Effect of Firm Value and Accounting Information on Equity Investment in Nigeria

Effect of Firm Value and Accounting Information on Equity Investment in Nigeria

Adeolu Thompson MAYAKI¹, Sunday Fatoba ADEBAYO²

¹Joseph Ayo Babalola University Ikeji- Arakeji Osun State

²Adeyemi Federal University of Education Ondo, Ondo State

DOI: https://doi.org/10.51244/IJRSI.2025.12020002

Received: 15 January 2025; Accepted: 24 January 2025; Published: 26 February 2025

 ABSTRACT

The study analysed the effect of firm value and accounting information on equity investment in Nigeria. This was with a view to providing information on the effect of accounting information and firm value on equity investment in Nigeria capital market. The study adopted the longitudinal research design and used secondary data. The population consisted of 168 quoted firms in the Nigeria Exchange Group as at 2021. Purposive sampling technique was used to select 50 firms whose data were consistently available and stocks traded on the Nigerian Exchange Group. Data on variables such as return on equity, dividend per share, earnings per share, business growth, profitability, firm size and market value of equity were obtained from Annual Reports and accounts of sampled listed firms in the Nigerian Exchange Group factsbook for the period 2011 – 2020. The data obtained were analysed using regression analysis technique involving pooled Ordinary Least Square (OLS) Model, Fixed Effect Model (FEM) and Random Fixed Model. Firm value and accounting information had complementary statistically significant effect on equity investment (R²= 84.72, P<0.05). Finally, the study concluded that accounting information and firm value had a remarkable and significant impact on equity investment in Nigeria. This study recommends that prior to making a final choice on an equity investment, investors should look into the firm value and accounting information variables analysis for profitable informed decision.

Keywords: Accounting Information, Capital Market, Equity, Firm Value, Investment, Nigeria.

INTRODUCTION

Equity investment is indubitably a requisite catalyst for economic development and growth. This essentially implies that for an economy to achieve the desired industrialization and expansion, the capital market must be thriving with apparent indices that are sufficient enough to attract potential investors (Oyedokun & Ajose, 2018). Investment in equity is intentionally carried out by an investor who is interested in sharing in the ownership of a firm. It logically involves the counting of risks and returns, both financial and non-financial, in the investor’s attempt to create and maximize value and profit. In other words, the investment decision regarding shares is not taken haphazardly (Kapellas & Siougle, 2017). It is pertinent to state, however, that the effectiveness or otherwise of any equity market is a function of certain variables which affect the industrial players in the various sectors of the economy. Put differently, there are certain economic elements that stakeholders in the capital market, especially the investors, put into consideration in their bid to take equity investment decisions (Isam &Nawal, 2018). For the purpose of this research, two of such variables selected for investigation are accounting information that management of companies prepare and report, and the firms’ value (Zayol et al. 2017; Triani & Tarmidi, 2019) among others. Accounting information’s value relevance infers relevance or appropriateness of information in financial statement for valuation of equity (Omokhudu & Ibadin (2015).  Value relevance is a significant and effective accounting and reporting quality proxy, for it directly supplies worth and appropriate financial statements’ information to the potential end users as well as existing users in capital market. Likewise, firm value, connotes the value or worth of a business, at a particular time frame (Chukwu, et al. 2019). It is a means by which potential investors as well as existing investors would find the business entity desirable and profitable to invest in. Also, firm value depicts and portrays propensity of business profitability and advancement which influence, translates into propensity to attract investors to the business. It can also be seen as the perceived worth of a company in the light of factors such as company profitability, business size, dividend policy, company growth, and so on (Matari & Swidi, 2014)

Theoretical Review

Transaction Cost Theory

Cost may be incurred in an organization in distributing or allocating dividends whilst cost may be incurred by an investor in collecting and reinvesting the paid dividend. Additionally, paying dividends leads to in current cost by both investors and the firm. In an attempt of meeting investment needs, some firms might have decided to seek internal or and external funds or finance resorting to extra expenses that have to be paid in obtaining financing externally, is the dividend cost. However, it is going to be adduced that pro-rata distribution (as of profits) to stockholders is beneficent for it leads to cutting down the transactional costs connected with consumption activities selling stocks. Moreover, in event that further costs in transactions are incurred which can be connected with payment or non-payment of dividends, the policy of dividend payment dividend ought to influence expectations of earnings, consequently firms value and price of shares (Miller and Rock 1985).

