FIRM ATTRIBUTES AND FINANCIAL INFORMATION QUALITY OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study

Financial information quality refers to the degree to which financial statements and disclosures faithfully represent the economic activities, financial position, and performance of an entity in a manner that is relevant, reliable, comparable, and understandable to users. High-quality financial information is essential for efficient capital markets, informed investment and credit decisions, effective corporate governance, and regulatory oversight. The International Accounting Standards Board (IASB) Conceptual Framework identifies fundamental qualitative characteristics of useful financial information: relevance (information can make a difference in users’ decisions) and faithful representation (information is complete, neutral, and free from error). Enhancing qualitative characteristics include comparability, verifiability, timeliness, and understandability. When financial information quality is low (e.g., inaccurate, incomplete, biased, delayed), investors may misallocate capital, creditors may misprice risk, and regulators may fail to detect financial distress or fraud (IASB, 2018; Penman, 2018).

Firm attributes are the inherent characteristics, features, or qualities of a company that influence its operations, governance, risk profile, and financial reporting practices. Key firm attributes that affect financial information quality include: (a) firm size – larger firms tend to have more resources for financial reporting systems, internal controls, and professional accountants, potentially leading to higher financial information quality; however, larger firms may also have more complex operations, making financial reporting more challenging, (b) firm age – older firms may have more established financial reporting systems and processes, but may also be resistant to change or have legacy issues, (c) profitability – profitable firms may have less incentive to manipulate earnings, but may also use earnings management to smooth income, (d) leverage – highly leveraged firms may have incentives to manipulate financial information to avoid debt covenant violations or to appear less risky, (e) liquidity – firms with strong liquidity may have less pressure to manipulate financial information, (f) growth – high-growth firms may face pressure to report optimistic results to support valuation, (g) ownership structure – concentrated ownership (e.g., family-owned, government-owned) may affect monitoring and incentives for financial reporting quality, (h) board characteristics – board independence, size, diversity, and expertise affect oversight of financial reporting, and (i) audit quality – the quality of the external auditor (e.g., Big 4 vs. non-Big 4) affects the credibility of financial information (Dechow, Ge, and Schrand, 2010; Watts and Zimmerman, 1986).

Deposit money banks (DMBs) in Nigeria are licensed financial institutions that accept deposits from the public and provide loans and other financial services. As at 2023, there were over 20 deposit money banks operating in Nigeria, including Tier 1 banks (e.g., Access Bank, First Bank, UBA, GTBank, Zenith Bank) and Tier 2 banks (e.g., Fidelity Bank, Sterling Bank, Union Bank, Wema Bank, Unity Bank). DMBs are listed on the Nigerian Exchange Limited (NGX) and are subject to regulation by the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC). Banks are also required to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the Financial Reporting Council of Nigeria (FRCN). The banking industry is of systemic importance to the Nigerian economy; the failure of a major bank can have contagion effects on the entire financial system (CBN, 2020; Nigeria Exchange Group, 2022).

The quality of financial information of deposit money banks is of particular importance for several reasons. First, systemic risk – banks are highly leveraged and interconnected; inaccurate financial information can mask solvency or liquidity problems, leading to bank failures and financial crises. The 2009 Nigerian banking crisis was partly attributed to poor financial reporting quality (hidden non-performing loans, inaccurate asset valuations, off-balance-sheet exposures). Second, depositor protection – depositors rely on bank financial statements to assess the safety of their deposits (though deposit insurance provides some protection). Third, regulatory oversight – the CBN uses bank financial statements to monitor compliance with prudential requirements (capital adequacy, liquidity, asset quality, etc.). Inaccurate financial information can lead to regulatory forbearance or delayed intervention. Fourth, investor confidence – investors in bank shares rely on financial information to value banks and make investment decisions. Poor information quality can lead to mispricing and loss of investor confidence. Fifth, credit ratings – credit rating agencies use bank financial statements to assign credit ratings, which affect banks’ cost of funds (CBN, 2020; Okafor and Udeh, 2021).

The relationship between firm attributes and financial information quality has been extensively studied in accounting and finance literature. Firm size has been found to be positively associated with financial information quality in many studies. Larger firms have more resources to invest in financial reporting systems, internal controls, and professional accountants. They also face greater scrutiny from analysts, investors, and regulators, creating incentives for higher quality reporting. However, larger firms also have more complex operations (multiple subsidiaries, complex financial instruments, international operations), which can increase the risk of errors or manipulation. For Nigerian banks, the relationship between size and financial information quality may be influenced by the fact that larger banks (Tier 1) are subject to more intense regulatory scrutiny and have more resources for financial reporting (Dechow et al., 2010; Okafor and Udeh, 2020).

Firm age may affect financial information quality in conflicting ways. Older banks have more experience in financial reporting, established systems, and institutional knowledge, which may lead to higher quality. However, older banks may also have legacy systems, resistance to change, or entrenched management that may resist transparency. Younger banks may have modern systems and a culture of transparency but may lack experience. For Nigerian banks, some of the oldest banks (First Bank, UBA) have long histories and established reporting systems, while newer banks (e.g., some Tier 2 banks) may have more modern IT systems (Adebayo and Oyedokun, 2019).

