THE ROLE OF FINANCIAL STATEMENT IN INVESTMENT DECISION: A STUDY OF SELECTED INVESTORS OF NIGERIAN BANKS
GANYAM, IORCHER AMOS
A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTING, FACULTY OF MANAGEMENT SCIENCES, BENUE
STATE UNIVERSITY, MAKURDI, NIGERIA
IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF BACHELOR OF SCIENCE (B.SC.) DEGREE IN ACCOUNTING
I hereby declare that this project titled “The Role of Financial Statement in Investment Decision: A Study of Selected Investors of Nigerian Banks” is an original work carried out by me under the supervision of Mr Anthony Onoja of the Department of Accounting, Benue State University, Makurdi.
Name: Ganyam, Iorcher Amos Sign... Matric No: BSU/MS/ACC/10/3962 Date...
This project work has been read, corrected and approved as meeting the requirements for the award of Bachelor of Science (B.Sc.) Degree in Accounting, in the Department of Accounting, Faculty of Management Sciences, Benue State University, Makurdi.
Mr. Anthony Onoja Date
Dr. Paul Angahar Date
(Head of Department)
External Examiner Date
This project work is dedicated to God Almighty from whom all source of wisdom and knowledge flows and to my beloved parents Engr. and Mrs. Jude Ganyam.
I am particularly indebted to my project supervisor Mr. Anthony Onoja, for his relentless efforts in giving me constructive criticisms and guidance towards successful completion of the study.
I am equally grateful to all lecturers in the faculty of Management Sciences, especially those in the department of Accounting who taught and transmitted their invaluable knowledge to me.
With deep sense of gratitude, I acknowledge my beloved parents Engr. and Mrs. Jude Ganyam for making enormous sacrifices towards my educational pursuit and all other ramifications of life. The support of my brother, Martin Ganyam and my sister, Zoe Ganyam is also highly commendable. I remain grateful to Mr. Thomas Akpera, Mrs. Grace Utim, Mrs. Francesca Asagba, Mr. Robert Igba and Mr. Christopher Igba. They all were very helpful and I owe them immense thanks.
I also share my considerable gratitude to my friends and colleagues especially Teryila Ahura, Teghtegh Maurice, Benedict Ikwuje, Michael Adorowa, Bemor Unum, Moses Orhungu, Paul Iordye, Eugene Uchin, Andrew Otene and all those who were of assistance to me during the course of this study.
TABLE OF CONTENTS Title - - - i Declaration - - - ii Approval - - - iii Dedication - - - iv Acknowledgements - - - v Table of Contents - - - vi Abstract - - - x
CHAPTER ONE: INTRODUCTION 1.1 Background to the Study - - - 1
1.2 Statement of the Problem - - - 3
1.3 Objectives of the Study - - - 4
1.4 Research Questions - - - 4
1.5 Research Hypotheses - - - 5
1.6 Significance of the Study - - - 5
1.7 Scope of the Study - - - 6
CHAPTER TWO: REVIEW OF RELATED LITERATURE 2.1 Introduction - - - 7
2.2.1 Importance of Financial Statement - - - 9 2.2.2 Users of Financial Statements - - -
2.2.3 Qualities of an Ideal Financial Statement - - - -13
2.2.4 Components of Financial statements - - - - -15
2.2.5 Ratio Analysis - - - 18
2.2.6 Concept of Investment Decision - - - 20 2.3 Theoretical Framework - - -
2.3.1 Residual Income Valuation Model- - - 23
2.3.2 Present Value Model - - - 25
2.3.3 Decision Theories - - - -28 2.3.4 Market Efficiency - - - -29 2.4 Empirical Review - - - -32
3.1 Introduction - - - -36
3.2 Research Design - - -
3.3 Population of the Study - - - -36
3.4 Sample Size of the Study - - - -37 3.5 Sampling Technique - - - 37 3.6 Sources of Data - - - 37 3.7 Definition of Variables- - - 37 3.7.1 Dependent variable - - - -37 3.7.2 Independent Variables - - - -38
3.8 Techniques of Data Analysis - - - -38
3.9 Model Specification - - - 39
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction - - - -41 4.2 Data Presentation - - - -41 4.3 Data Analysis - - - 41
4.3.1 Data Validity Test - - - -42
4.4 Test of Hypotheses - - - 48
4.5 Discussion of Findings- - - 50
CHAPTER FIVE: SUMMARY, CONCLUSION AND
5.1 Summary - - - 53
5.2 Conclusion- - - 53
5.3 Recommendation s - - -
5.4 Suggestion for further study - - - -55
REFERENCES - - - 56
This study examines the role of financial statement in shareholders’ investment decision. Data relating to the study were obtained from the published annual reports of six selected banks in Nigeria for a period of 2009 to 2013. The data obtained were analysed using the multiple linear regression analysis and the results revealed that earnings per share have no significant role in shareholders’ investment decision while return on equity and dividend per share have significant roles in shareholders’
investment decision. The study recommends that shareholders should make proper investigation about the financial state of the company
of their interest and seek the advice of financial analysts so as to be properly guided in their investment decisions.
