Value- Relevance of Accounting Information in the Nigerian Stock Market

VALUE- RELEVANCE OF ACCOUNTING INFORMATION IN THE NIGERIAN STOCK MARKET

BY

OYERINDE, DORCAS TITILAYO

CUGP040120

A THESIS IN THE DEPARTMENT OF ACCOUNTING,

SUBMITTED TO THE SCHOOL OF POSTGRADUATE STUDIES,

COVENANT UNIVERSITY, OTA, NIGERIA

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF DOCTOR OF PHILOSOPHY (Ph.D) IN ACCOUNTING

JUNE,2011

DECLARATION

It is hereby declared that this study titled “Value Relevance of Accounting Information in the Nigerian stock Market” was undertaken by Oyerinde, Dorcas Titilayo and it is based on my original work in the Department of Accounting,School of Business, College of Development Studies, Covenant University, Ota, under the supervision of Prof. Enyi, P. Enyi and Dr K. W. Olayiwola. The ideas and views of this research work are products of original research undertaken by me and the views of other researchers have been duly expressed and acknowledged.

Oyerinde, Dorcas TitilayoSignature and Date………………………

CERTIFICATION

This is to certify that this study titled “Value Relevance of Accounting Information in the Nigerian stock Market”is an original research work carried out by Oyerinde, Dorcas Titilayo of the Department of Accounting, College of Development Studies, Covenant University and that it has not been submitted for the award of any other degree in this or any other institution.

Prof. Enyi, P. Enyi...………………………………..

SupervisorSignatureDate

Dr. Olayiwola, Wumi...………………………………..

Co-supervisorSignatureDate

Dr. Umoren, Adebimpe...………………………………..

SignatureDate

Head, Department of Accounting

Prof. G.N. Emecheta...………………………………..

SignatureDate

External Examiner

DEDICATION

This thesis is dedicated to the Holy Spirit, the Untaught Teacher who teaches all. You are my Teacher, Comforter, Helper and my All in All.

Acknowledgements

I want to thank the Almighty God for His unsearchable riches for sending Jesus His Son, whose gift of eternal life has made me a permanent winner. God in His infinite mercysent kindhearted people my way and I want to acknowledge the efforts of these numerous behind-the-scenes people who worked to make this thesis possible. This cannot be completed, let alone be successful, without the assistance of these talented individuals.

My big thanks to God’s servant, Bishop (Dr.) David Oyedepo for providing the platform that made my dream of having a Ph.D in Accounting a reality.My special gratitude also goes to the Management of Covenant University, particularly my mentor, the Vice Chancellor, Professor Aize Obayan, the Deputy Vice Chancellor, Professor Charles Ogbologo, erstwhile Registrars, Pastor Yemi Nathaniel and Dr. Daniel Rotimi, the current Acting Registrar, Mr. Emmanuel Ojo for your encouragement and leadership styles worth emulating.

My profound gratitude to my supervisors, Professor Enyi, Patrick, Enyi andDr. Olayiwola, Wumi for your patience, thoughtfulness, forthrightnessand untiring academic mentoringthat made the completion of this study possible. Your immense contributions enhanced the quality of this work to a great extent. May your labour of love be rewarded by the Almighty God. I also thank and acknowledge theimmense contributions of the Head of Department of Accounting - Dr. Umoren, Adebimpe for always being around to comfort and encourage me. The good God will reward you greatly.

I want to acknowledge the support and encouragement of the former Dean, Professor M.O. Ajayi andthe currentDean,College of Development Studies,Professor K. Soremekun.I am also grateful to Professor C.O. Awonuga, Dean, School of Postgraduate Studies for yourmentorship rolethat ensured thatthe quality of this research meets the required standard. I greatly appreciate the Deputy Dean, School of Business, Professor J.A. Bello, Professor J.A.T.Ojo of the Department of Banking and Finance, Professor S.O. Otokiti, former Chairman, of College of Development Studies Postgraduate Committee, Professor Don Ike and Professor Fadayomi,T. O.,both of the Department of Economics and Demographic Studies, Professor Omoweh, D. of the Department of Political Science foryour words of encouragement, Professor E. Adebiyi of Computer Science and Professor E. Omolehinwa of University of Lagos for your great contributions. My thanksalso goto Dr. Oloyede, S.A., Dr.J. Ayam, Dr. I. O. Ogunrinola, Dr. Edewor, P., Dr.Alege, P.,Dr. Ashikhia,O.U. Dr. Chinonye Okafor, Dr. Oyero, O., Dr. Abioye, T. O., Dr. Osabuothien, E.Dr. Okodua, H., Urhie, E.Mrs. Babajide, A.,Mrs Aboyade,M. and Mrs Ilo, P.

