The study examined the effectiveness of earnings management (EM) as a financial strategy under the context of

rising inflation in Nigeria's capital market. Under the consistent macroeconomic uncertainty, listed Nigerian

firms are often faced with pressure to present stable and positive financial reports. This has triggered growing

concern about the extent to which firms utilize earnings management to survive inflationary volatility. The study

adopted a conceptual approach, critically reviewing theoretical frameworks and available empirical research to

explore the impact of inflationary pressures on motives, methods, and perceived efficacy of earnings

impacts as investors turn more cynical and financial oversight improves. The research also discovers a paradox:

EM might temporarily insulate firms from the immediate shock of inflation, but it tended to undermine

long-term financial transparency and credibility.

In the inflationary economy of Nigeria, where accounting frameworks evolve continuously and regulatory

monitoring is sporadic, the strategic use of EM carries threats as well as high risks. The study called for stronger

governance frameworks and more investor awareness to detect and measure earnings signals effectively. The

study contributes to the existing literature on the resilience of financial reporting in inflationary economies,

especially in frontier markets.

Corporate Governance, Market Signaling

performance measures look more favorable for opportunistic reasons (Dechow, Ge, & Schrand, 2010). The fine

line between true flexibility and deliberate manipulation remains vague, especially where macroeconomic

uncertainty prevails, such as during periods of inflation.

Inflation directly and repeatedly distorts the financial statements. It erodes the purchasing power of money,

increases the operating cost, and inflates nominal values of revenues and expenses. As a result, the comparability

and credibility of historical cost accounting—still the standard model of most emerging economies—are

undermined by sustained inflation. Managers, under pressures of meeting earnings targets, would take advantage

of such distortions to manage earnings either accrual-based or real activity-based (Roychowdhury, 2006).

Earnings management in this setting is not necessarily a defensive measure but an economic reaction to financial

stress, particularly where the accounting standards fail to reflect the reality of inflation within economics.

reporting standards.

Besides, the Nigerian accounting and regulatory context lacks clear inflation-adjustment requirements. Even

though Nigeria adopts International Financial Reporting Standards (IFRS), IAS 29—Financial Reporting in

Hyperinflationary Economies—remains unadopted officially, despite the country having consistently recorded

inflation rates above the 10% threshold typically used as a cut-off point for inflationary accounting (IFRS

Foundation, 2021). The shortfall in the regulatory context allows room for discretionary usages of the accounting

rules, hence increasing the scope of earnings management.

This paper therefore attempts to theoretically analyze the effectiveness of earnings management during

inflationary pressures in Nigeria. It touches on how such practices manifest in the NSE market, whether they

enhance or detract from transparency in finances, and how current laws and institutional framework either

Earnings management has been at the center of a great deal of debate in financial reporting, corporate

governance, and accounting theory literature. One of the most frequently quoted definitions is given by Healy

and Wahlen (1999), who describe earnings management as intentional interference with the external financial

reporting process for the private benefit purpose. It is management's option in financial reporting to achieve

intended effects, like satisfying analysts' expectations, maintaining share prices stable, or satisfying regulatory or

contractual obligations. Even if possible within the constraints of Generally Accepted Accounting Principles

(GAAP), it is ethical and transparency concerns when it is deceptive and does not reflect the true financial health

of a company.

Earnings management practices are commonly categorized as three categories: accrual-based manipulation, real

activities manipulation, and classification shifting. Accrual-based manipulation refers to altering accounting

timing recognition (Dechow & Skinner, 2000). Real activities manipulation entails changing real operating

practices, such as manufacturing excess of needed inventory to lower the cost of goods sold or eliminating

In inflationary economies, the same earnings management becomes more troublesome and potentially more

detrimental. Inflation introduces variability and unpredictability in financial reporting by decreasing the

purchasing power of money and warping the true value of revenues and expenses. In cost accounting at historical

cost, still used in Nigeria, the effect of inflation is left out of asset valuation and income measurement, thus

diminishing the usefulness and accuracy of financial reports. The problem is resolved under International

Financial Reporting Standards (IFRS) by IAS 29: Financial Reporting in Hyperinflationary Economies that

necessitates restatement of accounts in constant purchasing power units. However, despite the fact that Nigeria

has witnessed double-digit inflation recurring over the last few years, IAS 29 has not been officially

implemented by Nigerian regulators (IFRS Foundation, 2021).

