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 i 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 Titilayo Signature and Date……………………… ii 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 .…………………… ………… Supervisor Signature Date Dr Olayiwola, Wumi .…………………… ………… Co-supervisor Signature Date Dr Umoren, Adebimpe .…………………… ………… Signature Date .…………………… ………… Signature Date Head, Department of Accounting Prof G.N Emecheta External Examiner iii 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 iv 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 mercy sent 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 and Dr Olayiwola, Wumi for your patience, thoughtfulness, forthrightness and untiring academic mentoring that 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 the immense contributions of the Head of Department of Accounting - Dr Umoren, v 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 and the current Dean, College of Development Studies, Professor K Soremekun I am also grateful to Professor C O Awonuga, Dean, School of Postgraduate Studies for your mentorship role that ensured that the 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 for your words of encouragement, Professor E Adebiyi of Computer Science and Professor E Omolehinwa of University of Lagos for your great contributions My thanks also go to 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 vi 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 the School 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, Messrs Fatai, Sunday and Mutiu Adeleke Thanks for your love and care I want to vii also appreciate my late parents- Mr Bello and Mrs Sariyu Adeleke for 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 viii 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 Key Words: Value Relevance, Stock Exchange, Accounting Information, Investor Perception and Financial Statement ix TABLE OF CONTENT Title Page…………………………………………………………………… i Declaration……………… ………………………………………………… ii Certification ……………… ……………………………………………… iii Dedication………………………………………… …………………… … iv Acknowledgements………….…………………………………… ……… v Abstract……………………………………………………………………… ix Table of Content…………………………………………………………… x List of Tables………………………………………………………………… xiii List of Figures……………………………………………………………… xv Appendices………………………………………………………… ……… xvi Definition of Terms………………………………………………………… xvii Abbreviations……….……………………………………………………… xx CHAPTER ONE: Introduction 1.1 Background to the study……….…….……………………… 1.2 Statement of Research Problem.…………………………… ……… 1.3 Objectives of the study …………………………………………… 1.4 Research Questions………………………………… …………… 1.5 Research Hypotheses……………………………………………… 1.6 Significance of study…………………………………………… 10 1.7 Scope of study …………………………………………… 12 x DETAILED RESULTS OF MODEL3 INVESTIGATING AGGREGATE MARKET REACTION TO NEGATIVE EARNINGS: USING OLS regress ldsp vre vrbv negearning Source SS df MS Number of obs = F( 3, 445) = Prob > F = R-squared = Adj R-squared = Root MSE = Model 93226.1677 31075.3892 Residual 483826.935 445 1087.25154 Total 577053.103 448 1288.06496 ldsp vre vrbv negearning _cons Coef Std Err .1115092 -.0000371 4.545989 9.560142 0129347 0008515 5.380487 1.99864 449 28.58 0.0000 0.1616 0.1559 32.973 t P>|t| [95% Conf Interval] 8.62 -0.04 0.84 4.78 0.000 0.965 0.399 0.000 0860885 13693 -.0017106 0016365 -6.028331 15.12031 5.632196 13.48809 186 DETAILED RESULTS OF MODEL3 INVESTIGATING AGGREGATE MARKET REACTION TO NEGATIVE EARNINGS: USING FIXED EFFECTS xtreg ldsp vre vrbv negearning,fe Fixed-effects (within) regression Group variable: year Number of