Profitability may be associated with financial information quality through several channels. Profitable banks have less incentive to manipulate earnings (since they already report good results) and more resources to invest in financial reporting systems. However, profitable banks may also engage in earnings smoothing (to report stable, predictable earnings) or may use discretionary accruals to manage earnings to meet targets. The relationship may be non-linear; very high profitability may indicate aggressive accounting (e.g., under-provisioning for loan losses) (Eze and Nwafor, 2020).

Leverage (debt-to-equity ratio) is a particularly important attribute for banks, which are highly leveraged by nature (banks typically have debt-to-equity ratios of 5:1 to 20:1). Highly leveraged banks face greater risk of financial distress and may have incentives to manipulate financial information to avoid regulatory intervention, maintain access to funding, or meet debt covenants. Leverage may also affect bank risk-taking behavior, which in turn affects financial reporting quality. For Nigerian banks, the relationship between leverage and financial information quality is an empirical question (Okafor and Udeh, 2021).

Liquidity (e.g., current ratio, loan-to-deposit ratio) reflects the bank’s ability to meet short-term obligations. Banks with stronger liquidity may have less pressure to manipulate financial information, as they are less likely to face a liquidity crisis. Conversely, banks with weak liquidity may have incentives to overstate assets or understate liabilities to appear more solvent. The relationship between liquidity and financial information quality may be moderated by regulatory oversight (CBN, 2020).

Audit quality is a critical firm attribute affecting financial information quality. Banks audited by Big 4 audit firms (Deloitte, PwC, EY, KPMG) are generally perceived to have higher quality audits due to greater resources, expertise, and reputation capital at stake. Big 4 auditors are also more likely to resist management pressure and require appropriate accounting treatments. For Nigerian banks, the choice of auditor (Big 4 vs. non-Big 4) may affect financial information quality. However, some non-Big 4 auditors may also provide high-quality audits (Okafor and Udeh, 2020).

Ownership structure may affect financial information quality. Banks with concentrated ownership (e.g., a single majority shareholder, family-owned, government-owned) may have weaker monitoring of management, potentially leading to lower financial information quality (since the majority shareholder may have access to private information and may not demand public transparency). Banks with dispersed ownership (widely held shares) may face stronger market discipline and demand for high-quality financial information from diverse shareholders. For Nigerian banks, ownership structures vary; some are widely held (e.g., GTBank), while others have significant government ownership (e.g., Union Bank historically had government ownership) or family ownership (Nwankwo and Okeke, 2021).

Board characteristics, including board independence, size, diversity, and financial expertise, affect the board’s ability to monitor management and ensure high-quality financial reporting. Independent directors (non-executive directors without material relationships with the bank) are more likely to challenge management and demand transparency. Banks with a higher proportion of independent directors may have higher financial information quality. The CBN’s Code of Corporate Governance for Banks requires that the majority of board members be non-executive directors, with a specified number of independent directors. However, compliance varies, and the effectiveness of independent directors depends on their expertise and diligence (CBN, 2014; FRCN, 2018).

The measurement of financial information quality is a methodological challenge. Researchers have used various proxies, including: (a) accruals quality – the extent to which accruals map into cash flows; higher accruals quality indicates lower earnings management, (b) earnings management – the magnitude of discretionary accruals (e.g., using the modified Jones model), (c) earnings persistence – the sustainability of earnings; more persistent earnings indicate higher quality, (d) earnings smoothness – the inverse relationship between earnings volatility and cash flow volatility; excessive smoothness may indicate manipulation, (e) timely loss recognition – the speed with which economic losses are recognized; quicker recognition indicates higher quality, (f) financial restatements – restatements indicate errors or irregularities, (g) audit opinions – modified audit opinions indicate lower quality, and (h) disclosure quality – the extent and clarity of disclosures (Dechow et al., 2010; Penman, 2018).

For banks, specific measures of financial information quality include: (a) loan loss provision timeliness – the speed with which banks recognize loan losses; delayed recognition indicates lower quality, (b) loan loss provision accuracy – the accuracy of loan loss provisions relative to actual charge-offs, (c) non-performing loan (NPL) recognition – the extent to which NPLs are accurately classified and provisioned, (d) fair value measurement – the quality of fair value estimates for financial instruments, (e) related-party transaction disclosures – transparency about transactions with directors, shareholders, and related entities, and (f) capital adequacy reporting – accuracy of risk-weighted asset calculations (Okafor and Udeh, 2021).