In an alternative way, dividends can influence or affect a firm’s value if the dividend scheme of an organization influences the impression on investment decisions of the management. For an instance, management can wish to avoid or eschew the present net positive value of investment since the decrease in internal finance as a result of dividend payments and upraise extraneous financing other costs of the transaction.  The dividend valuation arises from distorting or cutting investment decisions. Howbeit, typically farther, the theory of cost of dividend transaction holds on to idea specific investment situation and centers on the external fund’s source price when organizations increase payment of dividend.

Costs of transaction entail Floatation costs being part of the transactional cost to an organization for sourcing more external funds like legal costs, fees of underwriter cost of, administration, and expenses of management. In addition, when a company pays a dividend and then needs to raise added external finances, existing stockholders will have experienced dilutions in control. Wherefore, in other to have control regulation and as additional reasons subscription of new issues can be made by existing stockholders additionally liable to transaction expenses like stockbroker’ commission and stamp tax. Ultimately these costs of the transaction are apparent within the firms’ value and the share price (Oyedokun and Ajose, 2018).

Additionally, as to explicitly state the cost of the transaction also there are less apparent expenses that are connected to payment of dividend, sequence to external or foreign funding, and are a result of information considerations imbalance and hierarchy. Specifically, raising new share equity is usually more expensive during period stocks are underestimated transitory or due to the indication this action presents a statement to the market about the firm’s value.  Furthermore, because of the associated cost in external financing raising, the theory of transaction cost opined that retain earning should be utilized to high possible extent by firms.  Payment of dividend should only be made when it will not result to internal funds shortage that is essential for investment.

Expansion feasibility are parts of basis that might accelerate reliance on costly external funds and financing raising.  Leverage of high level indicates fixed costs that are high, which the company has ascertained it can meet. Expansion potential indicates the company is contending with prosperous investment opportunities that it demands financing and funding. Another substantial basis that has a consequence on control consideration and the size of transaction costs for raising outside capital as well as for corporate dividend policies. Especially, the ownership structure of small firms is likely going to be less diverge than that of bigger in size companies (Fama 1991).

Agency Theory

Jensen and Meckling (1976) developed agency theory. The theory is on legally binding agreements between two or more parties who hire a third party to carry out a task or perform a service on their behalf and which includes giving the agent the authority to make decisions on their behalf (Alqatamin, 2016). According to agency theory, there is a high possibility that shareholders and managers’ interests could conflict. This lack of agreement or harmony exists when managers act in a way that maximizes their interest, or when they engage in opportunistic behavior. Stakeholders can be misled by managerial action about the entities financial position and market value of a company and induce outsiders to make wrong economic decisions.

Agency costs can be reduced by way of disclosure of information about the economic reality of the firm and manager’s actions, shareholders will have a better chance of keeping an eye on the managers with the disclosed information, in addition is a procedure for legitimacy for managers. Therefore, the information disclosure functions as a device for the purpose of controlling the company’s stockholders, in addition as procedure or device of managers’ legitimacy. More also, Modugu and Eboigbe (2017) affirm that the theory of agencies has a direct connection or significant linkage by means of corporate disclosure investigation and research inasmuch as corporate disclosure states a large likelihood to reapply theory of positive agency. The managers, because of the nature of about their position within the organization, have more and higher accessibility to firm detailed information, if all other relevant things, factors remain unaltered, can make reliable, credible and timely information exchange the market or economy to optimize the firm value.

In a very brief statement, it can be adduced that increase in compulsory disclosure may decrease the organization or agency cost emerging based on data disparity and asymmetries and buttress or strengthen the management reputation. Company management have an impetus and incentive to supply or provide mandatory disclosure of high level (Boshnak, 2017). One noticeable limitation  of this theory is that It doesn’t give a thorough, (Omran and El-Gaify, 2014) and explanation of the accounting decisions readily available, including disclosure alternatives and measurement techniques.

