European Journal of Accounting, Finance and Investment

Thin Capitalisation And Financial Reporting Quality In Industrial Goods Companies In Nigeria

JONAH Ngbomowa Moses PhD

Department of Accounting, Faculty of Administration and Management, Rivers State University, Nkpolu Port Harcourt Rivers State, Nigeria.

CHINDA Innocent Ezinwene PhD

Department of Accounting, Faculty of Administration and Management, Rivers State University, Nkpolu Port Harcourt Rivers State, Nigeria.

Keywords: Thin Capitalisation, Financial Reporting Quality, Debt-to-Equity Ratio, Earnings Quality, Timeliness of Reporting, Nigerian Industrial Goods Companies

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Abstract

This study investigates the effect of thin capitalisation on financial reporting quality of industrial goods companies listed on the Nigerian Stock Exchange. Thin capitalisation, measured through debt-to-equity ratio (DER) and interest expense to total debt (IETD), represents excessive reliance on debt financing relative to equity. Financial reporting quality was proxied using earnings quality (EQ) and timeliness of reporting (TR). The study adopted an explanatory research design and utilized a census of 22 listed industrial goods companies over the period 2018–2022, resulting in 110 firm-year observations. Data were sourced from audited financial statements and annual reports. Descriptive statistics, correlation analysis, and panel regression analysis (fixed-effects) were employed to test the hypothesized relationships. Empirical results indicate that thin capitalisation negatively affects financial reporting quality. Specifically, higher DER and IETD significantly reduce earnings quality and delay the release of financial statements. The models explain 38% and 41% of the variation in earnings quality and timeliness of reporting, respectively, with regression results statistically significant at the 5% level. The findings align with Agency Theory and Trade-Off Theory, highlighting that excessive debt increases managerial pressure, leading to opportunistic reporting behaviour and compromised transparency. The study concludes that thin capitalisation is a critical determinant of financial reporting quality in Nigerian industrial goods companies. Recommendations include maintaining an optimal capital structure, enforcing regulatory compliance on reporting timelines, strengthening internal control systems, and considering debt-related risk factors in investment decisions. The study contributes to knowledge on the interplay between corporate leverage and reporting quality in emerging markets and provides practical insights for regulators, investors, and corporate managers.

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