Accounting Information Relevance and Investor’s Decision in Nigerian Equity Market (2008-2014)

Accounting Information Relevance and Investor’s Decision in Nigerian Equity Market (2008-2014)

Mayaki Adeolu Thompson

Obafemi Awolowo University Akure, Ondo State, Nigeria

DOI : https://dx.doi.org/10.47772/IJRISS.2024.809025

Received: 28 August 2024; Accepted: 31 August 2024; Published: 27 September 2024

ABSTRACT

This study examines the relationship between accounting information relevance and investment decision. This is with a view to providing information on the relationship between accounting information relevance and investment decision in Nigerian Equity Market.

The study used secondary data. The population consists of all investors in 200 firms quoted on the floor of Nigeria Stock Exchange. Purposive sampling technique was used in selecting 40 firms that were fully in operation during the period 2008-2014. Simple random sampling technique was used to select five investors from each firm totaling 200 investors.

Secondary data on variables such as earning per share, dividend per share, price earnings ratio and earning yield were obtained from Annual Reports and accounts of sampled quoted firms in the Nigerian Stock Exchange and Factsbook for the period 2008-2014. The data obtained were analyzed using   descriptive and inferential statistics.

The findings showed that there is a significant positive relationship between accounting information and investment decision in Nigerian equity market. (t=1.607757; p=<0.05).

The study concluded that the accounting information has significant effect on investors in their investment decisions in equity market and that miss-statement of financial accounting information will negatively affect the confidence of the investor on financial statements.

Keywords: Accounting Information, Value Relevance, Stock, Financial Statement, Equity Market, Nigeria.

INTRODUCTION

Investors and other interested parties of accounting make use of financial statements and disclosures, among other publicly available information, to assess the risk and value of firm when taking the investment decisions. Oyerinde (2011)   Active stock investors turn to financial statement analysis to ascertain the fundamental value of firms. They want to know the worth of the firms in order to evaluate the respective stock prices. In fact, one of the major objectives of financial information is to provide equity investors with information relevant for estimating company value. Investors and other interest parties of accounting information make use of Financial Statement and disclosure to assess the risk and value of a firm when taking investment decision (Adaramola & Atanda 2014). The value relevance study deals with the usefulness of financial statement information in equity valuation

Equity market is a market where stocks are bought and sold. In an economy, besides playing the role of a source for financing investment, stock market also performs a function as a signaling mechanism to managers regarding investment decisions, and a catalyst for corporate governance. However, equity market is best known for being the most effective channel for company’s capital raise (Zuravicky, 2005). People are interested in stock because of “long-term growth of capital, dividends, and a hedge against the inflationary erosion of purchasing power” (Teweles & Bradley, 1998,). The other feature that makes the stock market more attractive than other types of investment is its liquidity. Most people invest in stocks because they want to be the owners of the firm, from which they benefit when the company pays dividends or when stock price increases. However, many people buy stocks for the purpose of gaining control over the firms. Regularly, shareholders need to own specific amount of shares to be in the board of directors who can make strategic decisions and set directions for the firms.

Financial accounting information is the product of corporate accounting and external reporting systems that measure and publicly disclose audited, quantitative data concerning the financial position and performance of publicly held firms. These financial statements are Statement of Financial Position, Statement of Profit or Loss and Other Comprehensive Income, Statement of Change in Equity, Statement of Cash Flow and Notes to the Financial Statement. According to International Accounting Standard Board (IASB) Framework for the preparation and presentation of financial statement, paragraph 9, states that the objective of financial statement is to ‘provide information about the financial position, performance and change in equity of an entity that is useful to wide range of users in making informed economic decision’. Any event that is likely to affect a company’s current financial position or future performance should be stated in its financial statement.