Furthermore, maximization of shareholders’ worth may not be a constant priority of the management of an organization, the setting apart of control and ownership gives increase to conflicts in agency clashes and discord as opined in Jensen and Meckling (1976). When there are high retain earnings, the management of an organization may direct available resources and reserves to projects for personal benefits and interest. Bounteous and fulsome dividend scheme and policy will increase and heighten the value of a firm, in as much as it will reduce the free and autonomous cash flows indisposition of the discretion of the management and therefore regulate the excessive investment issues.

The challenge of combined acts and deeds that leads to watching or under –monitoring of the management and firm can be provided with a solution to by dividend payment. Therefore, payment of dividend and hence the later increase of external financing bring about firm investigation by investment banks, regulators of the security exchange where firms’ shares are traded, with potential and existing investors. Shriveling and monitoring of capital markets leads to a reduction in agency costs and affects increase in the firm value price. The potential and likelihood of wealth transfer can be scale back and reduced by paying out dividends as well as raising and boosting debt and negotiating new debt contracts.

Empirical Review

Chukwu et al., (2019) investigated how specific firm attributes affect the accounting information value relevance in Nigeria. The study examines whether or not International Financial Reporting Standard influence the relationship betwixt accounting numbers and specific firm attribute proxy by leverage, firm size and liquidity. Data from fifty-four companies selected from ten different sectors out of the Nigeria Exchange Group covering six years from 2009 to 2004 were analyzed premised on Ohlson of 1995. Findings showed that specific firm attributes significantly affect relationship betwixt the market value and accounting data and this influence heighten more after International Financial Reporting Standard was adopted.

Afsar and Karacayir (2020) examined investment and financial decision effect on value of a firm.   The annual data between 2003 and 2018 of 100 firms operating in the Borsa Istanbul industrial index utilizing the fixed effect for analysis panel data analysis method. The findings showed that current ratio, asset turnover ratio, return on asset, stock turnover ratio, profit per share and intangible asset variable positively and significantly affect firm value and debt turnover ratio and leverage ratio variable affect the firm value negatively and significantly

Mahmoud (2017) in the research study on firm value and capital structure in Nigeria quoted manufacturing firms, Tobin’s Q model was employed to empirically investigate the research work. Data for the research study were gathered from the published annual reports and account of the listed manufacturing companies in Nigeria. The study population consists 38 Nigerian manufacturing firms that have been quoted from 2012 to 2016 with 20 sample size. Ex-post factor design method was employed in the research work. The result revealed that financial performance, company size, leverage and liquidity are negatively significant to firm value while Age of the company and company growth are significantly positive to value of the firm.

In 2019, Ganyam and Ivungu evaluated financial performance and the accounting information system of firms’ Theoretical and conceptual foundation that are related to financial performance of firms and accounting information system are reviewed as well as related empirical literature. The result from the research findings showed that studies in the past on impact of accounting information on firm financial performance aligned   the research studies to accounting information system cost implication as it interrelates or concern firms’ financial performance.

Ardina (2018) conducted a study on the impact of profitability, company growth, leverage and liquidity on firm value, as a moderating factor, dividend policy with firm size as control variable.  Sampling purposive technique and documentation method was used in conduction the research work. SPSS program was used in processing and totality of 396 observation with date 146 quoted manufacturing firms in the Stock Exchange from 2013 to 2016 were employed as population, the result shows that, company growth and profitability increase the firm value while high leverage and liquidity reduces firm value.

Oyedokun and Ajose (2018) a study was conducted on financial variables impact on the share price of deposit money banks listed in Nigeria.   The population consist 15 Nigeria Exchange Group listed deposit money banks and 12 quoted deposit money banks using an ex-post factor research design, judgmental sampling and filtering criteria techniques were employed.  The sampled deposit money banks’ annual reports served as a source of secondary data, which were then used to analyze the data using Ordinary Least Square, the conclusion from the research using multiple regression showed that price earnings ratios and dividend payout ratio have positive significant relationship with equity and negative significant relationship exists between dividend yield, share price, and book value per share has no relationship that is meaningful with equity share price. Research study recommend that shareholder should be guided by firm financial ratio and more importantly price earnings ratio and dividend payout ratio as they are factors that are critical in predicting equity market share price.