INTRODUCTION 1.1 Background to the Study
In Nigeria today, the need for channelling resources into investment is rapidly increasing. Individuals, investors and firms want to invest their current surplus fund most efficiently in the long term assets in anticipation of an expected flow of benefit over a given period of time.
Since investment performance is one of the most important factors for the success with banks, insurance, and other financial institutions (Wild et al. 2007), it then becomes very pertinent that decisions to invest are done with utmost certainty of benefits. The quality of investment decision made greatly relies on the value of the essential information that forms the source of that investment decision.
Of enormous value is the information published in the financial statements, which generally provides a synopsis of all the other activities of the organisation. Financial statement is acclaimed to provide reliable information about the financial position and performance of a company or business. It is to this regards that listed companies use financial statements as one of the major medium of communication with their shareholders and the general public (Osuala et al. 2012).
When financial statements are released, they can have large impacts on the business and on the investors of the company. This makes it mandatory for companies to ensure that financial statements published are accurate and reliable. In this regard, a lot of regulations exist both in Nigeria and abroad that defines the content and form of financial statement reports. The International Financial Reporting Standards (IFRS) defines the recognition and measurement of accounting transaction and the mandatory disclosures to be made in the financial statements. In
Nigeria, different acts such as the Companies and Allied Matter Act (CAMA) Cap 1990 and Bank and Other Financial Institution Act (BOFIA) 1990 put an obligation that the information content of the financial statement be expressed as a guarantee of compliance with the act’s requirements.
Financial statements are the primary information that firms publish about themselves and investors are the primary users of financial statements. Firms, companies and business organisations seek capital funds from investors and prepare financial statements to help investors decide whether to invest. Investors however expect the firm to add value to their investment and to return more than was invested and so it becomes necessary for them to read and understand the financial statements to evaluate the firm’s ability to do so.
Therefore, this study examines the role of financial statement in investment decision making in the Nigerian business environment.
1.2 Statement of the Problem
Examining the role of key accounting information contained in financial statements in shareholders’ investment decision in the banking sector has attracted significant research interest over a period of time. There are various studies that examine this relationship (Cheng & Yang,
2003; Sloan, 1996; Hribar & Collins, 2007). Most of these studies focus their investigations on the financial statement of banks in Asia, Europe and America with Africa specifically Nigerian banking sector receiving limited research attention.
In Nigeria, it has become a problem ascertaining the extent to which key accounting information contained in the financial statement of companies including Earning per Share (EPS), Return on Equity (ROE) and Dividend per Share (DPS), influence shareholders and prospective investors in making investment decision. It is observed that investors still consider non-accounting information such as frequency and regularity of dividend payout in making investment decisions and as such pay less attention to the financial statements of companies they intend to invest in.
