Executive compensation, share ownership, and earnings management of banks in Nigeria

Abstract

Aim/purpose – Higher compensation and increased share ownership are believed to drive fewer earnings management. Therefore, the study examines the moderating impact of share ownership on the relationship between executive compensation and earnings management of listed Deposit Money Banks in Nigeria. Design/methodology/approach – Panel Least Square regression and Stata 13 were used for the estimation. The secondary data source was employed and extracted from the banks’ published financial statements covering the period from 2007-2018. Post- estimation tests, including normality tests of standard error, heteroscedasticity, and mul- ticollinearity, were carried out to validate the outcome. Executive compensation variable is represented by Chief Executive Officer Pay (CEO Pay), Board Chairman’s compensa- tion, and the highest-paid director, while executive share ownership represents the mod- erator variable. Chang et al. (2008) model was used to proxy earnings management. Findings – The findings revealed that CEO Pay increases the banks’ level of earnings management, while after moderation with executive share ownership; CEO pay decreas- es the possibilities of earnings management by banks. Compensation to Chairmen of the banks decreases the level of earnings management of banks. However, an increase in share ownership of the board with an increase in compensation to chairmen of banks’ boards increases the earnings management practices of the management of the banks. Research implications/limitations – The findings imply that the executive ownership interest should be made to align with that of the minority shareholders following an increase in their stake so that they can act in the overall best interest of the owners. The study is limited to only the banking sector and some specific executive compensation variables. Originality/value/contribution – The utilization of the highest paid director variable and use of share ownership as a moderator between executive compensations and earn- ings management. Keywords: earnings management, executive, share ownership, compensation, and expectan- cy theory. JEL Classification: M21, M41, M42, G32.