Okoro et al (2020) in their investigation work of the study on market value of quoted manufacturing firms in Nigeria Nigerian manufacturing companies that have been listed and accounting information from 2008 to 2017.  The result showed that significant positive relationship exists between market value of quotes firms and accounting information, seventy nine percent of the variables that are independent make known the variation in the quoted companies’ market value. Coefficient beta of the variation showed EPS, ROE and DPS to have positive effect and impact on the quoted companies’ market value.

Adebimpe et al (2018) evaluated the accounting information value relevance in quoted financial firms in Nigeria to ascertain whether(if) or not if value relevance of accounting information in Nigeria financial firms are decreasing or increasing over the financial year period of 2007 to 2016.  Data analysis was done using Ordinary Least Square (OLS) regression. The results showed relationship that is significant between market share price and earning per share and that earning per share and book value per share are no more sensitive to share price during the period of the adoption of International Financial Reporting Standard more than during the period of SAS adoption in Nigeria.

Zayol el al (2017) In their study research of the monetary information effect on investment by the shareholder in the banking sector in Nigeria using correlation metrics and regression analysis method, opined that prospective and existing investors can obtain information regarding dividend per share useful when making decision on investment in Nigeria banking sectors market share, because dividend per share is positively significant to shareholders investment decision.

Mahmoud (2017) examined relevance of monetary reporting quality reported by listed oil companies in Nigeria for 2011 to 2016. Ohlson model was employed to determine extent of influence of accounting information of oil companies on valuation share price of firms listed in Nigeria. Earnings per share and share price were of oil firms were used, the finding showed that quality of financial reporting of listed oil companies in Nigeria is significantly relevant to the information users’ decision making. The study also substantiates reporting financial quality and the share valuation of Ohson Model.

METHODOLOGY

This study adopted the longitudinal research design. This is because data were collected on variables of interest for a period of 10 years (2011 to 2020). This made the source of data collected to be panel data. Panel data is taken into account appropriately because it increases the degree of precision of the estimate obtained from the pool of knowledge available. The panel data has cross sectional units and time series. Time-frame for this study is (2011 to 2020) and the cross-sectional units are fifty firms listed on the Nigerian stock market.

The population of this study consist of one hundred and sixty-eight (168) companies quoted on the Nigeria Exchanges Group as at March, 2021 (NGX, Fact book, March 2021). Purposive sampling techniques was adopted to select the sample size of 50 firms that were listed as at the study period and had their stock actively traded on capital market and there was consistent availability of their accounting information within the period.  The study analysed the effect of firm value (i.e. Business Growth(BG), Firm Size(FS) & Profitability(PR)) and accounting information (i.e. Earnings Per Share(EPS), Dividend Per Share(DPS), and Return on Asset(ROA)) on equity investors in companies quoted in Nigeria. The complementary effect was determined by estimating regression coefficients of firm value and accounting information variables included within the model and the R-Squared. The empirical analysis follows the work of Ohlson (1995) valuation model based on model of residual income valuation, which states that the equity investment may be a linear function of the accounting value indicators variables. The study employed model adapted from Adebimpe et al., (2018).

\[
EI_{it} = \beta_0 + \beta_1 FS_{it} + \beta_2 BG_{it} + \beta_3 ROA_{it} + \beta_4 PR_{it} + \beta_5 EPS_{it} + \beta_6 DPS_{it} + \mu_{it} \quad \text{(3.5)}
\]

Where:

