. The theories anchoring the study included the agency theory, the bonus maximization theory and the passive hand theory. Descriptive Cross-sectional research design was used to conduct the census study. Secondary data was obtained from the entire 44 non-financial companies listed at NSE over a five-year period from 2015-2019.The study concluded presence of a statistically significant positive link between ownership structure, the size of the firm, firm profitability and earnings management. However, the investigation found no statistical interrelation between firm age, leverage and earnings management. The outcomes of the investigation confirm the assumptions of the bonus maximization theory and the passive hand theory. However, these results fail to confirm the assertions of the agency theory. Therefore, the study recommends that capital markets authority (CMA) should intensify its surveillance on big firms. Further the study proposes that the institute of certified public Accountants Kenya (ICPAK) should increase monitoring of the audits conducted on big firms. This is because large firms have the capacity to manipulate the auditors to overlook earnings management practices. Therefore, the study proposes that further inquiries should be undertaken to ascertain the interconnection between the quality of external audit and earnings management in Kenya. The study also suggests that independent studies should be done to find out the characteristics of institutional investors in Kenya and its relationship to earnings management.