A Study Of Nigerian Stock Exchange

A STUDY OF NIGERIAN STOCK EXCHANGE

Abstract

Regarding its capacity to explain variations in the security prices of listed businesses on the Nigerian Stock market (NSE), little is known about the Nigerian stock market. The majority of the evidence in this field comes from the United States or Western European nations, which have developed marketplaces in comparison to most underdeveloped nations. This study looks into the value relevance of accounting data in the Nigerian stock market to see if it can capture information that influences share prices of companies listed on the NSE. This study employed secondary and primary data to analyze the value relevance of accounting numbers, as well as the differences between institutional and individual investors’ perceptions of the value relevance of key financial statement items in equity valuation. Primary data were gathered through survey questions given to the respondents, while secondary data were obtained from the Nigerian Stock Exchange Factbook, Annual Financial Reports of companies traded on the Nigerian Stock Exchange, and the Nigerian Stock Market Annual. The Ordinary Least Squares (OLS), Random Effects Model (REM), Fixed Effects Model (FEM), and Independent-Samples t-Test methods were utilized to assess the information content of various accounting figures. The results demonstrate that share prices of businesses listed on the NSE and accounting information have a significant link. Earnings, net book value, and dividends are the three accounting metrics that are most frequently employed in Nigeria while making investment decisions. The NSE provides more insightful accounting data for industrial organizations. The analysis also discovers a strong inverse association between share prices of companies listed on the Nigerian Stock Exchange and negative earnings. It also notes that there is no discernible difference between institutional and individual investors’ perceptions of the importance and usefulness of accounting information. The study concludes that companies should enhance the quality of their results because manipulated earnings, of which dividends are a subset, have a significant impact on stock prices. Additionally, the national standard-setters should impose a stern and severe penalty for manipulating earnings on the Nigerian stock market. Additionally, it is advised that all companies listed on the Nigerian Stock Exchange publish Simplified Investor’s Summary Accounts (SISA) that emphasize the most commonly utilized accounting data in addition to the requisite complete financial statements that are necessary to meet Nigerian characteristics. The information overload that results from this is projected to be reduced, especially for non-accountants and non-financial analysts. The aforementioned actions are anticipated to boost investors’ confidence in accounting data, which would subsequently boost Nigeria’s economic growth.

Chapiter 1

Introduction

1.1 The Study’s Background

Accounting offers a crucial service to many different types of users. Investors utilize financial accounting information to make investment decisions; government organizations require it, notably for tax purposes; and regulatory organizations use it, among other things, to check for compliance with existing statutory pronouncements (Kajola and Adedeji, 1999). Accounting “plays a significant role within the concept of generating and communicating wealth of companies,” according to Meyer (2007:2). The most significant source of externally verifiable information about corporations is still financial statements. However, the entire integrity and viability of the value relevance of this service has been questioned in the light of the recent accounting scandals and economic catastrophe where billions of naira of investment and retirement savings have vanished.

According to Island (2009), the ability of accounting figures found in financial statements to explain stock market metrics is known as value relevance. According to Gjerde, Knivsfla, and Saettem (2007), accounting data, such as earnings per share, is deemed value relevant if it has a strong correlation with the dependent variable, which can be expressed as price, return, or abnormal return.

The fact that financial statements are one of the primary communication tools listed firms utilize with their equity shareholders and the general public motivates studies on the value relevance of accounting information (Vishnani and Shah, 2008). The businesses and Allied Matters Act (CAMA), (1990) and its later revisions, for instance, mandate that all directors of businesses listed on the Nigerian Stock Exchange must compile and publish financial statements on a yearly basis. Additionally, all firms listed on the first tier market are required by the Nigerian Stock Exchange to provide quarterly, semi-annually, and annual statements of their accounts to the Stock Exchange. Companies trading on the second tier market are required to submit their annual financial statements to the stock exchange (Osaze, 2007). For the purposes of this research, accounting information refers to written information found in a complete or partial financial report, such as a balance sheet, profit and loss account, or fund flow statement. Accounting information is any data or information obtained from an organization’s accounting system, whether it is contained in a financial statement, a special report, or a verbal statement (William, 1968). This study looks into whether or not these numerous financial statement elements have any bearing on value on the Nigerian Stock Exchange.