obs = Number of groups = 449 R-sq: within = 0.1675 between = 0.0112 overall = 0.1612 Obs per group: = avg = max = 60 64.1 68 corr(u_i, Xb) = -0.0228 F(3,439) Prob > F = = 29.45 0.0000 ldsp Coef Std Err t P>|t| [95% Conf Interval] vre vrbv negearning _cons 1132793 0128492 -.0004014 0008477 4.171881 5.322086 9.701589 1.97521 8.82 -0.47 0.78 4.91 0.000 0.636 0.434 0.000 0880257 -.0020674 -6.288054 5.819546 sigma_u sigma_e rho 138533 0012647 14.63182 13.58363 7.0657898 32.530297 04505309 (fraction of variance due to u_i) F test that all u_i=0: F(6, 439) = 3.03 Prob > F = 0.0064 187 DETAILED RESULTS OF MODEL3 INVESTIGATING AGGREGATE MARKET REACTION TO NEGATIVE EARNINGS: USING RANDOM EFFECTS xtreg ldsp vre vrbv negearning,re Random-effects GLS regression Group variable: year Number of obs = Number of groups = 449 R-sq: within = 0.1674 between = 0.0171 overall = 0.1615 Obs per group: = avg = max = 60 64.1 68 Random effects u_i ~ Gaussian corr(u_i, X) = (assumed) Wald chi2(3) Prob > chi2 ldsp Coef Std Err z P>|z| = 86.97 = 0.0000 [95% Conf Interval] vre 1121088 0128779 8.71 0.000 0868686 1373489 vrbv -.0001588 0008484 -0.19 0.852 -.0018216 001504 negearning 4.417927 5.349224 0.83 0.409 -6.066359 14.90221 _cons 9.63655 2.267459 4.25 0.000 5.192411 14.08069 sigma_u 2.8730978 sigma_e 32.530297 rho 00774016 (fraction of variance due to u_i) 188 DETAILED RESULTS OF MODEL4 a) Investigating Value Relevance of Accounting Information across Industries Using OLS Ldsp=share price; vre= earnings per share; vrbv=net book value regress ldsp vre vrbv comd Source SS df MS Number of obs = F( 3, 445) = Prob > F = R-squared = Adj R-squared = Root MSE = Model 98062.4579 32687.486 Residual 478990.645 445 1076.38347 Total 577053.103 448 1288.06496 ldsp vre vrbv comd _cons Coef Std Err .1042201 0002354 9.231157 2.864244 0119623 0008558 4.042629 3.719485 t P>|t| 8.71 0.28 2.28 0.77 449 30.37 0.0000 0.1699 0.1643 32.808 [95% Conf Interval] 0.000 0807104 1277298 0.783 -.0014466 0019173 0.023 1.28614 17.17617 0.442 -4.445694 10.17418 189 ANALYSING USING FIXED EFFECTS b) Ldsp=share price; vre= earnings per share; vrbv=net book value xtreg ldsp vre vrbv comd,fe Fixed-effects (within) regression Group variable: year Number of obs = Number of groups = 449 R-sq: within = 0.1762 between = 0.0122 overall = 0.1696 Obs per group: = avg = max = 60 64.1 68 corr(u_i, Xb) = -0.0221 F(3,439) Prob > F ldsp vre vrbv comd _cons sigma_u sigma_e rho Coef Std Err .1063822 -.0001294 9.107856 3.0387 0118906 0008517 3.987942 3.671076 = = 31.29 0.0000 t P>|t| [95% Conf Interval] 8.95 -0.15 2.28 0.83 0.000 0.879 0.023 0.408 0830127 -.0018034 1.270024 -4.176368 1297518 0015446 16.94569 10.25377 7.0592703 32.361373 04542309 (fraction of variance due to u_i) F test that all u_i=0: F(6, 439) = 3.06 Prob > F = 0.0060 190 c) ANALYSING USING RANDOM EFFECTS Ldsp=share price; vre= earnings per share; vrbv=net book value xtreg ldsp vre vrbv comd,re Random-effects GLS regression Group variable: year Number of obs = Number of groups = 449 R-sq: within = 0.1761 between = 0.0164 overall = 0.1698 Obs per group: = avg = max = 60 64.1 68 Random effects u_i ~ Gaussian corr(u_i, X) = (assumed) Wald chi2(3) Prob > chi2 ldsp vre vrbv comd _cons sigma_u sigma_e rho Coef Std Err .1053377 0000489 9.168545 2.997141 0118852 0008508 4.001056 4.001031 = = 93.12 0.0000 z P>|z| [95% Conf Interval] 8.86 0.06 2.29 0.75 0.000 0.954 0.022 0.454 0820431 -.0016188 1.326618 -4.844735 4.1280778 32.361373 0160115 (fraction of variance due to u_i) 191 1286324 0017165 17.01047 10.83902 d) Investigating Value Relevance of Accounting Information