




































American Research Journal of Economics, Finance and Management 
Volume 13 Issue 3, July-September 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM 

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CORPORATE TAX SHIELD OF CHARITY DONATION ON 

EARNINGS MANAGEMENT OF DEPOSIT MONEY BANKS IN 

NIGERIA 
 

Pajo Adi Stephen and Ikilidih, Joy N. 
Department of Accountancy Paul University, Awka 

E-mail: pajoadi@gmail.com, joyikilidih@yahoo.com 

DOI: https://doi.org/10.5281/zenodo.15829650 

 

Abstract: This ascertained the effect of corporate tax shield of charity donations on earnings 

management of deposit money banks in Nigeria. Ex post Facto research design was adopted. Data 

were extracted from audited annual reports and accounts of the sampled banks in Nigeria spanning 

from 2014 to 2023. From the findings, the result revealed that the probability of the slope 

coefficients indicate that; P-value =0.4724 >0.05). The co-efficient value of; β1= 1536.19; t = 0.792 

for TAC implies that charity donations are positively affect earnings management, but not 

statistically significant at 5%. Based on the findings, the study recommended that since charitable 

donations can also lower a taxpayer’s obligations. In order to qualify, the tax authority should 

ensure that banks use itemized deductions on his tax return and that the donations are qualify as it 

must be given to an approved organization. 

Key word: Corporate tax shield, Donation and Earnings management. 

 

Introduction  

One of the motivations for earnings management is taxation, the phenomenon of effective tax rate 

increases the occurrence of earnings management and the quality of corporate profits (Martani & 

Persada, 2019). Studies such as Desai and Dharmaphala (2018, 2019b) have investigated the book-tax 

trade-off where firms must balance the incentive to minimize taxes and to maximize book income and 

studies linking earnings management and corporate tax shield have explained the relationship relying 

heavily on the agency theory. They argued that due to the conflict of interest between managers and 

shareholders, opportunistic managers, seeking to maximize their self-interest, resort to tax shield 

practices to divert wealth to them through earnings management. Managers opportunistically adjust 

earnings to expropriate wealth from shareholders to themselves   (Hunt, Moyer, & Shevlin, 2017). 

Moreover, the literature suggests one incentive for managing earnings is corporate tax shield. 

Christensen and Murphy (2020) argued that the corporate tax shield is value accruing to shareholders 

hence managers is encouraged to employ their best effort to minimize taxes. A corporate tax shield is 

favoured by shareholders (Graham, Hanlon, Shelvin and Shroff (2017); it has been described as a 

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https://www.investopedia.com/terms/t/taxliability.asp


American Research Journal of Economics, Finance and Management 
Volume 13 Issue 3, July-September 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM 

Email: contact@americaserial.com 
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14 | P a g e  

transfer of value from the government to the shareholders. However, tax shield techniques like, 

interest payment, debt payment and differed tax liability give room for opportunistic management to 

manage earnings in a way that is beneficial to managers instead of the owners (Desai & Dharmapala, 

2018). Hence, managers, managing earnings are more likely to insulate themselves by avoiding more 

taxes, as avoidance offers them shield from shareholder scrutiny. This is possible because corporate 

tax shield techniques are require obfuscation of transactions to guarantee tax benefits whilst shielding 

such actions from tax authorities (Goncharov & Zimmermann, 2016a). Such mystification of 

transactions and its consequent shielding from the tax authorities reduce the ability of shareholders 

to monitor managers’ behaviour.  

Governments anywhere need tax revenues to provide socially mandated services and infrastructure. 

However, the drive to increase government revenue through effective corporate tax regime is often 

jeopardized by the competitive strategy of tax avoidance adopted by commercial banks. However, 

banks generally, under competitive market environment, are more motivated to avoid tax so as to 

boost their profit levels and have more capital to compete well in the market. They may not increase 

the charges for their services so as to retain their customers, but prefer to engage in activities leading 

to tax avoidance in order to remain in competition and declare reasonable profit. The study therefore, 

sought to assess corporate tax shield charity donations on earnings management of deposit money 

banks in Nigeria. 

Conceptual Review  

The debt tax shield has stimulated decades of debate regarding firm valuation and the cost of capital. 

