Inflationary Pressure and Executive Compensation: Implications for Earnings Management in Nigerian Deposit Money Banks

Abstract

This study examines the effect of inflationary pressure and executive compensation on earnings management in Nigerian commercial banks. The study is motivated by the persistent concern that managerial incentive structures and macroeconomic instability may jointly influence financial reporting quality in emerging economies. Using an ex-post facto research design, the study employs balanced panel data from twelve listed deposit money banks over the period 2012–2022. Earnings management is measured using discretionary accruals derived from the modified Jones model, while inflationary pressure is proxied by the consumer price index inflation rate. Executive compensation is measured using directors’ remuneration scaled by firm performance indicators. The study applies the fixed effects regression model to control for unobserved heterogeneity across banks and over time, while interaction terms are included to capture moderating effects. The results reveal that executive compensation has a statistically significant positive effect on earnings management, indicating that higher remuneration incentives encourage discretionary financial reporting behavior. Inflationary pressure, however, shows a positive but statistically insignificant effect on earnings management, suggesting limited direct influence. Furthermore, the interaction between inflation and executive compensation is insignificant, implying that inflation does not significantly moderate the compensation–earnings management relationship. The model is jointly significant, confirming that the explanatory variables collectively influence earnings management behavior. The study concludes that earnings management in Nigerian commercial banks is primarily driven by internal incentive structures rather than macroeconomic conditions. The findings support agency theory and have implications for corporate governance reforms and executive compensation design. The study recommends stronger regulatory oversight of compensation contracts to reduce earnings manipulation incentives.