across Industries: USING OLS Ldsp=share price; vrd= dividends per share; vrbv=net book value regress ldsp vrd vrbv comd Source SS df MS Number of obs = F( 3, 446) = Prob > F = R-squared = Adj R-squared = Root MSE = Model 160252.247 53417.4158 Residual 416868.753 446 934.683303 Total 577121 449 1285.34744 ldsp Coef Std Err 450 57.15 0.0000 0.2777 0.2728 30.573 t P>|t| [95% Conf Interval] vrd 2229681 017969 12.41 0.000 vrbv 000731 0007809 0.94 0.350 comd 5.74223 3.790007 1.52 0.130 _cons 4.413391 3.455834 1.28 0.202 192 1876537 -.0008037 -1.706261 -2.37835 2582824 0022656 13.19072 11.20513 e) Investigating Value Relevance of Accounting Information across Industries ANALYSING USING FIXED EFFECTS Ldsp=share price; vrd= dividends per share; vrbv=net book value xtreg ldsp vrd vrbv comd,fe Fixed-effects (within) regression Group variable: year Number of obs Number of groups = = 450 R-sq: Obs per group: = avg = max = 60 64.3 68 within = 0.2887 between = 0.0050 overall = 0.2772 corr(u_i, Xb) F(3,440) Prob > F = -0.0159 ldsp Coef vrd vrbv comd _cons 2257407 000328 5.545126 4.715876 sigma_u sigma_e rho 7.1569122 30.041958 05370579 F test that all u_i=0: Std Err t 0177042 0007748 3.725126 3.397429 P>|t| 12.75 0.42 1.49 1.39 0.000 0.672 0.137 0.166 = = 59.54 0.0000 [95% Conf Interval] 1909454 -.0011947 -1.776125 -1.961329 260536 0018507 12.86638 11.39308 (fraction of variance due to u_i) F(6, 440) = 3.65 Prob > F = 0.0015 ANALYSING USING RANDOM EFFECTS Ldsp=share price; vrd= dividends per share; vrbv=net book value xtreg ldsp vrd vrbv comd,re Random-effects GLS regression Group variable: year Number of obs Number of groups = = 450 R-sq: Obs per group: = avg = max = 60 64.3 68 within = 0.2886 between = 0.0018 overall = 0.2775 Random effects u_i ~ Gaussian corr(u_i, X) = (assumed) ldsp Coef Wald chi2(3) Prob > chi2 Std Err z P>|z| = = 176.62 0.0000 [95% Conf Interval] vrd of Difference 224512 0177568 12.64 0.000 1897094 Output in Perception of Institutional Investors.2593146 and vrbv 0005074 0007747 0.65 0.512 -.0010109 0020257 Individual about the Value Relevance Information comd 5.633564 3.740252 1.51of Accounting 0.132 -1.697195 12.96432 _cons 4.611748 sigma_u sigma_e rho 4.1898716 30.041958 01908001 3.763306 1.23 193 0.220 -2.764196 (fraction of variance due to u_i) 11.98769 Results Profit and Loss Accounts Reliability Test Case Processing Summary N % Valid 166 96.0 Exclude 4.0 d(a) Total 173 100.0 a Listwise deletion based on all variables in the procedure Cases Reliability Statistics Cronbach's Alpha 781 N of Items Item Statistics Turnover Gross profit Net operating expences Profit after tax Earning per share Dividend per share Dividend cover Mean 3.3795 3.2952 Std Deviation 80563 76490 N 166 166 2.9940 87037 166 3.7410 3.6024 3.5422 3.1084 56064 73756 75158 95995 166 166 166 166 194 Item-Total Statistics Scale Scale Mean Variance if Corrected if Item Item Item-Total Deleted Deleted Correlation 20.2831 10.325 412 20.3675 9.882 549 Turnover Gross profit Net operating expences Profit after tax Earning per share Dividend per share Dividend cover 20.6687 9.883 451 765 19.9217 20.0602 20.1205 20.5542 10.921 10.008 10.082 8.782 506 548 516 599 758 745 751 733 Scale Statistics Std Deviation 3.62074 Mean Variance 23.6627 13.110 N of Items Independent-sample T-Test Profit and Loss Accounts Group Statistics P_L New2q N 101 72 Std Deviation 6.734 6.495 Mean 4.88 4.14 Results Balance Sheet Reliability Test Case Processing Summary N Cases Valid Excluded( a) Total Cronbach's Alpha if Item Deleted 771 744 % 151 87.3 22 12.7 173 100.0 a Listwise deletion based on all