Some studies conducted in Nigeria have investigated how inflation and economic duress influence earnings

management practice. Okolie (2014) finds that Nigerian firms employ discretionary accruals to meet financial

performance expectations, particularly during economic stress or debt obligations. Ezeagba and Ohakwe (2017)

of the works available quantify the magnitude or establish the presence of earnings management but do not

critically discuss the institutional, legal, and ethical dimensions of such practices. There is little, too, of the way

in which inflationary conditions specifically give rise to circumstances likely to make earnings management a

rational managerial response rather than opportunistic distortion.

management during times of inflation has a stabilizing role to play for firms or contributes to overall

deterioration of financial disclosure and market confidence. It challenges the dominant legal frameworks under

the Companies and Allied Matters Act (CAMA) 2020, evaluates partial IFRS adoption, and locates managerial

behavior in agency, signaling, and positive accounting theory. Based on this scholarship, the study not only

contributes to existing scholarly literature on earnings management in Nigeria but also presents policy-relevant

findings for regulators and stakeholders who are concerned with financial reporting credibility in

To comprehend the earnings management practice in a period of inflation, three basic theories yield conceptual

Agency Theory, in its formulation by Jensen and Meckling (1976), studies conflicts of interest that exist between

agents (managers) and principals (shareholders). Managers are tasked with maximizing shareholder interests,

but their self-interests—e.g., receiving bonuses, securing employment security, or protecting reputational

capital—can result in shareholder-objective-different decisions. Inflation fuels such agency conflicts.

During periods of inflation, real corporate profits may decline due to exaggerated input costs, depreciating

currency value, and tightening credit availability. Managers at such times may be inclined to sustain financial

results on paper regardless of deteriorating operating results. They may do so by delaying costs, accelerating

revenues, or enhancing asset values, effectively manipulating earnings in the context of the generally accepted

This directly results in having increased agency costs as shareholders are less able to observe the behavior of

managers due to greater opaqueness. It is not possible for the interest of principals and agents to be always

aligned due to incomplete contracts and imperfect information systems, according to Watts and Zimmerman

(1986). Inflation also distorts crucial financial ratios and renders monitoring even weaker, hence promoting

opportunistic earnings management.

Inflation creates a spotlight on the profit of large firms, which could lead to their exposure to state scrutiny, union

demands, or higher taxation. Managers can preempt such costs by implementing accounting choices in order to

lower the profit figures. For example, they can alter the depreciation policies, adjust inventory values under

First-In-First-Out (FIFO) or Last-In-First-Out (LIFO), or adjust provisions and reserves to smooth income

(Fields, Lys, & Vincent, 2001). These decisions are made not out of the desire for faithful representation but to

protect the firm from political and economic fallout. In Nigeria's inflationary economy, PAT explains the use of

earnings management as a prudential response to regulatory gaps, weak enforcement of accounting rules, and

volatile macroeconomic conditions. Rather than being a devious tactic, earnings management is an adjustment

strategy that is symptomatic of institutional weakness and survivalist managers.

However, the quality of such signals relies on the purity of corporate governance and the effectiveness of

external audits. If stakeholders believe that earnings are regularly manipulated into reported figures, the

The effectiveness of earnings management in the context of inflationary pressures can be measured from two

symbiotic lenses: one, as a tool for minimizing financial instability and firm value cushioning; and two, as the

potential vehicle for manipulating market signals, misleading stakeholders, and crippling efficient resource

allocation. In Nigeria, persistent inflationary pressures have incited several listed companies on the Nigerian

which all these activities enhance or erode financial transparency depends significantly on the institutional

monitoring mechanisms and the regulatory environment that prevail.

lead to a divergence between the historical cost numbers and current economic realities. Firms in such a scenario

find themselves having to pursue income-smoothing practices in an effort to maintain investor confidence and

In this context, earnings management may be regarded as an effective short-term strategic move. It allows firms

to maintain perceived profitability stability, which in turn solidifies stock prices and bargaining power among

lenders and investors. This applies particularly in emerging economies like Nigeria, where investor confidence is

easily eroded by economic shocks (Fan, Wei, & Xu, 2011). By presenting a better earnings story, corporations

Moreover, it cannot be overlooked that the function of earnings management as a signaling device. As noted by

Graham, Harvey, and Rajgopal (2005), managers generally rate highly appearances of smooth earnings since the

Act (CAMA) 2020, which requires companies to maintain true and fair books of accounts in relation to

performance. Additionally, the Financial Reporting Council of Nigeria (FRCN) also requires compliance with

International Financial Reporting Standards (IFRS), which aim to provide greater transparency and

comparability of financial reports.

the possibilities of discretionary earnings management (IFRS Foundation, 2021).

the practice legitimacy of earnings management. Although managers are required to follow the "fair

presentation" principle, the lack of well-defined definition of acceptable inflationary adjustments allows

In addition, accountants who are tasked with reviewing financial statements may be unable to challenge

management estimates where there are no clear guidelines on inflation accounting. This regulatory uncertainty

invites firms to push the limits of reasonable discretion to extremes at the expense of massive financial deception

in sectors. In a setting where investor sophistication is fairly low, the likelihood that earnings manipulation goes

unchecked is particularly high (Ezeagba & Ohakwe, 2017).

Thus, while earnings management, on the surface, can manage well the volatility caused by inflation, its success

is over the long term undermined by the absence of good enforcement, poor regulatory tools, and the absence of

clear-cut inflation-adjusted reporting guidelines. Without a good legal and institutional framework, earnings

management under inflation becomes a cosmetic remedy rather than an actual solution, ultimately damaging the

Among the chief concerns is that financial statements, without inflation accounting, are bound to be misleading.