High quality accounting information is a prerequisite for a well-functioning capital market and economy as a whole and as such it is of a great importance to investors, accounting standard setters and other users. Accounting information disclosure system that is based on high quality standard, gives investors’ confidence in the credibility of financial statement and without investors’ confidence, equity market cannot thrive (Holthausen, 2009). The study of whether the market prices of stock listed on the Nigerian Stock Exchange therefore reflect accounting information is not only important to investors but also crucial to Nigerian economic growth. This study is thus motivated to examine the extent to which accounting information summaries stock prices in the Nigerian equity market as an indicator of accounting information relevance and its effect on investors decision).

The studies so far conducted with respect to the market prices of stock listed in Nigeria reflect sparse accounting information. Hence, this study attempts to fill the gap in literature by investigating the value relevance of accounting information and the ability to capture or summaries information that affects equity value by examining the relationship between accounting numbers and share prices in the Nigerian Stock Exchange. This in turn is expected to accelerate development of the Nigerian stock market. Furthermore, most previous studies relate to a certain time frame and given the dynamic nature of accounting, there is a continuous need to fill the gap of what is known about the state of value relevance of accounting information in Nigeria

LITERATURE REVIEW

Investing in the stock market is among the most common ways investors attempt to grow their money, but it’s also among the riskier investment options available. Understanding the basic concept of the stock market is a first step in becoming an informed investor. While the stock market is an extremely complex system, its basic traits are much simpler.

The Efficient Market Hypothesis (EMH)

This hypothesis states that the capital market is efficient and the behavior of stock prices is related with the information i.e. under the efficient market hypothesis the investors are rational and they all have right to use the same information and have similar expectations regarding their investment. Also, in an efficient market, all available information is reflected in stock prices quickly and fully (Fama, 1970).

According to Fama, the capital market is considered to be efficient in three different forms: the weak form, semi-strong form and the strong form of efficiency. The different forms of efficient market hypothesis have been tested by Fama and he also documented the evidence in favour of the existence of efficient market.According to the idea of the efficient market theory, that in an efficient market the prices of stock are continuously adjusted to new and correct levels as and when the new information arrives in the market. As a result, investors cannot outperform consistently by doing the fundamental analysis and technical analysis.

Weak Form of Efficiency

The market data is one of the most traditional types of information which is used to determine the value of stock prices. Here all past price information are considered as the market data. The weak form of efficient market hypothesis says that historical prices should be reflected in current prices of stocks (Marton1998). It is one of the weakest forms of efficiency as it is based on the historical information about the stock prices, which are easily available. It has been argued that the weak form of efficiency will not be effective for the rational investors, because the movements of the new stock prices are completely arbitrary and the new pieces of information which is generated from the stock price movements are not dependent on the historical price movements of the stock.The weak form of efficiency was tested by Fama in 1970 and the result supported his theory. Generally, it is seen that people respond excessively to unanticipated and dramatic events of news. Under this behavioral situation, it becomes difficult to predict future stock prices by analysing historic prices.

Semi-strong form of efficiency

The semi-strong form of efficient market hypothesis states that stock prices not only reflect historical prices of information but also reflect all publicly known and available data. Examples of all publicly available information are- company yearly reports, earnings announcement of company, forthcoming dividend announcements, press releases, stock splits etc. Thus, a market can be said in the form of “semi-strong sense” if the current stock prices instantly adjust to all public information that is received from available sources (Ross et al., 2005).Numbers of researches have been done by different researchers such as Ball and Brown (1968), Fama (1970), they concluded that a great majority of the semi-strong form of efficiency test provide strong empirical evidence in favor of this hypothesis; though there have been some contradictory results too.

Strong Form of Efficiency

The strong form is the most extreme form of efficiency. It states that current stock prices reflect all information, both public and private. This means that no information, whether public or private can be used to earn abnormal returns consistently. Investors buying and selling decision of a security depends on such information which are generated by them and based on their findings they will determine whether they should buy or sell the security. With this action, the stock prices will be adjusted instantly to reflect all information, including private information.

