Institutional (Governance) Quality and Earnings Management in African Listed Non-Financial Firms: Evidence from A Cross-Country Study

Abstract

This study examines the effects of governance quality, measured through the Worldwide Governance Indicators (WGI), on earnings management. The analysis employs balanced panel data from firms listed in South Africa, Nigeria, Ghana, Kenya, Tanzania, Zambia, and Uganda over the period 2004–2023. Institutional indicators are sourced from the Worldwide Governance Indicators, while firm-level and macroeconomic data are obtained from audited financial statements and World Bank databases. Earnings management is measured using discretionary accruals estimated with the Modified Jones model. The empirical analysis combines pooled Ordinary Least Squares (OLS), fixed- and random-effects models, and a dynamic two-step System Generalized Method of Moments (System-GMM) estimator with Windmeijer-corrected robust standard errors to address endogeneity, unobserved heterogeneity, and the persistence of earnings management. The findings indicate that the rule of law, government effectiveness, voice and accountability, and audit quality significantly reduce earnings management, whereas regulatory quality and political stability are positively associated with discretionary reporting. Firm size, leverage, sales growth, and inflation increase earnings manipulation, while profitability constrains it. Gross Domestic Product (GDP) growth is statistically insignificant. The study advances the literature by integrating institutional, firm-specific, and macroeconomic determinants within a dynamic cross-country framework, demonstrating that the effectiveness of governance mechanisms depends not only on their formal design but also on their implementation across institutional settings. The findings provide policy-relevant evidence for strengthening governance quality, enhancing financial reporting transparency, and supporting sustainable corporate governance and capital market development in emerging African economies.