I wish to acknowledge the inputs of my colleagues in the Department of Accounting, Covenant University,Dr Umoren, A., Dr. Iyoha, F., Dr. Mukoro,D., Mr. Fakile, F., Mr. Adeyemo, K., Mr. Faboyede, S., Dr. Uwalomwa, U.Dr.Uwalomwa,B., Mr. Ben-Caleb, E.,Mrs.Obigbemi, A., Mr. Efobi,U., Miss. Uwobu, A., Miss. Oyewole, S., Miss. Okuugbo,P., Miss. Akinlesi, O. and Mr. Roy, C.

I acknowledge the contributions of my lecturers and senior colleagues from outside Covenant University. Professor Prince Izedonmi- a father and mentor,thank you sir. Professor A. E. Okoye of the University of Benin, Professor Bayo Oloyede, of the University of Ado-Ekiti, Professor Emmanuel Emenyonu, of the Southern Connecticut State University who was on sabbatical leave at Covenant University, Professor Felix Famoye, of the Central Michigan University, USA, who was a Fulbright Scholar, at University of Lagos. I appreciate all your inputs. I also appreciate Mr. Nkiko, C., the Director, Centre for Learning Resources(CLR) for providing quality database at Covenant University and for all your prayers.

My appreciation also goes to the following people – Mr. O. Kazeem, of theSchool of Postgraduate Studies, Mr. T. Fadipe, Secretary and Ms Mary Obot of Department of Accounting, Messrs Olamuyiwa, V., Olanrewaju, Raphael and Mrs. Tobi-David, R. for their immeasurable administrative support.I am grateful to the staff and management of the organizations visited during my field work, particularly the trading members of the Nigerian Stock Exchange for your support.

To my siblings- Mrs Fumilola Odebisi and her husband, Mr. Johnson Odebisi, MessrsFatai, Sundayand Mutiu Adeleke. Thanks for your love and care. I want to also appreciate my late parents-Mr Bello and Mrs Sariyu Adelekefor inestimable value you in inculcate in me.

My gratitude goes to all my spiritual children too numerous to mention. I thank Pastors Segun Ogunsola, Peace Omotosho, Dele Joseph, Evangelist Sunday Olalegbin and all Christ Kingdom Expanders. I wish to thank my foster daughters Laide Olawale and Odunayo Ige for your understanding and support. I thank Pastor Oyerinde,Moses Olalekan for your counseling and encouragement. My list of honour is extended to my spiritual father and mother Rev. Oluwagbesan, H and Pastor (Mrs) Alice Oyerinde for your counseling, encouragement and prayers.

Finally, I appreciate the love, care, support and advice of my late husband Pastor Solomon Olayori Adisa Oyerinde that made me join Covenant University. You had so much confidence in me and encouraged me to start Ph.D,unfortunately you did not see the conclusion of it. Thank you my friend and confidant.

I acknowledge the financial support for this study from Covenant University on the platform of the Staff Development Program as well as the research grant by the Institute of Chartered Accountants of Nigeria.