In 1963, Modigliani and Miller ~hereafter MM first hypothesized that the tax benefits of debt increase 

firm value and decrease the cost of using debt capital. In 1977, Miller countered that firms pass out 

the tax benefits of debt to Creditors through high interest rates to compensate them for the personal 

tax disadvantage of debt. Graham (2000) uses firm-level Financial Statement data to calculate the tax 

benefit of debt and estimates the mean corporate tax benefit of debt for a large sample of Compustat 

firms equals approximately 10 percent of total firm value. Although he does not provide direct market 

evidence of the debt tax shield, Graham demonstrated that firms derive substantial tax benefits from 

debt. 

Few studies seek direct market evidence for the debt tax shield. For example, Engel, Erickson, and 

Maydew (1999) found out that firms derive substantial net tax benefits when they swap tax-deductible 

trust preferred stock for nondeductible regular preferred stock. On the other hand, Fama and French 

(1998) used cross sections to regress firm value on interest expense, which proxied for debt and 

various controls for profitability. They found a strong negative relation between debt and firm value, 

concluding that “imperfect controls for profitability probably drive the negative relations between 

debt and value and prevent the regressions from saying anything about the tax benefits of debt. 

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American Research Journal of Economics, Finance and Management 
Volume 13 Issue 3, July-September 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM 

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Tax shields according to Murray (2019) involved investments and purchases that are tax deductible. 

Some common examples include charitable deductions for individuals and businesses. Charitable 

giving is a deductible expense for both individuals and businesses. For an individual to take a tax 

deduction on charitable giving, they must itemize deduction. Corporations can include charitable 

donations with some limits and restrictions. 

Charitable Donations  

Similar to the tax shield offered in compensation for medical expenses, charitable donation can also 

lower a taxpayer’s obligations (Drummond, 2000). In order to qualify, the deductible amount may be 

as high as 60 percent of the taxpayer’s adjusted gross income, depending on the specific 

circumstances. For donations to qualify, they must be given to an approved organization (Purnama & 

Nurdiniah, 2019).  

For the 2020 tax year, there's a twist: you can deduct up to ₦300 of cash donations without having to 

itemize. This is called an "above the line" deduction. In 2021, the deduction rises to ₦300 per person 

rather than per tax return, meaning a married couple filing jointly could deduct up to ₦600 of 

donations without having to itemize. 

Earnings management 

The first step in estimating a proxy for accruals-based earnings management is to calculate the total 

accruals of a firm. These accruals are assumed to include both discretionary and nondiscretionary 

components. The discretionary accruals are accruals that the management has control over whereas 

the non-discretionary accruals constitute the expected level of accruals or accruals that the 

management has no or little control over (accruals mandated by different accounting rules). The 

second step is to apply a linear regression approach to separate the two accrual forms from each other 

by modelling non-discretionary accruals as a function of change in sales, tangible assets and 

performance by industry. The residuals of the regressions are then considered to be the discretionary 

part and used as a proxy for earnings management. Other approaches in the literature incorporate 

studying specific accruals or distributions of earnings. The discretionary accrual calculation is done by 

applying Jones model (1991) which has been modified by Guenther (1994). Such model uses current 

accrual from total accrual to estimate the value of discretionary accrual and nondiscretionary accrual 

because current accrual influences taxable income (Wijaya & Martani, 2011).  

Empirical Reviews 

Oranefo (2022) examined the effect of effective tax rate on cash flow of manufacturing firms in 

Nigeria and Ghana, using a sample of consumer manufacturing firms of both countries and Ordinary 

Least Square analysis. The study showed that the sampled firms in Nigeria have a favourable impact 

on cash flow while that of Ghanaian has no significant effect. Ndum (2022) ascertained the effect of 

tax avoidance on earnings management in Nigerian deposit money banks from 2010 to 2020; using 

nine deposit money banks with international authorization constitute the sample size of the study. 

