Earnings Management and Financial Performance: The Moderating Role of CEO Competency

This study examines the influence of earnings management on the financial performance of financial listed firms. It also investigates the moderating role of CEO competency on the relationship between earnings management and financial performance. The study argues that the competencies of CEOs are important to reduce the discretionary accruals of firms. Using a sample of deposit money banks in Nigeria, the study adopts the panel regression estimator to analyze the testable hypotheses of the paper. In support of the agency theory, the study finds evidence that earnings management reduces financial performance. On the contrary, the interaction of CEO competency and earnings management negatively reduce financial performance, indicating that CEOs use their competencies to entrench themselves for their personal interests more than the interests of shareholders. The magnitude of the combined CEO competency and earnings management affecting financial performance is less than the sole effect of earnings management. Thus, while we find support for the agency theory on earnings management, our study establishes little support for CEO competency to erode earnings management. Hence, we call for a broader CEO monitoring and resource mechanisms such as CEO compensation and CEO social capital to reduce the negative impact of earnings management on financial performance of financial institutions.