variables in the procedure 195 Std Error Mean 670 765 Reliability Statistics Cronbach's Alpha 846 N of Items Item Statistics share Capital Shareholders' Fund Mean 3.3444 Std Deviation 73979 3.3444 2.8013 79201 89458 151 151 3.0199 2.7417 88295 96238 151 151 3.2715 82409 151 Trade Investment Net asset per share Trade investment Capital Structure N 151 Item-Total Statistics share Capital Shareholders' Fund Scale Mean if Item Deleted 15.1788 Scale Variance if Item Deleted 11.321 Corrected Item-Total Correlation 586 Cronbach's Alpha if Item Deleted 829 15.1788 15.7219 10.908 9.789 621 749 822 795 15.5033 15.7815 10.585 9.839 595 666 827 814 15.2517 11.056 556 834 Trade Investment Net asset per share Trade investment Capital Structure Scale Statistics Mean 18.5232 Variance 14.784 Std Deviation 3.84506 N of Items t-Test Group Statistics B_S New2q6 N 101 72 Mean 7.13 7.42 Std Deviation 14.781 14.991 196 Std Error Mean 1.471 1.767 Independent Samples Test Levene's Test for Equality of Variances B_S F Sig T df Lower Upper Lower Upper Equal variances assumed Equal variances not assumed 053 818 t-test for Equality of Means Std Mean Error Sig (2Differen Differen tailed) ce ce Lower -.288 2.293 -4.815 4.239 -.125 151.76 900 -.288 2.299 -4.830 4.254 % 161 93.1 12 6.9 173 100.0 a Listwise deletion based on all variables in the procedure Reliability Statistics Cronbach's Alpha 887 Lower 900 Case Processing Summary N Upper 171 Reliability Test Valid Excluded( a) Total Lower -.126 Result of Value Added Statement Cases Upper 95% Confidence Interval of the Difference N of Items 197 Item-Total Statistics Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted Value added from operations 10.6646 10.449 744 859 Bought-in materials and services 11.2484 10.438 759 855 10.9255 10.669 813 845 10.4658 11.650 603 889 11.2050 10.126 731 863 Gross value added Retained profit for future growth Employee wages and salaries Scale Statistics Mean 13.6273 Variance 16.210 Std Deviation 4.02620 N of Items t-Test Value Added Statement Group Statistics VAS New2q6 N 100 70 Mean 2.65 2.88 Std Deviation 822 755 198 Std Error Mean 082 090 Independent Samples Test Levene's Test for Equality of Variances F Sig T Df t-test for Equality of Means Std Mean Error Sig (2Differenc Differenc tailed) e e 95% Confidence Interval of the Difference Upper VAS Equal variances assumed Equal variances not assumed 938 334 -1.840 168 068 -.228 124 -.473 017 -1.868 156.19 064 -.228 122 -.469 013 Cash Flow Statement Reliability Statistics Accounting information Cash flow statement Cron bach' s Alph a 909 N of Items Item-Total Statistics Scale Mean if Item Deleted Lower Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted Cash flow from operating activities 6.0592 2.770 799 884 Cash flow from investing activities 6.2367 2.765 811 874 Cash flow from financing activities 6.2722 2.699 842 849 T-Test 199 Group Statistics Cash_F New2q6 101 Mean 2.92 Std Deviation 862 Std Error Mean 086 69 3.37 647 078 N Independent Samples Test Levene's Test for Equality of Variances F Sig T Df t-test for Equality of Means Std Mean Error Sig (2Differen Differen tailed) ce ce 95% Confidence Interval of the Difference Upper Cash_ F Equal variances assumed Equal variances not assumed 4.319 039 Lower -3.681 168 000 -.450 122 -.691 -.208 -3.881 166.45 000 -.450 116 -.678 -.221 200 ... Signature Date Head, Department of Accounting Prof G.N Emecheta External Examiner iii DEDICATION This thesis is dedicated to the Holy Spirit, the Untaught Teacher who teaches all You are my Teacher,... 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