Managerial Ownership, Audit Committee Effectiveness and Real Earnings Management: Evidence from Non-Financial Companies Listed in the Nairobi Securities Exchange.

Abstract

Real earnings management has gained attention due to financial fraud stemming from distorted reporting and misrepresentation of firm value. Opportunistic managers may exploit reporting to enhance personal gain, making detection challenging as it involves legitimate operational decisions, like changing production or discretionary spending, which can mislead shareholders and hinder firm growth. To better understand and address this important issue, the study set out to investigate the mediating effect of audit committee effectiveness (ACE) on the relationship between managerial ownership structure (OS) and real earnings management (REM). The study's specific objectives were to determine the effect of managerial ownership structure and real earnings management, besides the mediating role of audit committee effectiveness on the link between managerial ownership structure and real earnings management. The study was guided by stakeholders’ theory and it employed an explanatory research design alongside a panel data approach to survey non-financial firms listed on the NSE that met the set inclusion criteria. The research population included 40 listed non-financial firms, with the focus narrowed to 26 firms that operated continuously between 2008 and 2023, resulting in a total of 416 firm-year observations. Secondary data extracted from financial reports were analyzed using both descriptive and inferential statistical methods. Audit committee effectiveness was found to mediate the relationship between managerial ownership and real earnings management. The study results specifically indicate a positive and significant effect of managerial ownership on real earnings management (β= 0.781, p<0.05), and audit committee effectiveness partially mediates the relationship between managerial ownership and real earnings management (β= -0.365, p<0.05). The study finds that managerial ownership structure is associated with increased real earnings management. While audit committee effectiveness partially mediates the relationship between managerial ownership and real earnings management. These findings align with stakeholder theory, highlighting the critical role of ownership structure and governance mechanisms in enhancing financial reporting quality.

Keywords: Managerial Ownership, Real earnings management, Audit committee effectiveness

DOI: 10.7176/RJFA/16-5-01

Publication date: June 30^th 2025