Effectiveness of Earnings Management Under Inflationary Pressures: Evidence from the Nigerian Stock Exchange

Abstract

The study examined the effectiveness of earnings management (EM) as a financial strategy under the context of rising inflation in Nigeria's capital market. Under the consistent macroeconomic uncertainty, listed Nigerian firms are often faced with pressure to present stable and positive financial reports. This has triggered growing concern about the extent to which firms utilize earnings management to survive inflationary volatility. The study adopted a conceptual approach, critically reviewing theoretical frameworks and available empirical research to explore the impact of inflationary pressures on motives, methods, and perceived efficacy of earnings manipulation. Particular attention is given to the Nigerian Stock Exchange as an example of the broader corporate environment of emerging markets
Drawing on agency theory and signaling theory, the research concluded that managers are able to enhance income-smoothing behavior in reaction to inflationary stress to meet market expectations, preserve investor confidence, and cope with unfavorable valuation outcomes. However, these manipulations ranging from accrual-based manipulation to real activity management may not be adequate to achieve desired economic impacts as investors turn more cynical and financial oversight improves. The research also discovers a paradox: EM might temporarily insulate firms from the immediate shock of inflation, but it tended to undermine long-term financial transparency and credibility.
In the inflationary economy of Nigeria, where accounting frameworks evolve continuously and regulatory monitoring is sporadic, the strategic use of EM carries threats as well as high risks. The study called for stronger governance frameworks and more investor awareness to detect and measure earnings signals effectively. The study contributes to the existing literature on the resilience of financial reporting in inflationary economies, especially in frontier markets.