In 1961, the Nigerian Stock Exchange (NSE) opened for business with just 19 equities totaling N80 million. As of May 2009, there were 294 listed securities, including 208 equity/ordinary shares (including emerging market securities) and 86 government stocks and industrial loan stocks, with a market valuation of N9.45 trillion (The Nigerian Stock Exchange, Factbook, 2009). In contrast to mature stock markets, the Nigerian Stock Exchange appears to still have a ways to go (Ologunde, Elumilade, and Asaolu, 2006). Without accurate and trustworthy accounting information, the Nigerian Stock Exchange may not function as a means of raising capital for economic progress.

The researcher is thus driven to investigate the degree to which accounting information summarizes stock prices in the Nigerian stock market as an indicator of value relevance. Investors and policymakers alike must consider the likelihood that market prices of stocks listed on the Nigerian Stock Exchange reflect accounting information. Recent research indicates that stock markets have a positive impact on economic growth (Healy and Williston, 2005 and C.

The value relevance of accounting information has been the subject of numerous studies in developed nations (Collins, Maydew, and Weiss, 1997; Lev and Zarowin, 1999; Francis and Schipper, 1999; Beisland, Hamberg, and Navak, 2010), but there hasn’t been a thorough investigation of the topic in Nigeria. Due to issues with data availability, it has not been thoroughly explored (Negah 2008). It is challenging to assess the value relevance of accounting information in Nigeria due to the paucity and scarcity of the literature on capital research in accounting in that nation. There is some fairly related literature on accounting systems (Jagetia and Nwadike, 1983), corporate financial reporting (Wallace, 1988), Weak Form Efficiency of the Nigerian Stock Market: Further Evidence (Olowe, 1999), communications in accounting: problems and solutions (Adeyemi and Ogundele, 2003), the relevance of financial statements to stakeholders’ investment decisions (Kantude, 2005), and factors that influence price trends on the stock market (Nwude, 2010). The aforementioned research do not significantly contribute to the validity of the empirical data that now supports the usefulness of accounting information in the growing Nigerian Stock Market.

By evaluating the relationship between accounting numbers and share prices on the Nigerian Stock Exchange, the study aims to close the knowledge gap by examining the capacity of accounting information to collect or summarize information that impacts equity value. In consequence, it is anticipated that this will hasten the growth of the Nigerian stock market.

1.2 Description of the research problem

Global stock markets experienced turmoil in 2008, which led to harsh criticism of the value relevance of accounting information. There are some worries that fast-paced economic and high-tech advances, which necessarily alter the value relevance of accounting information, have not kept up with accounting theory and practice. The argument makes the case that financial accounts are less important when determining the basic market value of service-oriented businesses, which are by their very nature high-technology focused. “While accounting can be a significant factor in some decisions, accounting that masks or fails to capture meaningful information for the benefit of all investors is not sound and puts investors at risk,” claims Sutton (1997:1). As a result, individuals with funds to lend and invest will do so in areas where there is a need for accounting data (Germon and Meek, 2001). How well accounting information satisfies user needs determines its value and quality (Khanagha, 2011). As a result, the expansion of the Nigerian Stock Exchange depends on the availability of trustworthy information; otherwise, savers would just hide their hard-earned money under their mattresses.

Saying that the Nigerian Stock Exchange won’t operate effectively in the absence of pertinent and trustworthy accounting information could not be overstating the case. Because the capital market is the catalyst for economic growth, a deficit in the Nigerian Stock Exchange will have an impact on the country’s economy (Okeke, 2004). Therefore, it is not only necessary for investors but also essential for the development of the Nigerian economy to determine whether market values of stocks listed on the Nigerian Stock Exchange reflect accounting facts.

According to Negah (2008), there have been few studies on how important accounting numbers are in emerging markets. He adds that the scarce literature duplicates studies conducted in developed markets and that a closer look at these studies reveals that both epistemological and empirical problems exist. In other words, works done in the developed economy account for a sizable share of the extant value relevance studies in capital market research. However, it is clear that there are issues and difficulties with these studies that necessitate more research (Holthausen and Watts, 2001). For instance, the majority of these research, which employed book value and earnings alone to explain share price behavior, were conducted in the established stock markets of the United States of America and the United Kingdom.

