Corporate governance compliance and accrual earnings management in eastern Africa: Evidence from Kenya and Tanzania

PurposeThe purpose of this paper is to examine whether compliance with corporate governance (CG) requirements has constrained earnings management (EM) for companies listed in Kenya and Tanzania.Design/methodology/approachThe sample comprises of 48 companies listed on the Nairobi Stock Exchange and the Dar es Salaam Stock Exchange. The data are collected from annual reports over the period 2005-2014, a total of 480 firm-year observations. Panel data models are used in the analyses.FindingsThe results show that discretionary accruals (DAs) average about 11.3 per cent, whereas audit quality is negatively and significantly related to DAs. However, board independence, board gender diversity and director share ownership were positively and significantly related to DAs suggesting that CG may not have constrained EM in eastern Africa.Research limitations/implicationsThe findings should be understood within the context that only annual reports and audited financial statements that were filed with Capital Markets Authority (Kenya) and Capital Markets and Securities Authority (Tanzania) are used as source of information.Originality/valueThe study potentially contributes in three main ways. First, this is the first cross-country analysis that has examined the effect of CG structures on EM in an African context. Second, literature on CG and EM has been extended. Finally, the authors have extended research by observing the limitations of CG in reducing EM in an environment that is experiencing weaknesses in CG structures.