Empirical Review

Oyerinde (2011) investigates the value relevance of accounting data in the Nigerian Stock Market, with the objective of establishing the relationship between accounting numbers and share prices in the Nigerian Stock Market. The study measures value relevance by the correlation coefficient between stock prices and some accounting numbers. The study shows that accounting information has the ability to capture information that affects equity values and that there is relationship between accounting numbers and share prices in Nigerian Stock Market

Melissa (2013) addresses the relationship between share price and bottom-line accounting information as dividends, earnings and book value in the Nairobi Stock Exchange. The study shows that earnings and book values are significantly associated with share values, though book value was found to be least significant of the three variables.

Ayzer and Cema (2013) examine the value relevance of financial statement information in Turkish Stock Markets during the period 1997-2011, using the Ohlson (1995) mode. Their result shows that combined book values and earnings are significantly value relevant in explaining stock prices in the Turkish Stock Markets. Book values and earnings were individually significantly value relevant, with book values having higher explanatory power than earnings. Adaramola & Atanda (2014) examine the trend in value relevance of accounting information, using a sample of sixty six listed companies in the Nigerian Stock Exchange. The study found that value relevance of accounting information did not follow any trend,but it was lower in the period of military dictatorship and global economic crisis. Using accounting ratios

Abiodun (2012) conducted a research on the value relevance in corporate sectors’ of Nigeria and used logarithmic regression models on 40 companies for the period between 1999 to 2009. The results conclude that earnings is more value relevant than book values by extension that, the information contained in the income statements, dictates more the corporate values of firms in Nigeria than the information contained in the balance sheet. Relevant information is such that it influences the economic decisions of users by helping them evaluate past, present and future events.

METHODOLOGY

The population size of this study consists of two hundred companies quoted on the Nigeria Stock Exchange as at 2015 (NSE, Factbook 2016). Purposive sampling was used to select the sample size of 40 companies based on the following criteria:

1. The company must be listed on the Nigerian stock exchange throughout the study period;
2. The company must remain in operation within the study period;
3. The company must have complete data throughout the study period to ensure the reliability and validity of data collected.

This study employs secondary data. Secondary data were obtained from annual financial statement of the listed companies in the Nigerian Stock Market over the period of 2008-2014 and publications of Nigerian Stock Exchange. The dependent variable is average market price of share in companies quoted in Nigeria Stock Exchange. This study adopted accounting information in financial statement as independent variables.  Earnings per Share (EPS), Dividend Yield (DY), Dividend per Share (DPS), Earning Yield (EY) and Price Earnings Ratio (PE) were employed as proxies for accounting information

EPS = Profit after TAX / Number of Ordinary Share

Dividend Yield = Dividend per Share / Market Price of Share

Dividend per Share = ordinary share dividend / Number of Ordinary Share

Earning Yield = Earnings per Share / Market Price of Share*100

Price Earnings Ratio = Market Price of Share / Earnings per Share

Model Specification

The present study has been undertaken to assess the extent of association between accounting variables (i.e., EPS, DPS, EY and PE) and market price of share in companies quoted in Nigeria, The Ordinary Least Square (OLS) regression analysis is used to test the hypotheses raised. Value relevance is determined by the estimated regression coefficients of accounting variables included in the model and the (R-Squared-R2). The analysis is based on the Ohlson (1995) valuation model which states that the firm value is a linear function of accounting variable. In the analysis, the objective here is to show empirically the extent to which relationship between accounting variables and market price of share in companies quoted in Nigeria Stock Exchange influence investors ‘economic decision for the period of 2008-2014.

In line with this, the study formulated the following equations to find the multiple regression results using the OLS Model.  This study adopted accounting information as independent variables and share market prices (P) as dependent variables. Earnings Per share (EPS),Dividend Per Share, Price Earnings Ratio and Dividend Yield were employed as proxies for accounting information.The relationship between Earnings per Share, Dividend Yield,Dividend Per Share, Price Earning  and Share market Prices will be analyzed.  The following functional form is therefore formulated:

Pit =f (EPS, DY, DPS, PE)……………………………………………..3.1

The mathematical model is specified as:

Pit = β0 + β1EPS + β2DY +β3DPS+β4EY + β5PE …………………………..3.2

The shortcomings of the mathematical model are due to the fact that it does not cater for other factors not represented in the model but which influence the dependent variable. An econometric model is therefore formulated as expressed below by introducing the stochastic error term to account for such factors.