It is from this backdrop that this study has been initiated to examine the role of key accounting information contained in financial statements in shareholders’ investment decision in the Nigerian business environment with specific reference to the Nigerian banking sector.
1.3 Objectives of the Study
The foremost objective of this study is to examine the role of key accounting information contained in financial statements in shareholders’ investment decision. Specifically, the following objectives are set to;
i. Examine how Earnings per Share (EPS) affect shareholders’ investment decision.
ii. Examine how Return on Equity (ROE) affects shareholders’ investment decision.
iii. Examine how Dividend per Share (DPS) affects shareholders’ investment decision.
1.4 Research Questions
i. To what extent do Earnings per Share (EPS) affect shareholders’ investment decision?
ii. To what extent does Return on Equity (ROE) affects shareholders’ investment decision?
iii. To what extent does Dividend per Share (DPS) affect shareholders’ investment decision?
1.5 Research Hypotheses
For the purpose of this study, the following hypotheses have been formulated in their null;
Ho1: Earnings per Share (EPS) have no significant role in
Ho2: Return on Equity (ROE) has no significant role in shareholders’
Ho3: Dividend per Share (DPS) has no significant role in
shareholder investment decision.
1.6 Significance of the Study
This study will be of significance to shareholders and to the investing public because proper investigation of the key accounting information contained in the financial statements will undoubtedly enhance efficient and effective investment decisions. This study will also be of benefit to financial analysts, potential investors and shareholders because it reveals what actually should form the basis of shareholders investment decision. Finally, this study will serve as a reference to students of this noble institution and other schools who may be interested to embark on a further research study of this nature.
1.7 Scope of the Study
The study empirically investigates the role of accounting information published in the financial statements on investment decision making by shareholders in the Nigerian banking sector. The study however concentrates on the financial activities of six commercial banks operating in Nigeria for a period of six years (2009-2013). This is to
ensure that the information and data used are timely, adequate and up to date.
LITERATURE REVIEW 2.1 Introduction
This chapter comprises of the conceptual and theoretical frameworks of the study. It also reviews several studies carried out by
various researchers relating to the role of financial statement on investment decision.
2.2 Conceptual Framework
Financial information is needed to predict, compare and evaluate a firm’s earning ability. It is also required to aid in economic decision making, investment and financial decision making. The financial information of an enterprise is contained in the financial statements.
Financial statement according to the Companies and Allied Matters Act (CAMA) 1990 is a document that consist the basic statements of accounts used to convey qualitative information of financial nature about a business to shareholders, creditors and others interested in the reporting company’s financial condition, results of operation, uses and sources of funds. Duru (2012) defined financial statement as a statement which conveys to management and to interested outsiders a concise picture of the profitability and position of a business. Faboyede & Mukoro (2012) supported that financial statements are the main source of information for major investment decisions including whether to lend money to a firm by investing in its bonds, or acquire an ownership stake in a firm by buying its preferred and common stock, or to buy warrant or options on a firm’s stock. Horngren & Harrison (2007) described financial
statement as documents that report on a business in monetary terms, providing information to help people make informed business decisions.
Financial statements are meant to communicate useful accounting information about the financial operations of a business to both internal and external users. The Nigerian Accounting Standard Board (NASB) describes the financial statement as the method of communicating to interested parties, information on the resource obligations and performance of the reporting entity. Pandy (2007) asserted that financial statements are important means of communicating the utilization of scarce economic resources by an enterprise as such need to contain all relevant information to be reliable and be readily understood by the users of the information.
Concurring with the above definitions, we can generally define financial statement as the audited annual report and accounts of an organisation which gives a synopsis of results of operations and the financial condition of an organisation for the period represented to the interested users.
Owole (2009) pointed out that the typical set of financial statements prepared by publicly held companies contains useful information as regard the success of operation of the firm, the financial position of the firm, the policies and strategies of management and insight into its future performance. However, financial statement can only be useful if they are well understood. Financial statement is the information source that is most directly related to items of interest to both existing and potential investors.
