VALUE RELEVANCE OF FINANCIAL ACCOUNTING INFORMATION IN THE NIGERIAN CAPITAL MARKET
ABSTRACT
This study investigates the value relevance of financial accounting information in the Nigerian capital market. The objective of the study is basically to ascertain if there exist a relationship (positive or negative) between publicly available financial accounting information and share price movements in the Nigerian bourse.
The study employed the Ordinary Least Square (OLS) regression technique. This is especially important for a better understanding of the impact (or relationship) of some specified financial accounting information and share price movements in the Nigerian Stock Exchange (NSE).
The regression results from our specified model reveals that Earnings Per Share reported in the income statement of financial statement is the only value relevant financial accounting information and investors mainly depend on stock brokers and non-financial information (fads, rumours and hearsay) in executing their investment and divestment activities. Therefore, this study recommends that financial reporters should improve the quality of earnings and that stock brokerage firms should adequately train their staff since they are the main source of information to the investors. This recommendation is aimed at ensuring the growth and survival of the Nigerian bourse both in the immediate and long term.
TABLE OF CONTENT
CHAPTER ONE:
INTRODUCTION
Background of the Study                    
Statement of Research Problems                 
Relevant Research Questions                     
Research Objectives                         
Research Hypotheses                         
Significance of the Study                         
Scope of the Study                            
Limitations of the Study                     
Organisation of the Study                     
CHAPTER TWO
LITERATURE REVIEW
2.1    The History of Stock Exchange                 
2.2    The Nigerian Stock Exchange                 
2.3    Value Relevance                         
CHAPTER THREE
RESEARCH METHODOLOGY
3.0    Introduction                                     
3.1    Population and Sampling                     
3.2    Data Sources/Data Collection                    
3.3    Restatement of Research Hypothesis                 
3.4    Model Specification                         
3.5    Data Estimation Techniques                         
CHAPTER FOUR
4.0    Introduction                            
4.1    Correlation Matrix                        
4.2    Regression Results                            
4.3    Discussion of Regression Results                    
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATION AND CONCLUSION
5.1    Summary of Findings                         
5.2    Recommendations                     
5.3    Conclusion                             
5.4    Recommendations of Further Studies                
    Bibliography                             
LIST OF TABLES
Table 4.1: Correlation between stock price reaction and financial statement
information                            
Table 4.2: Weak form hypotheses Test and Marker Risk Regression results    
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
Numerous empirical studies have appeared in recent years concerning the value relevance of accounting information in some developed and emergent capital markets (see, for example Francis and Schipper, 1999; and Holthausen and Watts, 200l ). While many of these studies have provided empirical evidence supporting the value relevance of accounting information in the investment and divestment decisions of capital market participants; there are dissenters who have increasingly criticized (in recent time) the value relevance accounting information in stock market investment and divestment activities (Oyerinde, 2009). This has resulted in an increase in the number of empirical literatures in the developed countries creating impressions that accounting numbers have lost their value relevance (Dontoh, Radhakrishnan and Ronen, 2001; Ramesh and Thiagarajan, 1995).
These criticisms were based on theory of life cycle stages, high technology, fraud, rapidly changing business environment and increasing conservatism (Oyerinde, 2009; Brown, Lo and Lys, 1999). These belief also developed significantly in response to claims of traditional financial statements losing relevance because of the move from an industrialized economy to a high-tech, service oriented economy (Oyerinde, 2009; Collins, Maydew and Weiss, 1997). These notions were also supported by past empirical studies that investigated the association between accounting numbers and stock market prices, which showed that in most cases the association between accounting information and stock prices has been declining over time (Lev and Zarowin, 1999; Francis and Schipper, 1999; Core, Guay and Buskirk, 2003, Oyerinde, 2009).
Furthermore, such empirical findings have been greatly refuted by studies such as those of  Oyerinde (2009), Collins Maydew and Weiss (1997), Balachandran and Mohanran (2006). Such studies have asserted that the claims that accounting information have lost their value relevance is very premature and false. For instance, in a recent study Callao, Cuellar and Jarne (2006) provides evidence of the value relevance of net earnings figure. Gjerde, Knirsfla and Saettem  (2007) also provide evidence that the time trend of overall value-relevance of accounting information has not declined after controlling for changes in underlying economic variables. In addition, Oyerinde (2009) in her study of the value relevance of accounting information in the emerging Nigerian stock market provides revealing evidence of a relationship between accounting numbers and share prices in the Nigerian bourse.
While the majority of the studies previously cited on this topic were carried out in very advanced and developed capital markets, only very few were done in underdeveloped or emergent capital markets like that of Nigeria, which is located in sub-Saharan Africa. The purpose of this study is to wade into this controversy and reinvestigate, using the Ordinary Least Square (OLS) regression technique, whether accounting information has the ability to capture or summarize information that affects equity value. This is with the intent of determining whether or not there is a significant relationship or value relevance of accounting numbers and share prices in the Nigerian bourse (stock market). Specifically, this study aims at filling the gap in the empirical literature by investigating the value relevance of some popular accounting statements like the Balance Sheet, Income Statement and Cash Flow Statements. Some key figures contained in this statements such as Networth, Profit after tax, total liabilities and total assets will be incorporated into our model, which is intended to capture the value relevance of the Balance Sheet, Income Statement and Cash Flow Statement of some selected firms that are quoted on the floor of the Nigerian stock exchange.
1.2    STATEMENT OF RESEARCH PROBLEMS
A number of research work has been done internationally which highlights the value relevance of accounting information on stock market prices of developed capital markets. Such studies have also brought about a controversy in regards to whether or not such accounting information provided to the investing public is indeed significantly relevant and related to share prices.
