Value-Relevance of Accounting Information in the Nigerian Stock Market

 – Value-Relevance of Accounting Information in the Nigerian Stock Market – 

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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 through survey questionnaires administered on the respondents.

The methods used for gauging information content of various accounting numbers were Ordinary Least Squared (OLS), Random Effects Model (REM), Fixed Effects Model (FEM) and Independent – 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 statements to suit Nigerian peculiarities.

This is expected 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.

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INTRODUCTION

Accounting provides a vital service to broad and diverse users. Investors use financial accounting information for investment decisions; government agencies need it particularly for tax purposes while 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).

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