The Role of Ownership Structure and Real Earnings Management on the Firm Performance of Non-Financial Firms Listed in Nairobi Securities Exchange, Kenya

Abstract

This study investigates the impact of real earnings management (REM) on firm performance and the moderating role of ownership structure among non-financial firms listed on the Nairobi Securities Exchange (NSE). Grounded in agency and stakeholder theories, the research examines how different forms of ownership specifically managerial and institutional shape the relationship between REM and firm profitability, measured through Return on Assets (ROA). Using panel data from 2008 to 2023, the study employs a dynamic panel regression model to control for firm-specific effects and potential endogeneity. The findings reveal that REM positively influences short-term profitability, but its effect is significantly moderated by ownership structure. Managerial ownership enhances overall firm performance but intensifies the negative impact of REM on ROA, suggesting potential overuse or ineffective application of REM strategies when managers hold significant equity stakes. Conversely, institutional ownership not only directly improves profitability but also weakens the positive impact of REM, reflecting its governance role in constraining opportunistic managerial behavior. These results highlight the dual influence of ownership structure in both enhancing firm performance and regulating earnings management practices. The study offers valuable insights for corporate managers, investors, and policymakers on the importance of tailoring governance mechanisms to mitigate REM risks and ensure sustainable financial performance.