VALUE RELEVANCE OF ACCOUNTING INFORMATION OF LISTED INDUSTRIAL GOODS FIRMS IN NIGERIA

MSC Project Topics in Accounting and Finance

Abstract

Activities in the Nigerian Stock Exchange (NSE) in the past years show that the Nigerian Industrial Goods firms is one of the sectors that contributed to the drop in the Nigerian Stock Exchange Turnover Ratio from 21.86% in 2008 to 13.26% in 2009, attributing to the decline in stock prices.. Therefore, this study examined the extent to which share price of the Listed Industrial Goods firms in Nigeria are associated with fundamental accounting variables (that is, earnings per share, Book value per share and dividends per share). The thesis investigates the value relevance of accounting information in Listed Industrial Goods firms in Nigeria using data obtained from the Nigerian Stock Exchange (N S E) fact book 2011, annual report of the firms for the period 2007-2013, and daily price list on the Cash Craft website. The study is based on the semi-strong form of Efficient Market Hypothesis applying the Ohlson (1995) valuation model. Initially, Ordinary Least Square (OLS), Fixed Effects (FE) and Random Effects (RE) models were employed as tools of analysis but after conducting relevant tests, REM is used in testing the hypotheses of the study The population of the study consisted of all the twenty-five (25) firms that are listed on the Nigerian stock exchange under industrial goods sector of the economy. After applying filtering method, 16 firms were selected as sample of the study. The result revealed that all the explanatory variables statistically and significantly influence the explained variable. This implies that accounting information published by listed industrial goods firms in Nigeria have high value relevance to the investors in making their investment decision on the firms. Specifically, earnings per share are the most value relevant accounting information followed by dividend per share, then book value per share. It is therefore recommended that the management of Nigerian industrial goods firms should maintain stability and consistency in their earnings by maintaining uniform accounting policy and diversification of operations, which will go a long way in increasing market value of the firms. The accounting standards setters should also enhance the quality of the financial reporting in order to increase the value relevance of financial statements.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Accounting is regarded as the language of business used by corporate firms in communicating their financial positions to their users through the publication of annual financial statements containing the required financial accounting information. Financial accounting information is the product of corporate accounting and external reporting systems that measures and publicly discloses audited, quantitative data concerning the financial position and performance of publicly held firms. These financial statements, according to the Generally Accepted Accounting Principles (GAAP), have certain qualitative characteristics that should be met in order for it to succeed in its purpose. The statement should disclose reliable, relevant, comparable, timely and understandable information (ICAN, 2014). For any accounting information to meet up with the above qualitative characteristics, it must be prepared and made public for the consumption of its target users. These users need different information at different times and as such, it is mandatory for preparers of these financial statements to prepare and present reliable information to assist them in their decision making (ICAN, 2014). Reliability has to do with the quality of information which assures that information is reasonably free from error and bias and faithfully represents what it is intended to represent. The International Accounting Standard Board (IASB) Framework (2011) shows that accounting information is only relevant when users are able to evaluate past, present or future events in taking economic decisions. These users could be owners, managers, or employees. Value relevance refers to the ability of accounting information to be reflected in stock values (Francis & Schipper, 1999). Value relevance has to do with the summarization of accounting information which affects stock values in such a way that the investors can come up with an informed decision, that has to do with an organization. Valuation study is mainly aimed at relating accounting numbers to a measure of firm value with a view to assessing the characteristics of accounting numbers and their relation to value of the firm (Barth, 2000). If accounting information is prepared in such a way that it plays the roles expected of it, it will lead the investors to come up with the right investment decision that at the end will give them higher returns on investment and minimize risks of the investment. Value relevance is seen as proof of the quality and usefulness of accounting numbers and as such, it can be interpreted as the usefulness of accounting data for decision-making process of investors and its existence is usually by a positive correlation between market values and book values (Takacs, 2012).

Studies on value relevance of accounting information are motivated by the fact that listed companies use financial statements as one of the major media of communication with their equity shareholders and public at large (Vishnani & Shah, 2008). For instance, in Nigeria, Companies and Allied Matters Act (CAMA, 1990) and the subsequent amendments require the Directors of all companies listed on the Nigerian Stock Exchange (NSE or the Exchange) to prepare and publish annually the financial statements. Beyond this, the Exchange mandates all companies listed on first tier market to submit quarterly, semi-annual and annual statements of their accounts to the Stock Exchange. Companies on second tier market are to submit their statements of accounts annually to the Stock Exchange. Accounting information is any information obtained from the accounting system of a firm whether contained in a financial statement, a special report, or verbal statement (William, 1968). However, for the purpose of this research, accounting information refers to written information contained in a complete or partial financial report, which include balance sheet and profit and loss account or fund flow statement. This study investigated whether these various items of financial statements are value relevant to investors/shareholders or not.

Individuals or organizations embark on investment decisions for several reasons. Some investors are only interested in the return on investment, that is, how far is the firm able to pay dividends to its stockholders. To these set of investors, dividend payment is their target whenever they are faced with investment decision. And as such, dividend per share will be the most value relevant accounting information. This means that there will be a significant impact of dividends per share on share price of the industry under consideration. Investors will always be keen and alert as to dividends announcement of their investing firms. Their investment decisions are always geared towards which firm pays higher dividends and how stable is the trend of dividends payment (Karki & Adhikari, 2014). Other investors consider value of the firm and how the firms gains wide acceptability from within and outside the country regardless of whether or not the firm pay dividend constantly. Proponents of this school of thought prefer long run benefits that accrue to them and therefore look at the firm‟s book value in their investment decision. This study is meant to test whether accounting information used – earnings per share, book value per share and dividend per share has significant impact in the decision making of prospective investors to invest in a firm and the existing investors to retain or increase their investment in their firms.

M.Sc Project Topics in Accounting and Finance