The regulatory environment for Nigerian banks has a significant impact on financial information quality. The Central Bank of Nigeria (CBN) issues prudential guidelines that prescribe accounting treatments for loan classification, provisioning, capital adequacy, and other matters. The CBN also conducts regular examinations (on-site and off-site) and may impose sanctions for non-compliance. The Financial Reporting Council of Nigeria (FRCN) oversees compliance with IFRS. The Nigeria Deposit Insurance Corporation (NDIC) also monitors bank financial health. Despite this regulatory oversight, challenges remain: (a) regulatory capture (banks may influence regulators), (b) limited resources for enforcement, (c) political interference in regulatory decisions, (d) complexity of banking operations (derivatives, securitization, off-balance-sheet vehicles), and (e) pressure on banks to report favourable results to maintain investor confidence (CBN, 2020; Okafor and Udeh, 2020).

The adoption of IFRS in Nigeria (effective 2012) was expected to improve the quality of financial information for all listed companies, including banks. IFRS provides principles-based standards that require more judgment and disclosure than previous Nigerian GAAP (SAS). IFRS also requires fair value measurement for certain assets and liabilities, which can increase relevance but may reduce reliability if fair values are unobservable (Level 3 fair values). Studies on the impact of IFRS adoption on financial information quality in Nigeria have produced mixed results; some studies found improved earnings quality, while others found no significant change or even deterioration due to increased management discretion. For banks, IFRS 9 (Financial Instruments) introduced an expected credit loss (ECL) model for loan loss provisioning, which is more forward-looking but also more judgmental than the incurred loss model (IFRS Foundation, 2021; Okafor and Udeh, 2020).

Finally, this study focuses on listed deposit money banks in Nigeria because they are a critical sector of the economy, with publicly available financial data, and are subject to significant regulatory oversight. By examining the relationship between firm attributes and financial information quality, the study can provide insights applicable to other banks and financial institutions in Nigeria and other emerging markets. The findings will contribute to the literature on financial reporting quality and provide practical recommendations for bank management, investors, auditors, and regulators (Yin, 2018; Creswell and Creswell, 2018).

1.2 Statement of the Problem

Listed deposit money banks in Nigeria operate in a highly regulated, complex, and systemically important industry. High-quality financial information is essential for depositor protection, investor confidence, regulatory oversight, and financial stability. However, concerns have been raised about the quality of financial information reported by Nigerian banks. Specific problems include: (a) loan loss provisioning practices – delayed recognition of loan losses, inadequate provisioning, and volatility in provisions, (b) non-performing loan (NPL) classification – misclassification of NPLs to avoid provisioning, (c) fair value measurement – lack of transparency and reliability in fair value estimates for financial instruments, (d) related-party transactions – inadequate disclosure of loans and other transactions with directors, shareholders, and related entities, (e) earnings management – use of discretionary accruals to smooth earnings or meet targets, (f) capital adequacy reporting – potential manipulation of risk-weighted asset calculations, (g) off-balance-sheet exposures – inadequate disclosure of contingencies, guarantees, and special purpose entities, and (h) audit quality – variation in audit quality across banks.

These problems may be associated with firm attributes such as bank size, age, profitability, leverage, liquidity, ownership structure, and board characteristics. For example, larger banks may have more complex operations and greater opportunities for earnings management. Highly leveraged banks may have incentives to manipulate financial information to avoid regulatory intervention. Banks with concentrated ownership may have weaker monitoring and lower transparency. Banks with less independent boards may have weaker oversight of financial reporting. However, the relationship between firm attributes and financial information quality for listed Nigerian banks has not been systematically examined. There is a lack of recent, empirical research that identifies which firm attributes are associated with higher or lower financial information quality and the magnitude of these effects. Therefore, this study is motivated to investigate the relationship between firm attributes and financial information quality of listed deposit money banks in Nigeria.

1.3 Objectives of the Study

The specific objectives of this study are to:

1. Examine the financial information quality (measured by loan loss provision timeliness, discretionary accruals, earnings persistence, and disclosure quality) of listed deposit money banks in Nigeria over the study period.
2. Analyze the firm attributes (size, age, profitability, leverage, liquidity, ownership concentration, board independence, audit quality) of listed deposit money banks in Nigeria.
3. Determine the relationship between firm attributes (size, age, profitability, leverage, liquidity, ownership concentration, board independence, audit quality) and financial information quality of listed deposit money banks in Nigeria.
4. Identify the specific firm attributes that are significant determinants of financial information quality for listed Nigerian banks.
5. Propose recommendations for bank management, investors, auditors, and regulators on enhancing financial information quality based on firm attributes.

1.4 Hypotheses of the Study

The following hypotheses are formulated in null (H₀) and alternative (H₁) forms:

Hypothesis One

• H₀: Firm size has no significant effect on the financial information quality (loan loss provision timeliness) of listed deposit money banks in Nigeria.
• H₁: Firm size has a significant effect on the financial information quality (loan loss provision timeliness) of listed deposit money banks in Nigeria.

Hypothesis Two

• H₀: Bank age has no significant relationship with the earnings quality (discretionary accruals) of listed deposit money banks in Nigeria.
• H₁: Bank age has a significant relationship with the earnings quality (discretionary accruals) of listed deposit money banks in Nigeria.