• \(EI_{it}\) = Equity Investment for company \(i\) at period \(t\)
• \(FS_{it}\) = Firm Size for company \(i\) during period \(t\)
• \(BG_{it}\) = Business Growth for company \(i\) during period \(t\)
• \(ROA_{it}\) = Return on Asset for company \(i\) during period \(t\)
• \(PR_{it}\) = Profitability for company \(i\) during period \(t\)
• \(EPS_{it}\) = Earnings Per Share for company \(i\) during period \(t\)
• \(DPS_{it}\) = Dividend Per Share for company \(i\) during period \(t\)
• \(\beta_0\) = The intercept, representing the value of \(EI_{it}\) when all independent variables are zero
• \(\beta_1, \beta_2, \beta_3, \beta_4, \beta_5, \beta_6\) = Regression coefficients for the independent variables, determined using the Ordinary Least Squares (OLS) method
• \(\mu_{it}\) = Error term

Lagrange Multiplier Test

The study conducted Lagrange multiplier test to assess the difference between random effect and the pooled OLS. The null of the Lagrange multiplier test is that there is no effect, while the alternative is that there is at least one effect. The effect can be from cross section or from the period. The result of the test as reported in Table 1, shows that there is a significant effect in the cross section. More so, the test for both effect shows that there is significant effect on both.  This result shows that pooled OLS will not be appropriate and a further test was carried out to assess the difference between random effect and fixed effect model.

Table 1: Lagrange Multiplier Test

Lagrange Multiplier Tests for Random Effects
Null hypotheses: No effects
Alternative hypotheses: Two-sided (Breusch-Pagan) and one-sided (all others) alternatives
	Test Hypothesis
	Cross-section	Time	Both
Breusch-Pagan	190.1638	1.681776	191.8456
	(0.0000)	(0.1947)	(0.0000)

Source: Author’s Computation, 2022

Hausman Test

Selecting the best fit model is key to an efficient model estimation.  The study carried out Hausman test to determine the best model between fixed model and random model. The outcome of the Hausman test as presented in Table 2. shows that better than random effect model is the fixed effect model, then fixed effect model was selected because the p-value of the test statistics is less than 0.05. Moreover, further test was carried out to assess the fixed effect model and also identify the existence of individual effect.

Table 2: Hausman Test

Correlated Random Effects – Hausman Test
Equation: Untitled
Test cross-section random effects
Test Summary	Chi-Sq. Statistic	Chi-Sq. d.f.	Prob.
Cross-section random	144.230861	7	0.0000

Source: Author’s Computation, 2022

Redundant Fixed Effects Tests

Furthermore, the redundancy fixed effect test was conducted in order to examine the difference between fixed effect and pooled OLS. The test assesses the significance of individual effect among the firms. If the p-value is less than 0.05, there is significant effect and therefore, the use of pooled OLS will not be valid. In view of this result, the study will adopt fixed effect model in achieving this objective.

Table 3: Redundant Fixed Effects Tests

Test cross-section fixed effects
Effects Test	Statistic	d.f.	Prob.
Cross-section F	29.897172	(40,277)	0.0000
Cross-section Chi-square	543.062682	40	0.0000

Source: Author’s Computation 2022

Diagnostics Test

Having discovered that fixed effect is the best fit among the three models, the study conducted post estimation test to test whether the residual violate the assumption of OLS or not. One of the assumptions is that there is no heteroskedasticity in the residual. The test’s outcome reveals as presented in Table 4: the model is devoid of heteroskedasticity problem. This shows that the residual does not violate the assumption of homoskedasticity.

Table 4.1: Panel Cross-Sectional Heteroskedasticity LR Test

Panel cross-sectional Heteroskedasticity LR Test
Equation: UNTITLED
Specification:  BG DPS EPS PR ROA ROE  FS  C
Null hypothesis: Residuals are homoscedastic
	Value	Df	Probability
Likelihood ratio	27.05031	41	0.9540

Source: Author’s Computation 2022

Arellano-Bond Serial Correlation Test

Prior to model estimation, post estimation tests were carried out to know the degree of consistency and efficiency of the model. The assumption of no serial correlation among the residual is one of the OLS assumptions that must be protected. Violation of this assumption will reduce the efficiency and consistency of the residual.  This study adopted the use of Arellano-Bond Serial Correlation Test in assessing the autocorrelation of the residual. The outcome of the serial correlation test shows that the residual of the model was consistency because it does not violate the assumption of no serial correlation.