According to Ekwe (2013), the satisfaction of the needs of the various users of accounting information as contained in the financial statement can be accepted as the objective of financial statement. The objective of accounting information is emphasized by the various accounting principles because investors and creditors use them in making rational investment and credit decisions.
Financial statement fairly represents the business and economic situation of a company, which if studied carefully can lead to enhance and better decision making by various users. For instance, the balance sheet provides the observant with a clears picture of the financial condition of the company as a whole. It lists in detail the tangible and intangible assets that the company owns and owes, while the income statement summarises the income and expenditure of a company in a
given period of time. It shows the result of operation during these accounting periods. Also, the cash flow statement shows how cash is predicted to move around at a particular period of time. It is useful for planning future expense. It shows whether or not there will be enough cash to carry out the planned activities and whether or not the cash coming in will be enough to cover the expenses. It is useful in the determination of a company’s liquidity in a given period of time. Finally, Elis & Thacker (1998) averred that the most important purpose of the financial statement is to get the shareholders informed about the financial status of a company, especially as to its income and financial position.
2.2.2 Users of Financial Statements
The persons who receive accounting reports are termed the users of financial statements. The type of information a specific user requires from financial statements depends upon the kind of decision that the person intends to make. This is why financial statement is said to be user oriented (Olabisi, 2009; Olowe, 2009). The various users of financial statement can be grouped into two broad divisions, internal and external users.
i. Management: They require financial statements to manage the affairs of the company by assessing its financial performance and position so as to take important business decisions. They are concerned about the overall financial worth of the enterprise. ii. Employees: They use financial statement for assessing the
company’s profitability and its consequence on their future remuneration and job security.
The external users of financial statements include;
i. Shareholders: They use financial statements to assess the risk and return of their investment in the company and make investment decision based on their analysis. They use financial statements to determine the profitability, growth potential, stability and dividend policy of a firm.
ii. Prospective investors: They need financial statements to asses the viability of investing in a company. Investors may predict future dividends based on the profits disclosed in the financial statements. Investors who wish to become shareholders of the firm are more concerned about the firm’s long run survival and earnings. They bestow more confidence in those firms that show steady growth in earnings. Therefore, financial statements provide a basis for the investment decision of potential investors.
iii. Creditors: They are interested in the ability of the business to pay interest and repay the principal sum on due dates and as such rely on the financial statements.
iv. Customers: They use financial statements to assess whether a supplier has the resources to ensure steady supply of goods in future. This is especially vital where a customer is dependent on a supplier for a specific component.
v. Banks and other Financial Institutions: Use Financial statements to assess the credit worthiness of a business and ascertain whether to grant a loan or credit to a business. Any decision to lend must be supported by a sufficient asset base and liquidity.
vi. Competitors: They compare their performance with rival companies to earn and develop strategies to improve their competitiveness.
vii. The general public: They may be interested in the effects of a company on the economy, environment and local community. They are interested in the social responsibility and environment protection policies of an enterprise.
viii. Government: They require financial statements to determine correctness of tax declared in the tax returns. Government also
keeps track of economic progress through analysis of financial statements of business from different sectors of the economy.
2.2.3 Qualities of an Ideal Financial Statement
Qualitative characteristics of financial statements are attributes that enhance their meaningfulness to various users. According to Okpe (2005), published financial statements must possess the following qualities;
i. Relevance: For information that is disclosed in the financial statement to be useful at all, it is legally relevant. That is, it must be associated with the decisions it is designed to aid and facilitate. What is relevant for one group of financial statements users may not be relevant for another group of financial statement users, thus, there is no such thing as all-purpose financial statement in the context.
ii. Consistency: Financial statements should be able to ensure a consistent evaluation of companies working in a particular
industry. It should be consistent in the presentation and disclosure of accounting policies including their method of depreciation.
iii. Reliability: The financial statement should be free from error or bias. Users must have confidence in the financial statement without it being misleading or deliberately constructed in a manner that presents the entity in a favourable position.