Pit=β0+β1EPSit+β2DYit+β3DPSit+β4EYit + β5PEit + μ ………………..     3.3

Where:

Pit =Average Market Share Price for company i at period t

EP Sit = Earnings Per Share for company i during period t

DY it = Dividends Yield for company i during period t

DPS it = Dividend Per Share for company i during period t

EY it=Earning Yield for company I during period t

PE it = Price Earnings Ratio for company i during period t

βo = a constant i.e. the value when all the independent variables are zeros

β1, β2, β3 β4 & β5 = Regression slopes for the independent variables

μ = an error term. For purposes of computation, the μ is assumed to be 0

This study employs both descriptive and inferential statistics to achieve the stated objectives. The descriptive statistics included the use of mean, median, maximum and minimum value to evaluate the selected variable. Other measures of descriptive estimate like standard deviation and variance were also employed so as to see the degree of variability of these estimates.

The inferential statistics adopted the panel data econometrics techniques involving the ordinary least square (OLS) model, Fixed Effect Model (FEM) and Random Effect Model (REM). The methods of analysis are discussed along the line of specific objectives of the study as follows:

RESULTS AND DISCUSSION

This chapter deals with the presentation, analysis and interpretation of the data collected and analysed for the purpose of achieving empirically, the objectives of the study. Specifically, this chapter is the result of the empirical study of the value relevance of accounting information in the Nigerian Stock Market over the period of 2008-2014. Results obtained from the estimation output of E-view 9 for the empirical model is presented below.

The first objective of this study is to examine the relationship between value relevance of accounting information and investment decision in Nigeria. For this to be carried out, total pool regression model, fixed effect model and random effect model were estimated. A total of 40 quoted companies on the Nigeria Stock Exchange were selected and independent variables such as Dividend Per Share (DPS), Earnings Yield (EY), and Price Earnings Ratio (PE) were estimated against the dependent variable Average Market Price Per Share (AMPS). A test of which model to use was conducted using Housman test.

Descriptive Statistics Analysis: It provides information about sample statistics mean median, maximum and minimum value and the distribution of the sample measured by the skewness, kurtosis and the Jarque-Bera statistics for the variables given 280 observations.

Table 4.1.1: Descriptive statistics

Source: Author’s Computation (2016)

Table 4.1 showed the results of descriptive analysis of the annual data of dividend per share (DPS), earnings yield (EY) and price earning ratio (PE) from 2008-2014. The average values of DPS, EY and PE 2.043446, 869002 17.47284 were respectively with standard deviation of 3.235417, 1454081,34.82889 respectively.

The skewness measures the symmetry of the distribution of the values around the mean which was arrived at positive values for DPS= 2.406733, EY=16.64342 and PE=6.590728 Likewise, the Kurtosis measures the peakness or the flatness of the distribution of a series in which 3.0 is the standard for normal distribution series; DPS, EY and PE with 8.758327,278.0036 and 57.20708 respectively. These two statistics are particularly of great importance since they are used in the computation of Jarque-Bera statistic, which is used in testing for the normality or asymptotic property of a particular series. The statistics in Table 4.1 clearly shows that the variables are positively skewed and greater than the median values.

In terms of kurtosis, it measures how fat the tails of the distribution are. The kurtosis statistics obtained for dividend per share (DPS) =8.758327, earning yield (EY) =278.0036 and price earnings ratio (PE) =57.20708 showed that the distribution series for each of the variables was peaked relative to the normal because the statistics were greater than 3.0. Their Jarque-Bera statistics of 657.1575, 895241.5 and 36308.51 with their probability values less than 0.01 suggested that the null hypothesis of normality in the distributions were rejected. Also, the sum for the variables is 572.1650, 2.4332004 and 4892.395 respectively.