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https://www.thebalancesmb.com/tax-deductions-for-charitable-donations-2501942
https://www.thebalancesmb.com/tax-deductions-for-charitable-donations-2501942
https://www.thebalancesmb.com/can-my-business-deduct-charitable-contributions-397602
https://www.thebalancesmb.com/can-my-business-deduct-charitable-contributions-397602
https://www.investopedia.com/terms/t/taxliability.asp


American Research Journal of Economics, Finance and Management 
Volume 13 Issue 3, July-September 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM 

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16 | P a g e  

Ordinary Least Square with the aid of E-View 9.0 used to arrive at a logical conclusion. The study 

showed that amortization has significant effect on Earnings Management of deposit money banks in 

Nigeria. Ofurum, Okoye, and Ezejiofor (2021) determined corporate tax shield and earnings 

management of commercial banks in Nigeria, using thirteen commercial banks with international 

authorization constituted the sample size of the study. Ordinary Least Square was used for the 

analysis. The study found that medical expenses and amortization have a positive relationship with 

and significant effect on earnings management of commercial banks in Nigeria.  Elena, Lubos, Lucia, 

and Lucia (2021) assessed the influence of the tax shield and earnings management on a corporate 

capital structure, in 14 countries. The interest tax shield found to be statistically insignificant for 

deciding between debt and equity, while the non-debt tax shield is negatively correlated with debt. 

Prabowo, et al (2020) assessed debt and earnings management in Indonesia. Analysis was based on a 

sample set consisting of 497 firms engaging in manufacturing operations listed in Indonesia Stock 

Exchange during the period of 2009 to 2014. The results revealed that corporate debt is an important 

determinant of earnings management as it was statistically significant. Purnama and Nurdiniah 

(2019) examined profitability, firm size, and earnings management: The moderating effect of 

managerial ownership. The study sought to know: if a company size influence profit; whether 

managerial ownership can afford to strengthen or weaken the influence of the size of the company 

towards profit. Findings revealed that profitability has a positive relationship with and earnings 

management while firm size negatively affected earnings management. Managerial ownership is 

found not to be moderating variable on the profitability, firm size and earnings management. Inua 

(2018) in a similar study undertook to examine determinants of corporate effective tax rate: Empirical 

evidence from listed manufacturing companies in Nigeria. The objective of the study was to identify 

how some corporate governance attributes such as (board size and board independence); as well as 

firm characteristics such as firm size and leverage, determine the effective tax rate (ETR) of 

manufacturing firms in Nigeria. Out of the 170 listed firms in Nigeria, as at 31st Dec. 2016, 30 

manufacturing firms with complete and consistent data were selected and the period under 

consideration was from 2011 – 2016. Linear regression was used to analyze the data. The analysis 

revealed that firm leverage, board independence and board size are negatively related to and 

significantly affect effective tax rate while firm size is negatively related to but insignificantly affect 

ETR. This implies that the higher the firm leverage, board independence and board size, the lower the 

effective tax rate paid by manufacturing firms in Nigeria. Zhu, Lu, Shan, and Zhang (2015) evaluated 

how Chinese reverse merger firms trade off and conduct income increasing earnings management. 

The study used both accruals-based and real activities-based methods over the period 1990-2011 

using descriptive analysis. It was found that firms substitute the two methods. Norhayat, Rahayu, and 

Noor (2013) examined the association between leverage and real earnings management (REM) 

activities. This study used Abnormal Cash Flow from Operation, Abnormal Production Cost and 

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American Research Journal of Economics, Finance and Management 
Volume 13 Issue 3, July-September 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM 

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Abnormal Discretionary Expenses model by Roychowdhury, 2006, as a proxy for REM. Using a 

sample of 3,745 firm-year observations for the period of 2006-2011, the study found that there is a 

significant negative association between leverage and REM. The finding also revealed that leveraged 

firms have lower levels of REM. This supports the view that leverage limits the REM activities, which 

in turn, could affect the quality of accounting earnings.  Llukani (2013) carried out a study on 

earnings management and firm size: An empirical analyze in Albanian market. This study aimed to 

bring evidence and analyze earnings management initiatives in Albanian context, and identify the 

relationship between earnings management and firm size. Empirical analysis was based on a valid 

sample of 75 firm-year observations. It considers historical data for a three-year period (2009-2011) 

from entities selected, mainly from the private sector. Log of total assets is used as proxy for firm size, 

and absolute value of discretionary accruals for earnings management. The results showed that firms 

in the Albanian market are engaged in earnings management initiatives and there are no significant 

differences concerning earnings management initiatives and practices, comparing large and small size 

companies. 

Methodology 

The study adopted ex-post facto research design.  This design is considered appropriate because the 

study aims at measuring the relationship between one variable and another in which the variables 

cannot be manipulated, hence the adoption of the design. The researchers used purposive sampling 

technique to select thirteen (13) quoted deposit money bank on the Nigeria Exchange Group out of the 

twenty one banks stated as population of this study. The choice of these banks was based on the 

availability of data that covered the period under study. 