iv. Comparability: Users of financial statement will want to compare the account with the previous account of their company and possibly with the account of other companies. Comparability adds a degree of transparency to financial statement by allowing comparison over time among entities.
v. Understandable: Financial statement can be somehow complicated for the uninformed to understand, but users must be able to understand the information within them. This applies to the format or layout of the statement, the terms used in the statement and the policies, methods and assumptions utilized in preparing the statement.
vi. Timeliness: Users of financial statement make use of current or up to-date information more than out dated information. The data of the publication of any financial statement or report should be
soon after the end of the period to which the report relates, as corporation is geared towards the provision of information for decision making. Unnecessary delay in the preparation of financial statement may lose their relevance.
vii. Objectivity: Information that is free from bias will increase the reliance people have on financial statements. Therefore, it is essential that the information is prepared as objectively as possible.
viii. Accuracy: The financial statement should disclose correct and accurate information about the profitability and financial position of a business. They should only factual information. No false information is to be included. False information could lead to wrong decision making.
ix. Uniformity: Accounting practices should be uniform both within the corporations and other organizations. Ideal financial statement of one enterprise should be readily comparable with those of another in the same industry. Nevertheless, adoption of different accounting policies like in the method of depreciation and stock pricing has made this difficult.
x. Verifiability: Financial statement should disclose information which can be verified from the records of the company. Qualified
individuals working independently of one another should be able, upon examination of the same data or to derive similar conclusion.
2.2.5 Components of Financial statements
According to Faboyede & Mukoro (2012) the components of financial statement in Nigeria are specified by two bodies including the Company and Allied Matters Act (CAMA) and Statement of Accounting Standards SAS N0.2 issued by the Nigerian Accounting Standard Board (NASB). The bodies state that “all accounting information of an entity should be disclosed and presented in a logical, clear and understandable manner”. Therefore, the components of financial statement include; as highlighted by the Statement of Accounting Standard SAS N0. 2, the components of a financial statement include;
i. Balance sheet ii. Income Statement iii. Cash flow statement iv. Value added statement
v. Five year financial summary vi. Notes on the accounts
According to Popoola, et al (2014), the most essential components of financial statements to look when investigating the quality of entire business or making decision for the future are; balance sheet, income statement, cash flow statement, value added statement and five year financial summary.
i. Balance Sheet: This is the fundamental financial statement that represents company’s financial position and the basis for estimating the security of a business (Zager & Zager, 2006). This is a financial statement showing the assets, liabilities and net equity of a company at a given point in time usually at the end of the year. It shows the financial position of a business hence the reason why most authors refer to it as statement of financial position.
ii. Income Statement: Aborde (2005) stated that, income statement can cover any period of time, but is usually prepared monthly, quarterly or annually for the planning and controlling purposes. It is a financial statement that gives a company’s operating results for a specific period of time. It is also referred to as earnings reports operating statement. Statements normally cover a year of operations. Its objectives include the measurement of capital maintenance and income distribution. In
this statement, operations are divided into two categories of transactions, sales and revenue.
iii. Cash Flow Statement: Olabisi (2009) asserted that cash flow statements can be prepared from the information contained in the balance sheet at the start and period in conjunction with the profit and loss account, bank and cash account, supplemented by additional information and data. Simply stated, cash flow statement means a statement showing changes or movement of cash or cash equivalent during a given period. Briefly it may be stated as showing various sources of cash inflows and various heads of cash outflows. It is prepared from income statement and changes in the working capital (current assets less current liabilities). Some of the objectives of cash flow statement is to reveal inflow of cash from various activities, to reveal actual cash position of a firm, to help in short term planning, to Reveal the liquidity of the firm and to Forecast weakness Comparison with budget.
iv. Value Added Statement: This is a statement highlighting on the performance of a firm in wealth creation. The importance of value added statement relies extensively upon its value to a
potential user. It provides a sound base for more realistic decision making (Akinsoyime, 1990).
v. Five Year Financial Summary: According to Akinadewo (2012), five year financial summary is an extraction of financial information in the balance sheet and profit and loss account. Financial summary gives the benefit of understanding the movements of the financial analysis of a firm, which will aid the investor to decide on either to invest on short term or long term basis. Five year financial summary enables users to have some ideas of trends in a company over a period of time. It is also used to asses and forecast future performance of a company (John, 1986).
