The Relationship between earnings management and cost of corporate bonds among the firms listed on the Nairobi Securities Exchange

Abstract

This research study aimed at determining the relationship between the cost of corporate bonds and earnings management among the firms listed on the Nairobi securities exchange. The study target population was the 21 firms listed at the NSE that issued corporate bonds in the period 2015-2020. The study used secondary data which was gathered from annual reports to provide empirical evidence which aimed at determining the extent of earnings management and its relationship to the cost of corporate bonds. OLS regression was used to analyze the secondary data. This study was anchored on the Agency theory, signaling theory, positive accounting theory and efficient market hypothesis theory. Analysis of the secondary data was through descriptive procedures assisted by SPSS Version 21 software. This study finds that a positive significant relationship exists between the cost of corporate bonds and accrual-based earnings management, however a negative and significant relationship exists between cost of corporate bonds and real earnings management. Investors are encouraged to exercise caution when deciding on whether to invest on corporate bonds or not. Researchers and scholars are encouraged to research on better models to estimate earnings management. The study incorporated both accrual-based and real activities in studying the relationship between cost of corporate bonds and earnings management, A limitation of this study is that it focused on listed companies, therefore other researchers are encouraged to look into earnings management in the unlisted companies. This study will be a valuable addition to the few existing studies on the corporate bonds market particularly in developing markets. It will serve as a guide to researchers and academicians who may wish to replicate the study in the other frontier markets due to shared market similarities.