In addition, value relevance research is a subject where the empirical findings can be inconsistent. The findings reported in the literature are in conflict. According to popular thinking, some of the differences in viewpoints can be attributed to the econometric issues used in these studies. Contradictory inferences were made in these literatures specifically as a result of the characteristics of accounting data deviating from the applied methodologies’ assumptions and the improper use of statistical indicators. It is crucial to look into whether the results will concur with or differ from those of the earlier investigations.

Additionally, there have been debates regarding the applicability and value of accounting information in numerous developing nations. The function of accounting data in these economies is still an open subject. There have been statements to the effect that accounting information typically has little bearing on the local environment in many of these nations. Instead, they frequently date and are based on the colonial histories of these nations. These take place notwithstanding Briston’s (1978) warning to accountants in developing nations to be wary of presuming that the institutions of industrialized nations can be transposed to their countries. International Accounting Standards (IAS) and UK accounting standards, for example, have had a significant impact on Nigeria’s accounting practices and standard-setting process (Wallace, 1988). The aforementioned statements, which were proposed as accounting norms guiding reporting in Nigeria between 2002 and 2008, are more comparable to UK and IAS. To the best of our knowledge, the accounting industries in this nation have not made any significant efforts to challenge this assertion.

Are these accounting procedures and standards, nonetheless, actually applicable in the Nigerian context? Given the foregoing, it is important to conduct a thorough evaluation of the value relevance of accounting information in addressing the urgent growth and development needs of Nigeria’s expanding stock market.

There has been a lot written about the value relevance of accounting information using data from the United States of America (USA) and the United Kingdom (UK), but empirical research in this field has been less active in developing nations. As a result, research on the correlation between stock market prices reported on the Nigerian stock exchange and accounting information is crucial for both investors and policymakers. The effects on local and international investors who rely their decisions on accounting data are significant. The stakes are equally high for decision-makers who view information as crucial to the growth of the capital market (Ologunde et al., 2006) and the stock market as the main engine for bringing economic success to Nigeria (Okereke-Onyiuke, 2008).

Due to the dynamic nature of accounting and the fact that all prior studies have a specific time frame in mind, there is a continuing need to fill in the knowledge gaps about the value relevance of accounting information in Nigeria. Given the foregoing, the following issues are recognized as of the time of this research:

The extent to which accounting information summarizes stock values in the Nigerian stock market is still up for debate;

Unresolved is the extent to which institutional and individual investors see the value and importance of specific financial statement elements to equities valuation differently, and

We don’t yet know how much manufacturing and service organizations’ value relevance of accounting numbers differ from one another.

1.3 The Study’s Objectives

This study’s main goal is to look into the dynamic relationship between market prices for listed companies on the Nigerian Stock Exchange and accounting numbers. Based on the problems observed, the specific goals are to:

Analyze how the share prices of companies listed on the Nigerian Stock Exchange are impacted by accounting information;

Identify the variations in Nigeria’s manufacturing and service sectors’ accounting data;

Examine the association between a company’s market value and its negative earnings for companies listed on the Nigerian Stock Exchange, and

Analyze the disparities between institutional and individual investors’ perceptions of the value of financial statements’ relevance to the valuation of stock.

1.4.1 Research Issues

The following specific research questions are developed in light of the aforementioned:

How much do the share prices of companies listed on the Nigerian Stock Exchange fluctuate as a result of accounting information?

Do the value and relevance of accounting information in Nigeria’s industrial and service sectors differ?

Exists a correlation between market values of companies listed on the Nigerian Stock Exchange and negative earnings?

Do institutional and individual investors’ perspectives on the usefulness of financial statements in valuing shares differ significantly?

1.5 Research Propositions

The following null hypotheses were examined in order to validate data analysis:

H0: Accounting information has little impact on the share prices of companies listed on the Nigerian Stock Exchange;

H0: In Nigeria, there are no appreciable variations in the value relevance of accounting information for the manufacturing and service sectors;

H0: Negative earnings and market prices of firms listed on the Nigerian Stock Exchange do not significantly correlate with one another.

H0: There are no appreciable distinctions between institutional and individual investors’ opinions regarding the importance of financial statements in equity valuation.