Abstract

There is little known about the role of accounting information in terms of its ability to explain changes to the security prices of listed companies on the Nigerian Stock Exchange (NSE). Almost all evidence in this area is obtained from the United States or Western European countries which have sophisticated markets compared to most developing countries. This work investigates the value relevance of accounting data in the Nigerian stock market,with a view to determining whether accounting information has the ability to capture data that affect share prices of firms listed on the NSE. It also examines the difference in perception of institutional and individual investors about the value relevance of various items of financial statements in equity valuation.This study used secondary and primary data to investigate the value relevance of accounting numbers. Secondary data were obtained from the Nigerian Stock Exchange Factbook, Annual Financial reports of companies quoted on the Nigerian Stock Exchange, the Nigerian Stock Market Annual and primary data were obtained throughsurvey questionnairesadministered on the respondents. The methodsused for gauging information content of various accounting numbers were Ordinary Least Squared (OLS), Random Effects Model (REM), Fixed Effects Model(FEM) andIndependent - Samples t-Test. The findings show that there is a significant relationship between accounting information and share prices of companies listed on the NSE. Dividends are the most widely used accounting information for investment decisions in Nigeria, followed by earnings and net book value. The accounting information of manufacturing companies is more informative in the NSE.The study also finds that a significant negative relationship exists between negative earnings and share prices of companies listed on Nigerian Stock Exchange. It equally observes that there is no significant difference between the perception of institutional and individual investors about the value relevance of accounting information. The study therefore suggests that the firms should improve the quality of earnings as manipulated earnings (of which dividends are sub-sets) have large effects on share prices. Moreover, there should be firm and stiff penalty by the national standards setters for manipulating earnings in the Nigerian stock market.It is also recommended that all companies listed on Nigerian Stock Exchange should prepare Simplified Investor’s Summary Accounts (SISA) with emphases on the most widely used accounting information along the required mandatory detailed financial statementsto suit Nigerian peculiarities. This isexpected to remove information over-load particularly for non-accountants and non-financial analysts.The afore-mentioned measures are anticipated to increase investors’ confidence in accounting numbers and by extension the economic growth in Nigeria.

Key Words: Value Relevance, Stock Exchange, Accounting Information, Investor Perception and Financial Statement.

