On the Link Among Earnings Management, Agency Costs, and Earnings Persistence: Is Sub-Saharan Africa Different?

This study examines whether agency cost mediates the relationship between earnings management and earnings persistence in Sub-Saharan Africa. We analyze 2,769 firm-year observations from 277 non-financial firms listed in Nigeria, Kenya, and South Africa during 2014–2023. Earnings management is captured through abnormal accruals and real earnings management proxies (abnormal cash flows, production costs, and discretionary expenses). Agency cost is proxied by directors’ remuneration, and earnings persistence reflects the extent to which current earnings predict future earnings. We estimate pooled OLS, fixed-effects, and LSDV models, and conduct robustness checks using two-step system GMM alongside Sobel – Aroian – Goodman and bias-corrected bootstrap mediation tests. The findings indicate institutional heterogeneity. Accrual earnings management is positively related to earnings persistence in the pooled SSA sample and in Kenya, suggesting that accrual discretion can smooth temporary shocks and enhance earnings predictability in volatile environments. The accrual effect is insignificant in Nigeria but significantly negative in South Africa. Real earnings management, particularly abnormal cash-flow manipulation, generally reduces earnings persistence. Agency cost exhibits partial mediation in the pooled SSA model and in South Africa, but not in Nigeria or Kenya. The study provides new SSA evidence that earnings quality mechanisms are institution-contingent rather than uniform across markets.