Sarcouncil Journal of Economics and Business Management

Abstract: Earnings management has been a topical issue over the past few decades largely as a result of the collapse of many firms thereby raising doubts by users of financial reports about the truth and fairness of the reports and the extent of reliance that can be placed. Corporate governance was instituted to curb this malaise and ensure improved quality of reports. However, with introduction of corporate governance and tightening of regulation by regulators and standard setters with the aim of curbing management latitude in preparing financial reports and mitigating accruals earnings management, the question agitating the mind of researchers is whether earnings management has shifted from accrual earnings management to real earnings management or is jointly used and if so are they mutually exclusive or complementary to each other. The goal of the study is therefore to determine whether real and accrual earnings management is mutually exclusive or complementary using data from financial statements of firms listed on the Nigeria stock exchange for the period 2003 to 2023. Accruals earnings management was measured through the Modified Jones model while real earnings management was measured using production method. Corporate performance using Balance score card was measured by internal efficiency, customer loyalty, return on assets, Net profit margin, price earnings ratio and Tobiq. This was done to capture accounting, market and internal efficiency of the firms. Result indicate that AEM have positive co-efficient impact on Return on Assets and Net Profit Margin while REM have negative co-efficient implying increased REM decreases Return on Assets. The result however indicate that there is a trade-off between AEM and REM indicating that for ROA and Net profit Margin, the two earnings management strategies are mutually exclusive. For internal efficicency, Arm has negative co-efficient while REM has a positive co-efficient indicating that REM and AEM are mutually exclusive. For Price earnings ratio both AEM and REM have positive co-efficient thus demonstrating complementary effect. Discretional Accruals, and Real Earnings management have significant effects on customer loyalty although the effects are mutually exclusive. The findings of the research highlights the effect of Real and accrual earnings management could be mutually exclusive or complementary depending on the yardstick of measurement. We therefore recommend when firms are desirable of improving ROA to improve their financial position can adopt more of accruals earnings management. By adopting aggressive and manipulative measures, our study demonstrates that financial performance will improve for the firms. Net profit margin improves for firms that engage in accruals earnings management, but not for firms that engage in real earnings management.The study also provided evidence that it is real earnings management that improves internal efficiency in terms of overall resource use by manufacturing firms in Nigeria. This outcome therefore presents a dilemma to managers who want to improve both financial performance and internal efficiency simultaneously. We recommend earnings management should therefore be considered as a strategic adaptation rather than a deliberate manipulation strategy of management in order to drive long term performance, especially in relation to the market performance of firms. Accruals earnings management and real earnings management are complements in terms of market performance of firms. Thus, firms that seek to improve their market performance do not need to overemphasize the need to manipulate earnings in order to influence investors’ decisions. These firms can as well employ real earnings management to generate the same outcome. Real earnings management improves customer loyalty. We recommend managers should improve real earnings management in order to improve their positions before customers. Results reveal that customer loyalty favors firms with real earnings management strategy necessitating minimization of costs of accruals earnings management over time