TABLE OF CONTENT

Title Page…………………………………………………………………….. / i
Declaration………………..………………………………………………….. / ii
Certification………………..……………………………………………… / iii
Dedication…………………………………………..…………………… … / iv
Acknowledgements………….……………………………………..……… / v
Abstract………………………………………………………………………. / ix
Table ofContent…………………………………………………………… / x
List of Tables………………………………………………………………… / xiii
List of Figures……………………………………………………………… / xv
Appendices………………………………………………………….……… / xvi
Definition of Terms………………………………………………………… / xvii
Abbreviations……….……………………………………………………… / xx
CHAPTER ONE: Introduction
1.1Background to the study……….…….………………………...... / 1
1.2Statement of Research Problem.…………………………………… / 4
1.3Objectives of the study ……………………………………………... / 8
1.4Research Questions……………………………………………….. / 9
1.5Research Hypotheses……………………………………………… / 9
1.6Significance of study……………………………………………. / 10
1.7Scope of study ……………………………………………...... / 12
1.8Summary of Research Methodology………………………………. / 14
1.9Sources of Data…………………………………………………….. / 15
1.10Outline of the Chapters……………………………………………… / 15
CHAPTER TWO:Literature Review and Theoretical Framework
2.1Introduction………………………………………………………….. / 17
2.2Conceptual Framework……………………………………………… / 18
2.2.1The Information Perspective……………………………………….. / 18
2.2.2The Measurement Perspective ………………………………...... / 20
2.3Theoretical Framework of the Research……………………………... / 26
2.4Review of Empirical Literature……………………………………… / 37
2.5 Equity Valuation and Negative Earnings……………………………. / 54
2.6Company Size and Value Relevance of Accounting Information…. / 55
2.7 Difference in Accounting Information across the Industries………. / 56
2.8Nigerian Stock Market Development and Economic Growth………. / 60
2.9Company and Allied Matters Act 1990, Investment and
Securities Act 1991 and FinancialStatements……………………… / 62
CHAPTER THREE: Research Methods
3.1Introduction………...……………………………………………….. / 67
3.2Research Design……………………………………………………. / 67
3.2.2Sample Size………………………………………………………… / 68
3.2.3 Sampling Technique………………………………………………. / 71
3.2.4Data Description……………………………………………………. / 72
3.2.5Sources and Data Gathering Method………………………………. / 73
3.2.6Questionnaire………………..…….……………………………….. / 74
3.2.7Validity of Research Instrument…………………………………….. / 75
3.2.8Reliability of Research Instrument………………………………….. / 75
3.3Analytical Framework……………………………………………… / 77
3.3.1Accounting Earnings and Equity Valuation…………………………. / 78
3.3.2Accounting Earnings versus Net Book and Equity Valuation……… / 80
3.3.3Dividends versus Net Book and Equity Valuation………………….. / 81
3.4Model Specification…………………………………………………. / 82
3.4.1Models………………………………………………………………. / 82
3.5 Method of Analysis………….………………………………………. / 88
CHAPTER FOUR: Data Analysis and Result Presentation
4.1Introduction…………………………………………………………. / 92
4.2 Data Presentation and Analysis of Aggregate Market Reaction to
Accounting Information …………………………………………… / 92
4.3 Data Presentation and Analysis of Difference in value
Relevance of Accounting Information across the Industries..………. / 104
4.4 Data Presentation and Analysis of the Value Relevance
of Negative of Earnings…………………………………… / 112
4.5 Presentation of Survey Data…...... / 114
CHAPTER FIVE: Summary of Findings, Conclusion and Recommendations
5.1 Introduction………………………………………………………… / 127
5.2 Summary of Work Done…………………………………………….. / 127
5.3 Summary of Findings………………………………………………… / 131
5.3.1Theoretical Findings………………………………………………… / 131
5.3.2Empirical Findings………………………………………………….. / 134
5.4Conclusion………………………………………………………….. / 137
5.5Recommendations and Policy Relevance…………………………… / 138
5.6Contribution to Knowledge…………………………………………. / 141
5.7Suggestions for Further Studies……………………………………… / 143
Bibliography…………………………………………………………………. / 145
LIST OF TABLES
Table 4.1Summary of Entire Panel of Aggregate Market Reaction to
Accounting Earnings and Book Value in Equity Valuation…… / 93
Table 4.2 Aggregate MarketReactionto Accounting Earnings and
Book Value in Equity Valuation………………………………. / 95
Table 4.3Aggregate Market Reaction toAccounting Dividends and
Book Value in Equity Valuation……………………………… / 99
Table 4.4Value Relevance of Accounting Information Across Industries:
Earnings, Net Book Value …………………………………… / 104
Table 4.5Value Relevance of Accounting Information
Across Industries:Dividends, Net Book Value……………….. / 108
Table 4.6Aggregate Market Reaction to Accounting
Negative Earnings and Book Value in Equity Valuation………. / 112
Table 4.7 Response to Questionnaire...... / 114
Table:4.8 Profile of Respondents………………………………………… / 115
Table 4.9Profit and Loss Accounts: Reliability Statistics……………….. / 117
Table 4.10Profit and Loss Accounts: Group Statistics…………………… / 117
Table 4.11Profit and Loss Accounts- Independent Samples Test…………. / 118
Table 4.12Balance Sheet Statement: Reliability Statistics………………… / 119
Table 4.13Balance Sheet Statement: Group Statistics……………………... / 120
Table 4.14Balance Sheet Statement: Independent Samples Test………….. / 120
Table 4.15Value Added Statement: Reliability Statistics…………………. / 122
Table 4.16Value Added Statement: Group Statistics…………………….. / 122
Table 4.17Value Added Statement: Independent Samples Test………… / 122
Table 4.18Cash Flow Statement: Reliability Statistics……………………. / 124
Table 4.19Cash Flow Statement: Group Statistics…………………………. / 124
Table 4.20Cash Flow Statement: Independent Samples Test……………… / 124
LIST OF FIGURE
Figure 2.1Summary of Selected Previous Work…………………………. / 65
Figure 3.1Reliability tests for the Survey Scale...... / 76
Figure 3.2 Analytical Framework………………………...……………….. / 81
Figure 3.3Summary of Independent and Dependent Variables…………… / 88
APPENDICES
Appendix ISample of Research Questionnaire……………………………. / 158
Appendix iiList of Companies and industries Sampled …………………… / 163
Appendix iii Dealing Members of the Nigerian Stock Exchange………….. / 165
AppendixivDetailed Output of Analyzed Data…………………………… / 177

Definition of Terms

Accounting information:This is quantitative written information contained in acomplete or partial financial report –balance sheet or profit and loss account or fund flow statement.

