A Dissertation Submitted in Partial Fulfillment of the Requirements for the Award of Master of Science in Accounting and Finance of
Mzumbe University
The aim of this study was to assess the impact of earnings management on firm’s performance. The study was conducted in Tanzania in which manufacturing firms registered at Dar – es -Salaam stock exchange was used as study cases.
The study used Jones revised model for discretionary accrual to measure earnings management while firm’s performance was measured using net profit margin as a measure for profitability, debt to equity and debt to asset as proxy measures for leverage, return on asset as a measure for asset management performance and current ratio as a measure for liquidity level of the firms.
The findings on the study show that manufacturing firms at DSE engage in earnings management. Most of the firms were found to manage earnings downwards. The results on the relationship between earnings management and performance shows that, earnings management has impact on firm’s performance but the nature of the impact depends on the variables used for measuring earnings management. The study found out that earnings management did not have any significant relationship with return on asset, debt to equity and debt to asset on the one hand, while on the other hand it was found that earnings management has significant impact on current ratio and net profit margin.
Basing on the findings of the study, the study recommends that registered firms at DSE should present their statements fairly to enable investors to make correct decisions. The regulators of DSE should develop more mechanisms to detect earnings management among the listed firms and should ensure that all firms present financial statements that show true and fair view. Earnings management has impact on performance, therefore the study recommends the users of financial statements especially those who wish to make decision basing on them, should first evaluate whether the related firms engage in earnings management so that the decisions made can be correct ones