Hypothesis Three

• H₀: Leverage (debt-to-equity ratio) does not significantly affect the financial information quality (non-performing loan recognition) of listed deposit money banks in Nigeria.
• H₁: Leverage (debt-to-equity ratio) significantly affects the financial information quality (non-performing loan recognition) of listed deposit money banks in Nigeria.

Hypothesis Four

• H₀: Board independence has no significant effect on the disclosure quality of listed deposit money banks in Nigeria.
• H₁: Board independence has a significant effect on the disclosure quality of listed deposit money banks in Nigeria.

Hypothesis Five

• H₀: Ownership concentration does not significantly affect the earnings management (discretionary accruals) of listed deposit money banks in Nigeria.
• H₁: Ownership concentration significantly affects the earnings management (discretionary accruals) of listed deposit money banks in Nigeria.

1.5 Significance of the Study

This study is significant for several stakeholders. First, bank management will benefit from understanding how their firm’s attributes (size, age, profitability, leverage, ownership structure, board composition) affect the quality of their financial information, enabling them to strengthen financial reporting systems, internal controls, and corporate governance to enhance transparency and credibility. Second, investors and financial analysts will gain insights into which bank attributes are associated with higher or lower financial information quality, supporting investment decisions and valuation. Third, the Central Bank of Nigeria (CBN) will benefit from understanding the relationship between bank attributes and financial reporting quality, informing regulatory oversight, prudential guidelines, and risk-based supervision. Fourth, the Financial Reporting Council of Nigeria (FRCN) will gain insights into the determinants of financial information quality in the banking sector, informing standard-setting and enforcement. Fifth, the Nigeria Deposit Insurance Corporation (NDIC) will benefit from understanding the link between firm attributes, financial information quality, and bank risk, supporting deposit insurance pricing and resolution planning. Sixth, the Nigerian Exchange Limited (NGX) will gain insights into the financial reporting quality of listed banks, informing listing requirements and continuing obligations. Seventh, external auditors will benefit from understanding which bank attributes are associated with higher audit risk, informing audit planning and procedures. Eighth, academics and researchers in financial accounting, banking, and corporate governance will benefit from the study’s contribution to the literature on financial information quality in the Nigerian banking context. Ninth, professional bodies (ICAN, ANAN, CIBN) will find value in the study’s findings for training and CPD programs. Finally, the broader Nigerian financial system will benefit as improved understanding of the determinants of financial information quality leads to more transparent banks, increased investor confidence, and greater financial stability.

1.6 Scope of the Study

This study focuses on the relationship between firm attributes and financial information quality of listed deposit money banks in Nigeria. Geographically, the research is limited to deposit money banks listed on the Nigerian Exchange Limited (NGX) as at the study period. The study covers all deposit money banks that were continuously listed during the study period (e.g., 2014-2023, or a shorter period depending on data availability). The banks include Tier 1 and Tier 2 banks. Content-wise, the study examines the following firm attributes: size (log of total assets), age (years since incorporation), profitability (return on assets ROA, return on equity ROE), leverage (debt-to-equity ratio, debt-to-assets ratio), liquidity (current ratio, loan-to-deposit ratio), ownership concentration (percentage of shares held by top three shareholders), board independence (percentage of independent non-executive directors on the board), and audit quality (Big 4 vs. non-Big 4 auditor). Financial information quality is measured using multiple proxies: loan loss provision timeliness (correlation between loan loss provisions and non-performing loans), earnings management (discretionary accruals using the modified Jones model), earnings persistence (autocorrelation of earnings), and disclosure quality (disclosure index based on annual report items). The study analyzes secondary data from bank annual reports, financial statements, corporate governance reports, and NGX filings. The time frame for data collection is the period 2014-2023 (10 years), subject to data availability. The study does not cover non-listed banks (e.g., non-listed deposit money banks, merchant banks, microfinance banks, development banks), nor does it cover non-bank financial institutions (insurance companies, pension funds, etc.), nor does it cover non-financial firms.

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter reviews the literature relevant to the relationship between firm attributes and financial information quality of listed deposit money banks in Nigeria. The review covers the concept of financial information quality, earnings management by banks, techniques of earnings management, proxies for measurement of financial information quality, review of empirical studies (economic profit, firm size, dividend, leverage, firm growth), and the theoretical framework. The chapter provides the theoretical and empirical foundation for understanding how firm attributes affect the quality of financial information reported by Nigerian banks.

2.2 Financial Information Quality

Financial information quality refers to the degree to which financial statements and disclosures faithfully represent the economic activities, financial position, and performance of an entity in a manner that is relevant, reliable, comparable, and understandable to users. High-quality financial information is essential for efficient capital markets, informed investment and credit decisions, effective corporate governance, and regulatory oversight. The International Accounting Standards Board (IASB) Conceptual Framework (2018) identifies fundamental qualitative characteristics of useful financial information: relevance (information can make a difference in users’ decisions) and faithful representation (information is complete, neutral, and free from error). Enhancing qualitative characteristics include comparability, verifiability, timeliness, and understandability (IASB, 2018; Penman, 2018).

