Earnings Management, Institutional Structures and Performance of Banks in Sub-Saharan Africa

Abstract

This thesis investigates how certain institutional structures impact the interplay between earnings management and financial performance in banking institutions across sub-Saharan Africa (SSA). Specifically, it delves into three key areas: 1) The influence of robust auditing and financial reporting standards on banks' earnings management behaviour 2) The interrelationships among contractual enforcement mechanisms, political institutions, and earnings management in SSA banks; and 3) The moderating effects of auditing and reporting standards, as well as contractual institutions on the link between earnings management and bank performance in the region. The data spans from 2007 to 2021, constrained by the availability of relevant data for the primary variables under scrutiny. Analytical techniques employed include the Generalized Method of Moments (GMM) estimator. Findings reveal that stringent auditing and reporting standards tend to curtail earnings management activities among SSA banks. Additionally, well-developed contractual institutions appear to discourage such practices. The deterrent effect of these institutional factors on earnings manipulation is particularly pronounced in countries with robust political institutions. Furthermore, the study uncovers that both rigorous auditing and reporting standards and effective contractual institutions positively moderate the relationship between earnings management and bank performance in SSA economies. This suggests that these institutional frameworks may help channel earnings management practices towards efficiency-enhancing outcomes rather than opportunistic behaviour. Based on these insights, the research recommends that policymakers focus on reinforcing these institutional pillars to promote more transparent and efficient banking practices across sub-Saharan Africa. By doing so, they can potentially harness the constructive aspects of earnings management while mitigating its detrimental effects on bank performance.