1.6 Importance of the Study

Nigeria is the most populous nation in Africa, home to 146.3 million people (Ibidapo-Obe, 2009), and the third-largest stock market on the continent, with a market worth of $82 billion US at the end of 2007 (Kumo, 2008). The ability of accounting information to explain changes in the security prices of listed businesses on the Nigerian Stock Exchange is still not well understood. The majority of the evidence in this field comes from the US or Western European nations, which have developed marketplaces in comparison to most underdeveloped nations.

According to Okonjo-Iweala and Osafo-Kwaako (2007), Nigeria’s economic growth rates from 2003 to 2006 averaged around 7.1 percent yearly. This represents a significant improvement over the previous ten years, when annual rates were on average 2.3 percent. It is crucial to emphasize that this might yet get better because the nation’s capacity to lead the region due to its economic growth. If Nigeria’s accounting information satisfies the requirements of both small and institutional investors, investors from all over the world may anxiously want to conduct business there. This is so because every nation’s accounting infrastructure must be developed if it is to have sustained economic growth (Emenyonu, 2007). Additionally, the start and finish of every expert investment research and investment are the financial history and projection of a company expressed in figures taken from standard accounting statements (Parker, 1967). Thus, the relevance can be succinctly stated as follows:

The results of this study could be utilized to test current hypotheses under extreme circumstances absent from developed economies, where the majority of earlier experiments were conducted;

Information is provided to investors to aid in making wise investment decisions;

Before rushing to adopt a single set of accounting standards, the results and conclusions may help the national standards setters understand the type of demand for accounting information by their local investment community, stakeholders, and public;

The Nigerian Accounting Standards Board values the work because it provides feedback on which accounting number is most frequently used for equity valuation in Nigeria and

By examining the value relevance of accounting data in the Nigerian stock market, this study fills a vacuum in the body of literature. The outcomes offer helpful support for other developing stock markets.

This study offers a roadmap for which accounting information investors appreciate or do not value, which should assist those who generate accounting information and those who establish standards in improving the value relevance of the most popular accounting number. In order to avoid information overload, companies should publish a Simplified Investor Summary Accounts (SISA) in addition to the legally required financial statements when preparing accounting for investment decisions.

1.7 Purpose of the Research

This research, which spans the years 2002 to 2008, sheds light on the value relevance of accounting information in the Nigerian stock market.

The tremendous rise of the Nigerian stock market from 2002 to 2007 and its dramatic fall in 2008 made this time frame a necessity. The market capitalisation of the Nigerian Stock Exchange (NSE) reached an all-time high of $82 billion US at the end of 2007 (Kumo, 2008). The sum is two times Nigeria’s current foreign reserve. Additionally, the Nigerian Stock Market experienced a huge increase in activity during those years, and share prices soared sharply before collapsing in the second half of 2008. Investors were all taking advantage of the boom in the Nigerian stock market prior to this collapse, earning fantastic returns as stock prices surged to previously unheard-of heights. Thus, the study’s attention is drawn to the time leading up to and immediately following this collapse.

There are also two schools of thought in accounting-information and measurement-based capital market research. While the information perspective is studied using primary data, the measurement viewpoint is covered in this study by concentrating on the long-term correlation between accounting information and market values of companies listed on the Nigerian Stock Exchange. Although this study only focuses on the equity for trading in shares of the listed firms, the term “stock market” refers to the total market of equity for trading in the shares and derivatives of the various companies.

All of the businesses registered on the Nigerian Stock Exchange between 2002 and 2008 make up the population for the purpose of measuring the overall Nigerian stock market response (measurement perspective) to accounting figures, including earnings, dividends, and net book value. Out of the total number of businesses listed on the Nigerian Stock Exchange year between 2002 and 2008, 68 businesses make up the sample.

The following factors are used to choose the companies:

During that time, the business had been listed on the Nigerian Stock Exchange, and

The company has the required financial statement information.

Additionally, the value relevance of accounting information is taken into account as well as institutional and individual investors’ perceptions. Institutional investors are represented by investment analysts working for stock brokerage firms, whereas individual investors are represented by other people’s opinions. Investment analysts are chosen because one of the most major sources of financial information for analysts is accounting information, and one of the most significant applications to which they apply themselves is valuing the companies (Rees, 1995). The primary users of financial accounting reports are investment analysts, therefore if accounting information is valuable to them, it is likely to be valuable to other individual investors as well (Mangena, 2004).