Effects of Political Connections on Earnings Management Practices in Nigeria: Does the Board of Directors’ Efficacy Matter?

The purpose of this study is to investigate the effects of political connections and earnings management and to explore the role of the board of directors’ efficacy on the relationship between political connections and earnings management practices. A panel data set of 365 observations from 73 firms (2018 to 2022) listed on the Nigerian Exchange Group (NGX) was used, and the Driscoll and Kraay standard error fixed effect was employed in testing the hypotheses. The findings indicated that politically connected boards are positively associated with accrual earnings management and negatively associated with real earnings management practices. The study also finds that the board of directors’ efficacy is negatively associated with both accrual earnings management and real earnings management activities and thus plays a significant role in strengthening accrual earnings management practices of politically connected boards. The results are robust to alternative accrual earnings management and real earnings management measures. However, following the reformation of the Nigerian Code of Corporate Governance 2018, this study is among the earliest to examine the effects of board efficacy on earnings management of firms with politically connected boards in Nigeria. As such, the findings might have important implications for policymakers, regulators, and investors, as board efficacy is a significant mechanism in strengthening the accrual earnings management practices, thereby curbing the earnings management of politically connected boards. Additionally, this study is limited to a sample of non-financial service firms in Nigeria for a period of 5 years, resulting in the non-generalizability of the findings in different contexts.