Financial information quality is not a binary concept (good vs. bad) but exists on a continuum. Higher quality financial information has greater predictive value for future cash flows, confirms or changes users’ prior expectations, is complete (includes all necessary information), is neutral (unbiased), and is free from material error. Lower quality financial information may be incomplete, biased, inaccurate, delayed, or incomprehensible. For banks, specific dimensions of financial information quality include: (a) loan loss provision accuracy and timeliness, (b) non-performing loan classification, (c) fair value measurement of financial instruments, (d) related-party transaction disclosure, (e) capital adequacy reporting, (f) earnings persistence, and (g) disclosure quality (Dechow, Ge, and Schrand, 2010; Okafor and Udeh, 2021).

The determinants of financial information quality can be classified into firm-level factors (size, age, profitability, leverage, growth, ownership structure, board characteristics, audit quality) and institutional factors (regulatory environment, legal system, enforcement, accounting standards). This study focuses on firm-level factors, specifically firm attributes of listed deposit money banks in Nigeria.

2.2.1 Earnings Management by Banks

Earnings management refers to the deliberate manipulation of reported earnings by management to achieve specific targets (e.g., meeting analysts’ forecasts, maintaining or increasing share price, maximizing management bonuses, avoiding debt covenant violations, reducing regulatory scrutiny). Earnings management can be achieved through accounting choices (e.g., selection of depreciation method, inventory valuation method) or through real activities (e.g., timing of asset sales, reduction of discretionary expenditures). Earnings management reduces the quality of financial information because reported earnings no longer faithfully represent the underlying economic performance of the entity (Healy and Wahlen, 1999; Dechow and Skinner, 2000).

Banks have unique opportunities for earnings management due to the nature of their operations. Key areas of earnings management in banks include:

Loan Loss Provisions (LLPs) : Loan loss provisions are estimates of expected credit losses on the loan portfolio. LLPs are a significant expense for banks and directly affect reported earnings. Management must estimate the probability of default, loss given default, and exposure at default for each loan or loan portfolio. These estimates involve significant judgment and discretion, creating opportunities for earnings management. Banks may under-provision (lower LLPs) to inflate earnings (income-increasing earnings management) or over-provision (higher LLPs) to create “cookie jar” reserves that can be released in future periods (income smoothing). Research has found that banks use LLPs to smooth earnings, manage regulatory capital, and signal private information (Beatty, Ke, and Petroni, 2002; Kanagaretnam, Lobo, and Mathieu, 2003).

Non-Performing Loan (NPL) Classification : Banks classify loans as performing or non-performing based on contractual past due status (e.g., 90 days past due). Management may delay NPL classification to avoid provisioning requirements (which are higher for NPLs) and to avoid regulatory scrutiny. Misclassification of NPLs is a form of earnings management that understates credit losses and overstates earnings (Okafor and Udeh, 2021).

Fair Value Measurement: Under IFRS 9, banks measure certain financial assets and liabilities at fair value. Fair value estimates for Level 2 (observable inputs) and Level 3 (unobservable inputs) involve significant judgment. Management may choose valuation models and assumptions that produce favorable results (e.g., higher asset values, lower liabilities), increasing reported equity and earnings (IFRS Foundation, 2021).

Securitizations and Off-Balance-Sheet Vehicles: Banks may use securitizations, special purpose entities (SPEs), and other off-balance-sheet structures to remove assets from the balance sheet, reduce capital requirements, and manage reported earnings. If the risks and rewards of ownership are not fully transferred, accounting rules require consolidation, but management may structure transactions to avoid consolidation (derecognition) (CBN, 2020).

Real Earnings Management: Banks may engage in real earnings management by (a) reducing loan origination standards to increase loan volume (short-term increase in interest income but higher future credit losses), (b) delaying loan charge-offs, (c) accelerating or deferring asset sales, (d) reducing discretionary expenditures (advertising, training, maintenance), and (e) altering investment portfolios (e.g., selling securities with unrealized gains) (Roychowdhury, 2006).

2.2.2 Techniques of Earnings Management

Earnings management techniques can be classified into accrual-based earnings management (AEM) and real earnings management (REM).

Accrual-Based Earnings Management (AEM) : AEM involves manipulating accounting estimates and assumptions that affect accruals. Common AEM techniques used by banks include:

• Loan loss provision manipulation: Under-provisioning (decreasing LLPs) increases earnings; over-provisioning (increasing LLPs) decreases earnings. Banks may use LLPs to smooth earnings over time (e.g., increase LLPs in profitable years, decrease LLPs in less profitable years) (Beatty et al., 2002).
• Depreciation and amortization estimates: Banks may change useful lives or residual values of fixed assets and intangible assets to alter depreciation and amortization expense.
• Valuation allowances: Banks may adjust valuation allowances for deferred tax assets to manage earnings (e.g., releasing valuation allowances increases earnings).
• Fair value estimates: Banks may select valuation models and assumptions that produce favorable fair values for Level 3 financial instruments (IFRS Foundation, 2021).
• Provisions for contingencies: Banks may understate or overstate provisions for legal claims, guarantees, and other contingencies.