In Nigeria, however, there has been paucity of research into this exciting aspect of stock price analysis due significantly to a lack of appropriate reliable data for statistical analysis, lack of technical skills to effectively utilize available statistical tools and a lack of interest in carrying out in-depth research into these aspect of the capital market.
It is against this background that the study attempts to determine the value relevance of accounting information in the Nigerian capital market. In specific terms, these problems which constitutes significant gaps in the existing literature are:
determine if stock prices respond to balance sheet information;
ascertain if income statements exert a positive influence on stock market prices;
determine if stock market prices are affected by the information content of cash flow statement.
1.3    RELEVANT RESEARCH QUESTIONS
The research questions in this study were derived from the earlier identified research problems. In essence, the research questions were designed in such a way that they reflected the research problems that were to be resolved. In specific terms, the following questions were answered in the course of conducting the research work:
Do stock prices respond to balance sheet accounting information?
Do income statement accounting information exert a positive influence on stock market prices?
Are stock market prices affected by the information content of cash flow statement.
1.4    RESEARCH OBJECTIVES
The aim of this study is to establish the relevance of Accounting Information on the Nigerian Stock Market.
The main objectives of this study is to establish the relevance of Accounting Information in the Nigerian bourse. More specifically however, the study aims at the following objectives:
ascertain whether stock prices responds to Balance Sheet Accounting Information.
determine the influence of income statement Accounting Information on stock market prices
ascertain the effect of information content of cash flow statement on stock market prices.
1.5    RESEARCH HYPOTHESES
The hypotheses to be tested will provide answers to the research questions and as well assist in dealing with issues raised in the research problems and objectives. The hypotheses are stated in the null form a follows:
Ho1:    Stock prices do not respond to Balance Sheet accounting information.
Ho2:    Income statements do not exert a positive influence on stock market prices.
Ho3:    Information content of cashflow statements does not exert a positive influence on stock market prices.
1.6    SIGNIFICANCE OF THE STUDY
There are several compelling reasons for undertaking this study. It will update existing body of knowledge by going a step forward in filling many of the obvious gaps in the controversy of the value relevance of accounting information in the stock market of developing and emerging economies (Nigeria inclusive). It is therefore expected that the study findings will be of immense benefit to policy makers of firms, government regulatory agencies such as Securities and Exchange Commission (SEC), Nigerian Stock Exchange (NSE) and Central Bank of Nigeria (CBN). It will also prove very useful to researchers, the investing public and members of the academia. The study will also point out the next direction in which capital market and financial reporting reforms (e.g. IFRS reporting) should focus in order to position our stock market for improved efficiency and effectiveness. Operators, investors and other participants in the capital market will also find the study beneficial as it will aid them in making more informed investment and divestment decisions.
Besides, the findings of this study will lay the foundation for other academia and research students (both home and abroad) to know what evidence exist in emerging economies  concerning the value relevance of accounting information or statements, on stock market prices. This it is hoped will significantly aid them in carrying out further research in this rather controversial and contentious area of finance and accounting.
1.7    SCOPE OF THE STUDY
The scope of this study will be limited to the Nigerian capital market with special reference to the accounting statements and share prices of selected firms whose equities are quoted on the Nigerian bourse (Nigerian Stock Exchange). For the study, accounting data and stock prices of five firms chosen from the list of Nigerian Stock Exchange (NSE) top thirty firms, will be analysed for the period spanning 1999 to 2008. The accounting data will majorly be sourced from the company’s annual income and financial statements (balance sheet inclusive).
The only restriction made in selecting the firms is that share price data must have been available for the entire period covered, i.e. the firms must have been in existence since January 1999, and share price quotations for their stock must also have been available since then. In addition, their financial statements must also have been made publicly available to the investing public since then (January, 1999).
Furthermore, according to Agbonifoh and Yomere (1999) the scope of a study can be defined geographically, temporally and in terms of the subject matter or population.
Temporally, our study can be defined as longitudinal in nature and scope and thus covers a specific time period (1999-2008). Geographically our study will cover stocks quoted on the floor of the Nigerian Stock Exchange. While our subject matter scope covers the field of finance and accounting. Finally the justification for the firms and stocks selected is based upon the fact that the firms are large, well known and thus easily could be an investors delight. Furthermore, they are industry leaders and are expected, as publicly quoted firms, to provide transparent financial statements prepared either according to the generally accepted accounting protocol (GAAP) or the international financial reporting standard (IFRS).
1.8    LIMITATIONS OF THE STUDY
The data utilized in this study is purely secondary in nature. This covers data on stock prices, total assets, total liabilities, net worth, sales/gross earnings amongst many others. Such data are often not accurate in emerging/developing economies (Nigeria inclusive) as a result of inadequate record keeping, inefficiency and malpractices on the part of the official statutory agencies. Also results from the data could be biased as a result of the imprecise measurement of variables, smallness of sample size, inability to obtain a purely random sample and other minor errors that could occur in the process of collating and analyzing data. Efforts will however be made to ensure that these limitations are significantly reduced.
1.9    ORGANISATION OF THE STUDY
The study is organized into five chapters as follows: chapter one provides the background to the study stating its objectives, hypotheses, the scope of the study and the limitations of the study. A review of related literature will be carried out in chapter two. The focus of chapter three is the research methodology with emphasis on model specification, estimation techniques, analytical tools, data collection and data requirements. Chapter four is concerned with data analysis as well as the various data presentation techniques to be used. The summary and conclusions from the study, recommendations offered and suggestions for further studies is covered in chapter five.