Capital Structure and Financial Reporting Quality; Evidence from Listed Consumer Goods firms of Selected Commonwealth African Countries

Abstract

The study investigates the effect of capital structure on financial reporting quality by employing samples from listed consumer goods manufacturing firms of selected Commonwealth African countries between the periods of 2011-2020. Particularly, the study provides evidence on the effect of capital structure on the financial reporting quality of listed consumer goods firms in Kenya, Nigeria, and South Africa. We conducted pool least square regression before proceeding to check for inconsistencies with the basic assumptions of the OLS regression. The diagnostic test reveals the absence of both multicollinearity and heteroscedasticity, hence implying that the OLS estimates can be employed for policy interpretation and recommendation. The results shows that firms which have higher debt in their capital structure are prone to higher agency cost. Particularly, the study fails to confirm the position of Agency theory to explain the relationship between firm leverage and financial reporting quality. Hence, the study concludes that financial reports may be used to avoid agency costs and to reduce information asymmetries. Hence, we recommend that firms with high leverage positions must be scrutinized keenly by both shareholders, auditors, and regulatory bodies as the propensity for low quality reporting indicative of manipulatory tendencies could be stronger