Real Earnings Management (REM) : REM involves altering the timing or structure of real transactions to achieve earnings targets. Common REM techniques used by banks include:

• Loan origination: Banks may relax lending standards to increase loan volume (and interest income) in the current period, but this leads to higher future credit losses.
• Asset sales: Banks may sell securities or other assets with unrealized gains to realize gains in the current period.
• Discretionary expenditures: Banks may reduce spending on advertising, staff training, marketing, or maintenance to increase current-period earnings.
• Investment portfolio management: Banks may shift investments from securities to loans (or vice versa) to alter reported interest income (Roychowdhury, 2006).
• Securitizations: Banks may securitize loans to remove assets from the balance sheet and recognize gains on sale (if structured as sales rather than secured borrowings).

The distinction between AEM and REM is important because REM has real economic consequences (e.g., relaxed lending standards lead to higher future defaults) while AEM affects only reported earnings (no direct cash flow effect). Both reduce financial information quality (Dechow and Skinner, 2000).

2.2.3 Proxy for Measurement of Financial Information Quality

Financial information quality is not directly observable; researchers use various proxies to measure it. Common proxies include:

Accruals Quality: Accruals quality measures the extent to which accruals map into cash flows. Higher accruals quality indicates that accruals are better predictors of future cash flows, implying higher earnings quality. The Dechow and Dichev (2002) model and its modifications (McNichols, 2002) are widely used. For banks, the focus is often on discretionary loan loss provisions (LLPs). The modified Jones model (Jones, 1991) is used to estimate discretionary accruals for non-financial firms; for banks, researchers use bank-specific models that isolate discretionary LLPs (Beatty et al., 2002).

Earnings Persistence: Earnings persistence measures the sustainability of earnings (the extent to which current earnings predict future earnings). More persistent earnings indicate higher quality. Earnings persistence is measured as the autocorrelation coefficient of earnings (or earnings per share) in a first-order autoregressive model. Banks with more persistent earnings are considered to have higher earnings quality (Dechow et al., 2010).

Earnings Smoothness: Earnings smoothness measures the inverse relationship between earnings volatility and cash flow volatility. Excessive smoothness (earnings volatility much lower than cash flow volatility) may indicate earnings management (income smoothing). Researchers compare the variance of earnings to the variance of cash flows; a lower ratio indicates more smoothing (Leuz, Nanda, and Wysocki, 2003).

Timely Loss Recognition (Conservatism) : Timely loss recognition measures the speed with which economic losses are recognized in earnings. Higher conservatism (faster loss recognition) is often associated with higher earnings quality (Basu, 1997). For banks, timely recognition of loan losses (provisions correlated with changes in non-performing loans) indicates higher quality.

Financial Restatements: Financial restatements (revision of previously issued financial statements) indicate errors or irregularities in original reports. Restatements are a direct (though infrequent) indicator of low financial information quality. Restatements due to fraud or material errors are particularly concerning (Dechow et al., 2010).

Audit Quality: Higher audit quality (Big 4 auditors, industry specialization, audit fees) is associated with higher financial information quality, as auditors constrain earnings management. Audit quality is often used as a proxy for financial information quality in cross-sectional studies (Becker, DeFond, Jiambalvo, and Subramanyam, 1998).

Disclosure Quality: Disclosure quality measures the extent and clarity of information provided in annual reports, including notes to the financial statements, management discussion and analysis, and other disclosures. Disclosure indices are constructed by counting items disclosed (e.g., from a checklist based on IFRS requirements) or by assessing the informativeness of disclosures (Botosan, 1997).

For Banks: Specific Proxies:

• Loan loss provision timeliness: The correlation (or regression coefficient) between loan loss provisions and changes in non-performing loans (or other credit risk indicators). Higher timeliness indicates higher quality (Okafor and Udeh, 2021).
• Loan loss provision accuracy: The accuracy of loan loss provisions relative to actual charge-offs (ex post). Lower absolute prediction error indicates higher quality.
• Non-performing loan (NPL) recognition: The speed and completeness with which loans are classified as non-performing (e.g., using the 90-day past due rule). Delayed recognition indicates lower quality.
• Discretionary loan loss provisions: The residual from a model that regresses total LLPs on non-discretionary determinants (e.g., changes in NPLs, loan growth). Higher absolute discretionary LLPs indicate higher earnings management (Beatty et al., 2002).
• Capital adequacy reporting: The accuracy of risk-weighted asset (RWA) calculations. Banks may understate RWA to inflate capital adequacy ratios (CAR). RWA manipulation indicates low financial information quality (CBN, 2020).

2.3 Review of Empirical Studies

This section reviews empirical studies on the relationship between firm attributes and financial information quality, focusing on economic profit, firm size, dividend, leverage, and firm growth.

