EARNINGS MANAGEMENT PRACTICES AND FIRM PERFORMANCE OF LISTED PHARMACEUTICAL COMPANIES IN NIGERIA

Abstract

This study investigated the relationship between earnings management practices and the performance of listed pharmaceutical companies in Nigeria. An ex post facto research design was adopted, and data was collected from six selected firms over a 13-year period (2010–2022), using audited annual reports. Earnings management was assessed through discretionary accruals management (DAC), real activities management (REC). Data analysis was conducted using the Panel Least Squares (PLS) estimation method, following appropriate diagnostic tests. The results showed that discretionary accruals management had a consistently negative but statistically insignificant relationship with all three firm performance measures, suggesting limited impact on performance. In contrast, real activities management demonstrated statistically significant relationships across all firm performance indicators. It had a positive and significant effect on market capitalization and enterprise value, indicating short-term enhancements in market-based valuation. However, it negatively and significantly affected book value, suggesting potential depletion of intrinsic asset worth due to operational manipulations. This indicate that manipulating real business activities — such as altering sales timing or reducing discretionary spending—can temporarily boost market-based valuations. However, the same practice had a significantly negative relationship with book value, reflecting the erosion of a firm’s net asset base. Based on these findings, the study recommends that firms in the pharmaceutical sector exercise caution when engaging in earnings management practices, particularly real activities manipulation because of the inherent long term risks. Regulatory authorities and industry stakeholders should enhance monitoring mechanisms and reporting requirements, especially around operational activities that can be easily adjusted to inflate performance figures.