Chief executive officer power, institutional ownership, integrated reporting, and earnings quality among listed firms in East Africa

Abstract

Earnings quality is an important aspect that influences decisions relating to resource allocation in the capital markets. Earnings also indicate the extent to which the firm has engaged in value-added activities. Manipulation of earnings has degraded shareholders' trust in the quality of information reported by corporations throughout the world and the eventual survival of the firm. This has heightened the interest of scholars, practitioners, and policymakers in the studies on earnings quality. Although many studies suggest that Chief Executive Officer (CEO) power affects earnings quality (EQ), the findings are mixed and inconclusive. The main objective of the study was to investigate the moderating effect of Institutional Ownership (IO) in the relationship between CEO power and EQ as mediated by Integrated Reporting (IR). The specific objectives were to establish whether: First, the various dimension of CEO power; CEO structural power (CEOSP), CEO ownership power (CEOOP), and CEO expert power (CEOEP) affect EQ. Second, IO moderates the relationship between CEO power and EQ. Third, IR mediated the relationship between CEO power and EQ. Finally, IO moderates the relationship between CEO power and EQ as mediated by IR. The study was grounded on; Upper Echelon theory, Agency theory, and Signaling theory. The study used the positivism paradigm and adopted the explanatory and longitudinal research design. The target population comprised 117 firms listed in East Africa (EA). Based on inclusion criteria for the study period 2013 to 2021, the sample size was 78 firms with 702 firm-year observations. Panel data was extracted from the individual firm’s audited annual reports. The data was analyzed through descriptive and inferential statistics. The results of the Hausman test guided the choice between fixed and random effect regression. The study found that CEOSP (β=-0.417, ρ<0.05), CEOOP (β=-0.201, ρ<0.05), and CEOEP (β=-0.176, ρ<0.05) had a positive and significant effect on EQ. Further results indicated that IO moderated the relationship between CEOSP (β=0.088, ρ<0.05, ∆R 2 0.198), CEOOP (β=-0.88, ρ<0.05 ∆R 2 , 0.188), CEOEP (β=-0.064, ρ<0.05, ∆R 2 0.224) and EQ. The results further indicated that IR mediated the relationship between CEO power and EQ; CEOSP (β=-0.0076, ρ<0.05), CEOOP (β=-0.0138, ρ<0.05), and CEOEP (β=-0.0101, ρ<0.05). Lastly, the study found that IO moderated the relationship between; CEOSP (β=-0.656, ρ<0.05), CEOOP (β=0.061, ρ<0.05), and CEOEP (β=0.054, ρ<0.05) on EQ as mediated by IR. Therefore the study concludes that CEO power is a positive driver of EQ. Additionally, the study revealed an indirect relationship between CEO power and EQ through IR and IO as a moderator. The study's findings support Upper Echelon’s and agency theories, that CEOs affect the accounting results of the firm which affects the quality of earnings. The results further support the signaling theory, that the CEO signals to the shareholders by producing IR to indicate that the company has quality earnings. The study recommends; that policymakers and regulatory bodies may consider the mandatory adoption of IR to improve EQ. Since the study focused on listed firms in EA, the results may not be generalized in other regions, which is fertile ground for further research.