Board structure, chief executive officer narcissism and real earnings management among companies listed in Nairobi Securities Exchange, Kenya

Abstract

Real Earnings Management has earned little attention in developing countries, yet it contributes to fraudulent reporting through operational activities. Extant literature indicates that boards’ effectiveness in reviewing the financial statements is crucial. In addition, individual characteristics of the CEO such as preferences, experiences and dispositions influence the way financial statements are reported. Several studies have been conducted to determine the relationship between board structure and earnings management, however, the results are mixed. Despite the extensive research on CEO’s individual characteristics and its influence on decision making and financial reporting, little attention has been given to CEO narcissism. The purpose of this study was to determine the effect of the board structure on real earnings management and the interaction effects of CEO narcissism among firms listed in Nairobi Securities Exchange. The specific objectives were to determine the effect of board independence, board tenure, board duality and board size on real earnings management and the moderating effect of CEO narcissism on the relationship between board independence, board tenure, CEO duality and board size on real earnings management. Agency theory, upper echelons theory and catering theory of earnings management were used to support the study. The study used longitudinal research design. Target population was 50 firms listed at Nairobi Securities Exchange. Secondary data from published financial reports of these listed firms from 2002 to 2017 was collected from Nairobi Securities Exchange and Capital Market Authority database using content analysis. Both descriptive and inferential statistics were used to analyse the data. Inferential statistics were done using hierarchical regression. The findings of the study showed that board independence (β = -.234, ρ < .05), board tenure (β = -.019, ρ < .05) and board size (β = -.035, ρ < .05) had a negative and significant effect on real earnings management while CEO duality (β = .643, ρ < .05) had a positive and significant effect on real earnings management. Further, the interaction effects showed that CEO narcissism negatively moderates the relationship between CEO duality (β = -.523, ρ < .05) and real earnings management, but had a negative but insignificant relationship between board independence (β = -.001, ρ > .05) and real earnings management, and a positive but insignificant relationship between board tenure (β = .002, ρ > .05), board size (β = .000, ρ > .05) and real earnings management. The study concludes that board independence, board tenure, board size and separated roles of the CEO, are crucial in mitigating real earnings management among firms listed in Nairobi Securities exchange. Further, CEO narcissism can help reduce the cases of real earnings management in situations where the CEO duality exist. The results support the agency theory that managers manipulate financial statements using real earnings management. It further supports the upper echelons theory that CEOs personal preferences can greatly influences the financial accounting choices and subsequently the level of earnings management. The study recommends that, for listed firms in NSE to reduce real earnings management, it should increase the proportion of independent board members, increase the board tenure, increase the size of the boards and ensure that there is separation of CEO and chairman roles. Additionally in cases where the CEO duality exist, a narcissistic CEO would be the remedy to reduce the real earnings management.