2.2.5 Ratio Analysis
Financial ratio is the relationship between two or more financial or statistical data in a financial statement or management account (Aborde, 2005). It may be expressed as another figure percentage of or in relation to another figure or group of figures in the same financial statement. Ratio analysis involves comparison of useful interrelated figures over a number of years to establish a trend. In assessing the financial statement of any particular firm, investors try to know how the firm had been operating over the years. From the answer they get by using ratio
analysis, they would then be able to know whether things are going well with the firm or not. In line with this argument, the kind of ratio used will reflect the nature of the business that is being treated. Weston and Brigham (1984) divided the ratios into five fundamental types, which are;
i. Liquidity Ratio: This ratio measures the firm’s ability to meet its maturing short-term (current) obligations.
ii. Leverage Ratio: This ratio measures the proportion of debt and equity in financing the firm’s assets. It relates to the study of proportions of various types of capital in the structure of the firm. iii. Activity Ratio: This ratio measures how efficiently and
effectively the firm is utilizing its resources management overall effectiveness as shown by the returns generated on sales and investment.
iv. Growth Ratio: measures the firm’s ability to maintain its economic position in the growth of the economy and industry. v. Valuation Ratio: which are the most complete measures of
performance because they reflect risk ratios and return ratios. Valuation ratios are of great importance since they related directly to the goal of maximizing the value of the firm and shareholders wealth.
The list of ratios is not exhaustive rather it is tailored to the nature of the problem, which it is intended to help in solving. According to Olabisi (2009), the needs of financial statement users are not normally the same. This depends largely on the type of user and the purpose for which the information is required. However, the various needs for which ratio analysis and financial statement analyses are required include;
i. Performance measurement: This includes appraising the performance of an organisation, a division, product or services. ii. Investment and divestment decision: This allows a potential
investor to analyse the financial statements to guide in either investing in a particular business or not. However, an existing investor does that to either invest or divert shares in a particular company.
iii. Liquidation and reorganisation decision: This helps to determine either to liquidate a business or to reorganise the business in form of business combination, merger, acquisition or internal reconstruction.
iv. To measure the strengths, weaknesses, opportunities and threats of an economic unit or business entity.
As postulated by Pandey (2007), investment decisions or analysis has to do with an efficient allocation of capital. It involves a decision to commit the funds to the long-term assets. Such decisions are of considerable importance to the firms and investors since they tend to determine its value size by influencing its growths, profitability and risk.
The investment decisions of a firm are generally known as the capital budgeting decision which may be defined as the firm’s decision to invest its current funds most efficiently in the long-term assets in anticipated of an expected flow of benefits over a series of years. Any situation where capital expenditure decisions are made or taken, they are based primary with measurement of capital productivity which provides an objective means of measuring the economic worth of individual investment proposals in order to have a realistic basis for choosing among the firm’s long run property (Pandey 2007). The long-term asset is those which affect the firms operation beyond one year period. The firm’s investment decision would generally include expansion acquisition, modernization and replacements of the long-term assets.
Future benefits of investment are difficult to measure and cannot be predicted with certainty. Risk in investment arises because of the uncertain returns. Investment proposals should therefore, be evaluated in terms of expected return and risk. Beside the decision to commit funds in
new investment proposals, capital budgeting also involves replacement decisions that are decision of recommitting funds when an asset becomes less productive or non-profitable. The correct cut-off rate in investments is the opportunity cost of capital which is the expected rate of return that an investor could earn by investing in financial assets of equivalent risk.