Data were collected from only secondary sources. The data were extracted from the annual reports 

and audited accounts of the banks under study from 2014 to 2023. 

Model Specification  

The model for this study was adapted from the study of Ofurum, Okoye, and Ezejiofor (2021) which 

was modified to suit the variables under study. The adapted model is presented as thus: EAMGT = 

f(MDE, CHD, AMT, DEP). 

In the course of modifying the model a variable such as Effective Tax Rate (ETR) was added to make 

the model conformed to the earlier stated specific objectives. Thereafter the newly modified model of 

this study is presented in functional form as stated below.   

EAMGT = f(ETR, MDE, CHD, AMT, DEP)…………………………………….Model1 

The econometric form of the model is stated in the equation below. 

EAMGTit = β1ETRit + β2MDEit + β3CHDit + β4AMTit + β5DEPit + ∑it …………. Eqn 1 

Where: EMT = Earnings Management 

CHD = Charity Donation 

β1 = Constant/Intercepts 

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American Research Journal of Economics, Finance and Management 
Volume 13 Issue 3, July-September 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

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β1 – β5 = Regression Coefficient 

∑ = Error Term 

i = Cross section 

t = Time Period  

Measuring Dependent Variable (Earnings Management)  

This study used the modified Jones’s model (Dechow et al., 1995) to measure the level of earnings 

management or discretionary accruals (DTAC). This model used total accruals (TAC) that are 

classified as discretionary components (DTAC) and non-discretionary components (NDTAC). Thus, 

defined as follows:  

TAC = NDTAC + DTAC  

Where:  

TAC = Total accrual period t  

NDTAC = Value of non-discretionary accruals  

DTAC = Discretionary accrual 

Method of Data Analysis  

In order to investigate corporate tax shield and earnings management, the study used descriptive 

statistics, correlation and simple regression analysis.  

Decision rule: 

The study’s hypotheses were tested at 5% level of significance. In view of that, when the p-statistics is 

less than 0.05, the null hypotheses is rejected and the alternate hypothesis is accepted. But when the 

P-statistics is higher than the critical level of 0.05, the null hypotheses is not rejected. 

Data Analysis 

The data gathered were analyzed with the help of E-view 9.0. The results are presented in the relevant 

tables. 

Descriptive Statistics 

The descriptive statistics provides evidence on the mean distribution, maximum, minimum, standard 

deviation, median and the count of the data collected which span from 2014 to 2023. 

Table 1: Descriptive Statistics  

 TACC CHD 

 Mean 1.56E+04  950809.5 

 Median 3286E+04  382792.5 

 Maximum  4.25E+09  4059824. 

 Minimum -3.41E+09  211568.0 

 Std. Dev.  3.09E+09  1302819. 

 Skewness -0.145120  1.737266 

 Kurtosis  2.204286  4.370779 

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ISSN: 2836-9416 

Impact Factor: 6.41 

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 Jarque-Bera  1.458353  5.813085 

 Probability  0.381188  0.054664 

 Sum 2.53E+05  9508095. 

 Sum Sq. Dev.  7.64E+28  1.53E+13 

 Observations  20 20 

Source: E-view 9 Output 

Table above revealed the mean for each of the variables, their maximum values, minimum values; 

standard deviation and Jarque-Bera (JB) statistics (normality test).The result in table 1 provided 

some perception into the nature of the deposit money banks in Nigeria that used in this study.  It was 

observed that on the average over the ten (10) year period (2014-2023), the sampled quoted banks in 

Nigeria were characterized by negative average TACC (2.560). It was also observed that Charity 

donation (CHD) mean stood at 950809.5 with maximum and minimum values of 4059824.0 and 

211568.0 respectively.  

From Table 1 above, the Jarque-Bera (JB) which test for normality or the existence of outlier or 

extreme values among the variables shows that all our variables are normally distributed and 

significant at 5% level and the result could be generalized. This also implies that a least square 

regression can be used to estimate the regression models. 

Correlation Analysis 

In examining the association among the variables, we employed the Pearson correlation coefficient 

(correlation matix) and the results are presented in table 2. 

