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IMPACT OF INFLATION ON FINANCIAL REPORTING QUALITY OF LISTED COMPANIES IN NIGERIA

Abstract

Inflation has remained one of the most persistent macroeconomic challenges confronting the Nigerian economy, with significant implications for corporate operations, financial reporting, investment decisions, and economic stability. Rising inflation affects the purchasing power of money, increases production and operating costs, alters asset valuations, and creates uncertainty in financial markets. For listed companies, prolonged inflationary pressures may distort the preparation and presentation of financial statements, thereby affecting the quality, reliability, and usefulness of accounting information provided to investors and other stakeholders. Although financial reporting standards require companies to present financial information that faithfully represents their financial position and performance, inflation-induced economic pressures may encourage managers to adopt accounting practices that influence reported earnings. Against this backdrop, this study investigates the impact of inflation on the financial reporting quality of listed companies in Nigeria, while examining the mediating role of earnings management and the moderating role of corporate governance.The study is grounded in Agency Theory, Positive Accounting Theory, and Stakeholder Theory. Agency Theory explains how conflicts of interest between managers and shareholders may motivate managers to manipulate accounting information in response to adverse economic conditions such as inflation. Positive Accounting Theory suggests that managers may select accounting methods that maximize organizational or personal benefits under changing economic circumstances, while Stakeholder Theory emphasizes the need for transparent and high-quality financial reporting to satisfy the information needs of investors, regulators, creditors, and other stakeholders. Drawing from these theoretical perspectives, the study seeks to determine the direct impact of inflation on financial reporting quality, assess whether earnings management mediates this relationship, and examine whether corporate governance moderates the influence of inflation on financial reporting quality.A quantitative research design will be employed using secondary data obtained from the audited annual reports and financial statements of listed companies on the Nigerian Exchange Group (NGX) over a specified study period. Macroeconomic inflation data will be sourced from the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS). The study population will comprise non-financial listed companies across selected sectors of the Nigerian economy, while purposive sampling will be adopted based on data availability and consistency of financial disclosures. Financial reporting quality will be measured using established accounting quality indicators such as accrual quality, earnings persistence, earnings predictability, and value relevance. Earnings management will be assessed using discretionary accrual models, while corporate governance will be measured through board independence, board size, audit committee effectiveness, ownership structure, and other recognized governance indicators. Data will be analyzed using descriptive statistics, correlation analysis, panel regression techniques, and Structural Equation Modeling (SEM) to examine the direct, mediating, and moderating relationships among the study variables. Diagnostic tests, including tests for multicollinearity, heteroskedasticity, autocorrelation, and model specification, will also be conducted to ensure the validity and reliability of the empirical results.The study anticipates that inflation will exert a significant negative effect on the financial reporting quality of listed companies by increasing financial reporting uncertainty, reducing the relevance of historical cost accounting information, and creating incentives for accounting discretion. Inflationary pressures are expected to increase managerial motivation to engage in earnings management as organizations attempt to maintain investor confidence, satisfy market expectations, comply with debt covenants, or present favorable financial performance. Consequently, earnings management is expected to partially mediate the relationship between inflation and financial reporting quality by transmitting the influence of inflation through managerial accounting choices that affect the credibility and transparency of financial reports.Furthermore, corporate governance is expected to moderate the relationship between inflation and financial reporting quality. Companies characterized by strong corporate governance structures—including independent boards of directors, effective audit committees, transparent disclosure practices, robust internal control systems, and concentrated oversight mechanisms—are expected to demonstrate higher financial reporting quality despite inflationary pressures. Effective governance mechanisms are anticipated to reduce managerial opportunism, strengthen regulatory compliance, improve monitoring functions, and limit earnings manipulation during periods of economic instability. Conversely, firms with weak governance structures may be more susceptible to aggressive earnings management practices and lower-quality financial reporting under inflationary conditions. The interaction between macroeconomic factors and governance quality is therefore expected to explain variations in financial reporting outcomes among listed companies.This study is expected to make significant theoretical and empirical contributions to the accounting and corporate governance literature by integrating both mediating and moderating variables into the relationship between inflation and financial reporting quality within the Nigerian context. Unlike previous studies that focused primarily on the direct effects of inflation on corporate performance or accounting information, this research provides a more comprehensive framework by examining the behavioral mechanism through which inflation influences reporting quality and the governance conditions under which these effects can be mitigated. The findings will provide valuable insights for corporate managers, investors, auditors, regulators, standard-setting bodies, the Nigerian Exchange Group (NGX), the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), and policymakers regarding the importance of strengthening corporate governance practices and minimizing earnings management to preserve the integrity and credibility of financial reporting during periods of high inflation. The study will also offer evidence-based recommendations for enhancing accounting policies, regulatory oversight, and governance frameworks that promote transparency, investor confidence, and sustainable corporate reporting practices in Nigeria.

Keywords: Inflation, financial reporting quality, earnings management, corporate governance, listed companies, financial disclosure, accounting quality, mediation, moderation, Structural Equation Modeling (SEM)