Correlation Matrix

Correlation matrix was carried out in order to test for multicolinearity among the independent and dependent variables. It shows the degree of association among the variables. The result showed all possible combinations for Average Market Price of Share (AMPS), Divided Per Share (DPS), Earning Yield (EY) and Price Earnings Ratio (PE). All the variables had correlation coefficients that were very low of less than 0.9, weak and positive and negative. This showed that independent variables were independent of each other and implied that the variables can be included in regression analysis.

Undoubtedly, the correlation matrix has shown some interesting results on the relationship between the dependent variable and independent variables; however, care must be exercised while interpreting the correlation matrix. This is because they can provide a reliable indicator of association in a manner which controls for additional explanatory variables. This result showed that the variables are independent of each other due to the fact that the table shows that all the variables in the model had correlation coefficients that are less than 0.9 having positive and negative values. This result showed that the variables are independent of each other and this means that the variables can be included and used in a regression analysis as independent variables; so, the Ordinary Least Square (OLS) method can be used for the analysis without getting spurious result.

Table 4.1.2: correlation matrix

Source: Author’s Computation (2016)

The relationship between value relevance of accounting information and investment decision in Nigeria this is the first objective which is to examine the relationship between accounting information relevance and investment decision in Nigeria, to examine the relationship between accounting information relevance and investment decision in Nigeria, total pool regression model, fixed effect model and random effect model were estimated. A total of 40 quoted companies on the Nigerian Stock Exchange were selected and independent variables [Dividend Per Share (DPS), Earning Yield (EY) and Price Earnings Ratio (PE) were estimated against the dependent variable Average Market Price per Share (AMPS). A test of which model to use was conducted using Housman test.

From the table 4.2, DPS has significant positive relationship on investment decision (β=1.071004, t=15.28237, P <0.05). This means that DPS has significant relationship on investment decision in Nigeria. Also, PE has significant positive relationship on investment decision in Nigeria (β=1.227430, t=0.461447, P <0.05). However, EY showed no significant relationship on investment decision in Nigeria (β=7.014223, t=0.121902, P >0.05).

The result implies that two of the three variables which are DPS and PE have significant positive relationship on investment decision in Nigeria while EY showed no significant relationship on investment decision in Nigeria. The F-statistic value of 27.689 with probability value of 0.000 showed that the model is appropriate for examining the relationship between accounting information relevance and investment decision in Nigeria.

Inferential Statistics Analysis

Table 4.1.3

Source : Data Analysis using E-view 9,2016

Correlated Random Effect–Hausman Test

Source: Data Analysis using E-view 9,2016

Based on the result of Hausman test, the probability of the Hausman test was 0.0023 which means that null hypothesis which claim that random effect is appropriate should be rejected at 5% p-value and fixed effect be accepted as the appropriate model.

The estimated relationship for the model using the fixed effect model is:  from the table 4.1.3,dividend per share, DPS has (β=1.071004, t=15.28237, P <0.05). This means that DPS has significant relationship on investment decision in Nigeria. Also,price earnings ratio, PE has (β=1.227430, t=0.461447, P <0.05),this means that price earnings ratio has significant positive relationship on investment decision in Nigeria.However, earnings yield, EY has (β=7.014223, t=0.121902, P >0.05), this means earnings yield has no significant positive relationship on investment decision in Nigeria.

The result implies that two of the three variables which are DPS and PE have significant positive relationship on investment decision in Nigeria while EY showed no significant relationship on investment decision in Nigeria. The F-statistic value of 5.114364 with probability value of 0.000 showed that the model is appropriate for examining the relationship between accounting information relevance and investment decision in Nigeria.

CONCLUSION

Based on the findings of this study, it can be reasonably concluded that investors of firms listed on the Nigerian Stock Exchange (NSE) are influenced by the contents of financial statements in their investment decisions. Accounting information has relevance in investment decision in Nigerian equity market and significantly has positive effect on investors.

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