Book Value:It is an accounting concept which tends to put a value on assets after making provision for depreciation. It is total equity divided by the number of shares outstanding. It is the original price paid for the assets reduced by any allowable depreciation on the assets.

Dividends:This is cash dividends. Money paid to stockholders, normally out of the company's current earnings or accumulated profits.

Earnings:The amount ofprofitthat a companyproduces during a specific period, whichis usually defined as a quarter (three calendar months) or a year payment.Earnings typically refer toafter-tax netincome.

Financial Accounting Standards Board:This is a designated private sector organization in the US that establishes financial accounting and reporting standards.

Financial Statements: Statement of the accounting policies; the balance sheet as at the last day of the year; a profit and loss account or, in the case of a company not trading for profit, an income and expenditure account for the year; notes on the accounts; the auditors reports; the directors’ report; a statement of the source and application of fund; a value added statement for the year; a five – year financial summary; and in the case of a holding company, the group financial statements as stipulated in CAMA, 1990

Individual Investor:Non- institutional investor whoinvests in listed firm on Nigerian Stock Market.

Institutional Investor:Corporate organization who invests in other listed firm on Nigerian Stock Market.

International Accounting Standards Board:This is an independent, privately-funded accounting standard-setter based in London, England

Market value:This is the current price at which securities are bought and sold in the market. It is the price the market assigns to the company’s share.

Nominal Data:A set of data is said to be nominal if the values / observations belonging to it can be assigned a code in the form of a number where the numbers are simply labels.

Ordinal Data: A set of data is said to be ordinal if the values / observations belonging to it can be ranked (put in order) or have a rating scale attached. You can count and order, but not measure, ordinal data.

Response Rate:In survey research, the actual percentage of questionnaires completed and returned.

Stock Exchange: Stocks are listed and traded on stock exchange which is an entity a corporation or mutual organization that specializesin the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together.

Stock Market:This refers to entire market of equity for trading in the shares and derivatives of the various companies.

Value Relevance:Ability of accountinginformation to capture or summarize share price of firm listed on the stock market.

Abbreviations

API :Abnormal Performance Index

CAMA:Companies and Allied Matters Act

ECM: Error Components Model

FASB :Financial Accounting Standards Board

FEM:Fixed Effects Model

IASB:International Accounting Standards Board

LDSP:Last day share price

NASB:Nigerian Accounting Standards Board

REMRandom Effects Model

RIVM:Residual Income Valuation Model

VRBV:Book Value per Share

VRE:Earnings per Share

VRD:Divided per Share

SEC:Securities and Exchange Commission

1

CHAPTER ONE

INTRODUCTION

1.1Background to the Study

Accounting provides a vital service to broadand diverse users. Investors use financial accounting information for investment decisions; government agencies need it particularly for tax purposeswhile regulatory agencies use it to determine whether existing statutory pronouncements are complied with, among others (Kajola and Adedeji, 1999). According to Meyer (2007:2),“accounting plays a significant role within the concept of generating and communicating wealth of companies”. Financial statements still remain the most important source of externally feasible information on companies. Nevertheless, in the wake of the recent accounting scandals and economic meltdown where billions of naira of investment and retirement wealth have disappeared, the very integrity and survivability of the value relevance of this service has been called to question.

Value relevance is defined as the ability of accounting numbers contained in the financial statements to explain the stock market measures (Beisland, 2009). Accounting data, such as earnings per share, is termed value relevant if it is significantly related to the dependent variable, which may be expressed by price, return or abnormal return (Gjerde, Knivsfla and Saettem, 2007).

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 and Shah, 2008). For instance, in Nigeria, Companies and Allied Matters Act (CAMA), (1990)and the subsequent amendmentsrequire the Directors of all companies listed on the Nigerian Stock Exchange to prepare and publish annually the financial statements. Beyond this, the Nigerian Stock 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 Stock Exchange(Osaze, 2007). Accounting information is any data or information obtains 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 –balance sheet or profit and loss account or fund flow statement.This study investigates whether these various items of financial statements are value relevant in the Nigerian Stock Exchange or not.