2.3.1 Economic Profit and Financial Information Quality

Economic profit (profitability) is a key firm attribute that affects financial information quality. Theoretical predictions are conflicting. According to the agency theory, profitable firms have more free cash flow, which may lead to agency problems (managerial entrenchment, wasteful spending) and potentially lower financial information quality if managers use earnings management to mask poor decisions. Alternatively, profitable firms may have less incentive to manipulate earnings (since they already report good results) and more resources to invest in financial reporting systems, leading to higher quality (Jensen, 1986; Watts and Zimmerman, 1986).

According to the positive accounting theory, managers of profitable firms may use earnings management to smooth earnings (to report stable, predictable earnings) or to meet bonus targets (if bonuses are tied to earnings). The relationship between profitability and earnings quality may be non-linear; extremely high profitability may indicate aggressive accounting (e.g., under-provisioning for loan losses) (Healy and Wahlen, 1999).

Empirical evidence on the relationship between profitability and financial information quality is mixed. In non-financial firms, studies have found that more profitable firms have higher earnings quality (lower absolute discretionary accruals). In banking, Okafor and Udeh (2021) studied Nigerian deposit money banks and found that more profitable banks had higher loan loss provision timeliness and lower discretionary accruals. However, Adebayo and Oyedokun (2019) found no significant relationship between profitability and earnings quality for Nigerian banks. The relationship may vary by sample period, measurement of profitability (ROA vs. ROE), and measurement of financial information quality.

For listed deposit money banks in Nigeria, this study will examine the relationship between profitability (ROA, ROE) and financial information quality (discretionary loan loss provisions, loan loss provision timeliness, earnings persistence).

2.3.2 Firm Size and Financial Information Quality

Firm size (measured by total assets, market capitalization, or revenue) is a widely studied determinant of financial information quality. Theoretical predictions are conflicting. According to the political cost theory, larger firms face greater political scrutiny and may have incentives to manage earnings downwards (to reduce political costs). According to the agency theory, larger firms have more diffuse ownership, weaker monitoring, and potentially lower financial information quality. However, larger firms also have more resources to invest in financial reporting systems, internal controls, and professional accountants, leading to higher quality (Watts and Zimmerman, 1986).

Empirical evidence generally supports a positive relationship between firm size and financial information quality. Larger firms have higher disclosure quality, lower absolute discretionary accruals, and lower incidence of financial restatements. In banking, larger banks may have more complex operations (e.g., international operations, complex financial instruments), which may increase the risk of errors or manipulation. However, larger banks are also subject to more intense regulatory scrutiny and have more resources for financial reporting. Okafor and Udeh (2020) found that larger Nigerian banks had higher loan loss provision timeliness and lower discretionary accruals than smaller banks.

For listed deposit money banks in Nigeria, this study will examine the relationship between firm size (log of total assets) and financial information quality (discretionary loan loss provisions, loan loss provision timeliness, disclosure quality).

2.3.3 Dividend and Financial Information Quality

Dividend policy (the amount and stability of dividends paid to shareholders) may be associated with financial information quality. According to the signaling theory, firms use dividends to signal future profitability and quality. Firms with higher and more stable dividends may have higher financial information quality because they are more committed to transparency and accountability (Miller and Rock, 1985). According to the free cash flow theory, dividend payments reduce free cash flow, reducing agency costs and potentially improving financial information quality (Jensen, 1986).

Empirical evidence on the relationship between dividends and financial information quality is limited, particularly for banks. Some studies have found that firms with higher dividend payouts have lower absolute discretionary accruals (higher earnings quality). Others have found no significant relationship. For banks, dividend policy is constrained by regulatory capital requirements (banks cannot pay dividends if capital adequacy ratios fall below regulatory minima). Therefore, the relationship may be weaker for banks than for non-financial firms.

For listed deposit money banks in Nigeria, this study will examine the relationship between dividend payout ratio (dividends per share / earnings per share) and financial information quality (earnings persistence, discretionary accruals).

2.3.4 Leverage and Financial Information Quality

Leverage (debt-to-assets ratio or debt-to-equity ratio) is a key firm attribute that affects financial information quality. According to the debt covenant hypothesis (positive accounting theory), highly leveraged firms are closer to violating debt covenants (e.g., minimum interest coverage, maximum debt-to-equity). To avoid covenant violations, managers may use earnings management to increase reported earnings (income-increasing earnings management) or to reduce reported leverage. Therefore, leverage is predicted to be positively associated with earnings management (higher absolute discretionary accruals) (Watts and Zimmerman, 1986).

For banks, leverage is particularly high (banks typically have debt-to-equity ratios of 5:1 to 20:1). Highly leveraged banks face greater regulatory scrutiny and may have incentives to manipulate financial information to avoid regulatory intervention (e.g., understate non-performing loans, overstate capital adequacy). However, banks are also subject to prudential requirements that limit their ability to manipulate earnings (e.g., CBN requires loan loss provisions based on NPL classification). The relationship between leverage and financial information quality for banks may differ from non-financial firms.

