Institutional Decoupling and the Economics of Financial Reporting: Evidence from Nigeria's Pharmaceutical Sector

Abstract

This study investigates whether corporate governance mechanisms constrain earnings management among listed pharmaceutical firms in Nigeria through the lens of institutional decoupling. The analysis covers 2015–2025 and uses a census of seven firms, yielding 58 firm-year observations. Discretionary accruals are estimated with the performance-adjusted Modified Jones Model, while the effects of board size, board independence, audit committee independence, and board gender diversity are examined using fixed-effects panel regression. Firm size and financial leverage are included as control variables. The results indicate that none of the four governance attributes has a statistically significant effect on discretionary accruals. Firm size is the only significant determinant at the 5% level and has a positive coefficient, consistent with the political cost hypothesis, whereas financial leverage is insignificant. A pooled ordinary least-squares sensitivity analysis similarly shows that the governance variables remain insignificant. These findings indicate that formally adopted governance structures may not translate into effective monitoring within the studied setting. The evidence is therefore consistent with institutional decoupling, whereby compliance with governance requirements may be more ceremonial than substantive. The study highlights the importance of assessing board processes, expertise, and monitoring performance rather than relying only on structural indicators. It also suggests that regulators and investors should evaluate the practical effectiveness of governance arrangements when assessing financial reporting quality in Nigeria’s pharmaceutical sector.