Table 2: Pearson Correlation Matrix Result  

 TACC CHD 

TACC 1  

CHD 0.66368 1 

Source: E-view 9 Output  

The use of correlation matrix in most regression analysis is to check for multicolinearity strength and 

direction of the relationship between two variables. It evaluates the extent variations in one variable 

correspond to changes in another variable. The table 2 focused on the correlation between earnings 

management dependent variable and explanatory variable which consists of Charity Donations 

(CHD). The findings from the correlation matrix revealed that the independent variable was positively 

and strongly correlated with the dependent variable.  

Test of Hypothesis  

Ho1: Charity donations have no significant relationship with earnings management of deposit money 

banks in Nigeria. 

Testing of Hypotheses  

Table 3 Regression Analysis Result  

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American Research Journal of Economics, Finance and Management 
Volume 13 Issue 3, July-September 2025 

ISSN: 2836-9416 

Impact Factor: 6.41 

Journal Homepage: https://americaserial.com/Journals/index.php/ARJEFM 

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Dependent Variable: TACC   

Method: Least Squares   

Date: 12/12/24   Time: 17:04   

Sample: 2014 2023   

Included observations: 20   

     
     Variable Coefficient Std. Error t-Statistic Prob.   

     
     C -9.67E+09 2.50E+09 -3.865690 0.0181 

CHD 1536.193 1938.448 0.792486 0.4724 

     
     R-squared 0.841769     Mean dependent var -2.70E+08 

Adjusted R-squared 0.764731     S.D. dependent var 3.09E+09 

S.E. of regression 1.14E+08     Akaike info criterion 34.80861 

Sum squared resid 4.08E+17     Schwarz criterion 34.99016 

Log likelihood -216.0431     Hannan-Quinn criter. 44.60945 

F-statistic 11.50642     Durbin-Watson stat 1.657087 

Prob(F-statistic) 0.056451    

     
     In Table 3, the regression analysis was conducted to test the relationship between Tax shield and 

earnings management. The result revealed that charity donations have a positive and insignificant 

effect on earnings management of deposit money banks in Nigeria. From the findings in the Table 3, 

the value of adjusted R squared was 0.80. This implies that only 80% changes in earnings 

management of banks could be accounted for by independent variable CHD, while 20% was explained 

by unknown variables that were not included in the model. 

The Durbin-Watson Statistic of 1.657087 suggests that the model does not contain serial correlation. 

The F-statistic of the regression is equal to 11.50642 and the associated F-statistical probability is 

equal to 0.056, so the alternative hypothesis was accepted and the null hypothesis was rejected.  

The probability of the slope coefficients indicate that; P-value =0.4724 >0.05). The co-efficient value 

of; β1= 1536.19; t = 0.792 for TAC implies that charity donations are positively related to earnings 

management, but not statistically significant at 5%. 

Since the P-value of 0.4724 is higher than the critical value of 5% (0.05), then, it would be upheld that 

charity and donation has a positive insignificantly effect on earnings management of deposit money 

banks in Nigeria at 5% level of significance, thus, Ho is preferred to H1. 

Conclusion and Discussion  

This ascertained the effect of corporate tax shield of charity/ donation on earnings management of 

deposit money banks in Nigeria. Data were extracted from audited annual reports and accounts of the 

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ISSN: 2836-9416 

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sampled banks in Nigeria spanning from 2014 to 2023. From the findings, the result revealed that the 

probability of the slope coefficients indicate that; P-value =0.4724 >0.05). The co-efficient value of; 

β1= 1536.19; t = 0.792 for TAC implies that charity donations are positively affect earnings 

management, but not statistically significant at 5%. The result from the findings are in congruence 

with Falikhatun and Gantyowati (2020); Tjondro and Pemeta (2019); Ayunku and Uzochukwu 

(2020). However, the findings showed that tax shield has significant effect on earning management in 

Nigeria. Based on the findings, the study recommended that since charitable donations can also lower 

a taxpayer’s obligations. In order to qualify, the tax authority should ensure that banks use itemized 

deductions on his tax return and that the donations are qualify as it must be given to an approved 

organization. 

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https://www.investopedia.com/terms/t/taxliability.asp
https://econpapers.repec.org/article/blajoares/
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ISSN: 2836-9416 

Impact Factor: 6.41 

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American Research Journal of Economics, Finance and Management 
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