Empirical evidence on the relationship between leverage and earnings quality is mixed. Some studies have found a positive relationship (higher leverage, higher earnings management), while others have found no significant relationship. For banks, Okafor and Udeh (2021) found that leverage was positively associated with discretionary loan loss provisions (higher earnings management) for Nigerian banks. Eze and Nwafor (2020) found that leverage was not significantly associated with loan loss provision timeliness.

For listed deposit money banks in Nigeria, this study will examine the relationship between leverage (debt-to-assets ratio, debt-to-equity ratio) and financial information quality (discretionary loan loss provisions, loan loss provision timeliness, earnings persistence).

2.3.5 Firm Growth and Financial Information Quality

Firm growth (measured by asset growth, revenue growth, or market-to-book ratio) may affect financial information quality. According to the agency theory, high-growth firms have more investment opportunities and greater information asymmetry between managers and investors. Managers of high-growth firms may have incentives to manage earnings to support high valuations (e.g., to facilitate equity issuance or to meet growth expectations). Therefore, growth may be positively associated with earnings management (Skinner and Sloan, 2002).

For banks, growth (e.g., rapid loan growth) is associated with higher credit risk (banks that grow too fast may relax lending standards, leading to higher future non-performing loans). Rapidly growing banks may under-provision for loan losses to inflate earnings and support growth. Therefore, growth may be associated with lower financial information quality (higher discretionary accruals, lower loan loss provision timeliness).

Empirical evidence on the relationship between growth and earnings quality is mixed. Some studies have found a positive relationship (higher growth, higher earnings management), while others have found no significant relationship. For banks, Okafor and Udeh (2020) found that asset growth was positively associated with discretionary loan loss provisions for Nigerian banks. Adebayo and Oyedokun (2019) found that loan growth was negatively associated with loan loss provision timeliness.

For listed deposit money banks in Nigeria, this study will examine the relationship between firm growth (asset growth, loan growth) and financial information quality (discretionary loan loss provisions, loan loss provision timeliness).

2.4 Theoretical Framework

The theoretical framework for this study is anchored on several theories that explain the relationship between firm attributes and financial information quality. These theories provide the conceptual foundation for understanding why firm attributes affect the quality of financial information reported by listed deposit money banks in Nigeria.

2.4.1 Agency Theory

Agency theory, developed by Jensen and Meckling (1976), describes the relationship between principals (shareholders) and agents (managers). Agency theory posits that managers (agents) may not always act in the best interests of shareholders (principals) due to information asymmetry (managers have more information about the firm than shareholders) and divergent interests (managers may pursue personal goals such as bonuses, job security, empire building, rather than shareholder value maximization). This divergence creates agency costs, which include monitoring costs (expenditures to oversee manager behavior), bonding costs (expenditures by managers to assure shareholders of their fidelity), and residual loss (the value lost when manager decisions deviate from shareholder interests) (Jensen and Meckling, 1976).

In the context of financial reporting, agency theory predicts that managers will engage in earnings management (manipulate reported earnings) to achieve personal objectives (e.g., meet bonus targets, avoid debt covenant violations, increase share price before selling their own shares). The quality of financial information is therefore a function of the alignment (or misalignment) between manager and shareholder interests. Firm attributes that affect the severity of agency problems (e.g., ownership concentration, board independence, leverage) will affect financial information quality (Watts and Zimmerman, 1986).

Agency theory predicts that:

• Firms with higher ownership concentration (dominant shareholders) may have lower financial information quality because dominant shareholders have access to private information and may not demand public transparency (expropriation of minority shareholders).
• Firms with more independent boards (higher proportion of non-executive directors) may have higher financial information quality because independent directors are more likely to challenge management and demand transparency.
• Highly leveraged firms may have lower financial information quality because managers have incentives to manipulate earnings to avoid debt covenant violations (debt covenant hypothesis).
• Profitable firms with high free cash flow may have lower financial information quality because managers may use earnings management to mask wasteful spending (free cash flow hypothesis).

2.4.2 Positive Accounting Theory

Positive accounting theory (PAT), developed by Watts and Zimmerman (1986), seeks to explain and predict accounting practices (why managers choose certain accounting methods) rather than prescribing what they should do. PAT identifies three hypotheses:

Bonus Plan Hypothesis: Managers of firms with bonus plans tied to accounting earnings are more likely to use accounting methods that increase current-period reported earnings (income-increasing earnings management) to maximize their bonuses. Therefore, profitable firms with high executive compensation tied to earnings may have lower financial information quality (higher discretionary accruals) (Healy, 1985).

Debt Covenant Hypothesis: Managers of firms with high leverage (debt-to-equity ratio) are more likely to use accounting methods that increase reported earnings to avoid debt covenant violations (e.g., minimum interest coverage, maximum debt-to-equity). Therefore, highly leveraged firms may have lower financial information quality (higher discretionary accruals) (Watts and Zimmerman, 1986).