Table 4.2: Arellano-Bond Serial Correlation Test

Arellano-Bond Serial Correlation Test
Test order	m-Statistic	rho	SE(rho)	Prob.
AR(1)	-0.908121	-78.454460	86.392114	0.3638
AR(2)	-0.222007	-9.057449	40.798106	0.8243

Source: Author’s Computation, 2022

Regression Result

From the result of the test for model specification, it was gathered that fixed effect model was the best fit model among the three models. The result of the post estimation test indicates that the residual lacks serial correlation and heteroskedasticity. Table 5. reports the result of the model estimation. The joint significance of the variables was captured by f-value and the result shows that all the variables were jointly different from zero. This shows that the firms’ value and accounting information had complementary statistically significant relationship with equity investment. In table 5, the R-Square value was 85.71% indicates that the accounting information and firms’ value as explanatory variables jointly accounted for 85.71 % of the total variation in equity investment. This finding corroborates the finding of Sharon (2020), Anaja & Emmanuel (2015), Okoro et al (2020) and Ardina (2018) who stated that accounting information and firm value are significantly related with equity investment.

The variable of dividend per share (DPS) is negatively related with the equity investment at 5% level of significance.  The decline in dividend per share leads to rise in the equity investment of the firm with coefficient of -0.1401 and t-value of -4.7633.  More so, reduction in earnings per share leads to rise in the equity investment of the firm in average. Earnings per share exhibited statistically significant relationship with the equity investment with p-value of 0.003 and t-value of -3.9537, while profitability exhibited positive statistically significant relationship p-value 0.031 and t-value of 2.541 with the equity investment at 5% level of significance. The coefficient of profitability 0.1368 shows that rise in profitability of firms leads to increase in equity investment. The t-value of 2.5407 shows that the variable is statistically significant. The result shows that when firm profitability rises, it will bring about rise in equity investment. Business growth reports statistical insignificant relationship with the equity investment in Nigeria. In the same vein, insignificant relationship was discovered between return on asset and equity investment.

Table 5: Regression Result

	Pooled OLS			Fixed Effect Model			Random Effect Model
	Coeff.	t-value	P-value	Coeff.	t-value	P-value	Coeff.	t-value	P-value
BG	-0.075	-2.187*	0.030	0.004	0.241	0.815	0.003	0.133	0.894
DPS	0.095	0.771	0.441	-0.140	-4.7633*	0.001	-0.083	-1.174	0.241
EPS	-0.038	-0.690	0.491	-0.032	-3.9537*	0.003	-0.041	-1.490	0.137
PR	0.538	12.179*	0.000	0.137	2.5407*	0.031	0.263	8.636*	0.000
ROA	-0.027	-3.820*	0.000	-0.025	-1.5307	0.160	-0.028	-6.895	0.000
FS	0.289	7.525*	0.000	0.053	1.4981	0.168	0.107	4.748*	0.000
C	3.4444	8.724*	0.000	12.783	17.4499*	0.000	10.089	23.749	0.000
R-Squared	0.7723			0.857189			0.33285
Adjusted R-Squared	0.767336			0.849925			0.317642
F-Statistic	153.6525			131.7729			22.554633
Prob(F-Statistic)	0.0000			0.0000			0.0000

Source: Author’s Computation, 2022

CONCLUSION AND RECOMMENDATION

The findings revealed that firm value and accounting information had complementary significant effect on equity investment of the listed firm (R² = 84.7189). The value of firms and information contained in its accounting books is a pointer to its financial position and performance. The firms need to be on sound level or promising position before equity investors can be encouraged to invest more equity. More so, investors consider the accounting information such as return on asset, profitability and return on equity before making investment decision. Rationale investors will not invest where the indicators are not tailored towards profitability. The findings revealed that firm value and accounting information had complementary significant effect on equity investment of the listed firm (R² = 84.7189). The value of firm and information contained in its accounting books is a pointer to its financial position and performance. The firm needs to be on sound level or promising position before equity investors can be encouraged to invest more equity. Prior to making a final choice on an equity investment, investors should look into the firm value and accounting information variables analysis for profitable informed decision.

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