It is significant to emphasize that expenditures and benefits or an investment should be measured in cash. In an investment analysis, it is cash flow which is important, not the accounting profit. It may also be pointed out that investment decisions affect the firm’s value. The firm’s value will increase if investments are profitable and add to the shareholder’s wealth. These increases are reflected in the financial statement of the firm, which invariably are used as tool for investment decisions owing to certain analysis inherent in them.
2.3 Theoretical Framework
In the 1960s, the emphasis of value relevance of accounting information was on the usefulness of accounting to individual users-which is also synonymous with information perspective. This perspective was pioneered by Ball and Brow in1968. Ball & Brown (1968) who are the first to attempt a value relevance test do not make any reference to theory (Klimczak, 2009). Despite the difficulties of designing experiments
to test the implications usefulness, they established that security market prices do respond to accounting information (Scott, 2003). However, their study was based on capital market theories prevalent at the time. Ball and Brown assume that the Efficient Market Hypothesis is maintained. Studies which followed continued to use diverse econometric methods, but there was still no comprehensive theory behind the tests.
However, in mid1990 the emphasis was shifted from information perspective to measurement perspective - that is, stock market reaction to the aggregate stock market (Bernard, 1995; Feltham & Ohlson, 1995; Bao & Chow, 1999 and Beisland, 2009. The Ohlson clean surplus theory also refers to as Residual Income Valuation Model (RIVM) provides a framework consistent with this measurement perspective known as balance sheet approach (Ohlson, 1995). The theory shows that the market value of the firm can be expressed in terms of fundamental balance sheet and profit and loss components (Scott, 2003). This study adopts a simplified version of Ohlson’s clean surplus theory following Beisland (2009). This section discusses the theory, prior studies that have used the Ohlson’s clean surplus theory and the relevance of RIVM to this present study.
Ohlson (1995), who bases his theory of valuation on the residual income valuation model (RIVM), claims that under certain conditions share price can be expressed as a weighted average of book value and earnings. Ohlson’s clean surplus theory shows that the market value of the firm can be expressed in terms of income statement and balance sheet items (Scott, 2003). Residual Income Valuation Model defines total common equity value in terms of the book value of stockholders’ equity and net income determined in accordance with GAAP (Halsey, 2001). The model has generated much empirical research examining the comparative valuation relevance of the balance sheet and the income statement components.
Residual Income Valuation Model (RIVM) has become prominent in the accounting literature (Spilioti & Karathanassis, 2010). This is because it has had some success in explaining and predicting actual market firm value (Scott, 2003). Prior empirical studies that find book value and discounted future abnormal earnings have vital role to play in the determination of equity prices include Bernard, (1995); Burgstahler & Dichev, (1997); Penman & Sougiannis, (1998); Dechow, et al. (1999).
Bernard (1995) is one of the first to gauge the value relevance of accounting data. He compares the explanatory power of a model in which share price is explained by book value and earnings versus a
model of share price based on dividends alone. He finds that the accounting variables dominate dividends, which is interpreted as confirming the benefits of the linkage between accounting data and firm value.
Burgstahler and Dichev (1997) develop and test an option style valuation model and find that the relevance of earnings versus book value varies by return-on-equity. Dechow, et al. (1999) evaluate the empirical implications of Ohlson’s model. These studies claim that the Ohlson’s model breaks new ground on two fronts namely:
a. The model provides a more complete valuation approach and b. The model explains stock prices better than the models based on
than the discounted cash flow model.
Ohlson’s model has important implication for this study as it specifies the relation between equity values and accounting variables such as earnings, dividends and book value. This is unlike the other models that make no appeal to book value or residual income.
Spilioti & Karathanassis (2010), claim that RIVM has three advantages. Firstly, special emphasis is given to book value, thus avoiding any economic hypotheses about future cash flows. Secondly, the treatment of investments is such that they are treated as a balance sheet factor and not one that reduces cash flows (Penman & Sougiannis,
1998). Thirdly, as Bernard (1995) has shown, for shorter horizons the Ohlson formulation is more suitable than the dividends valuation model, as the latter underestimates share value. Other related capital market theories that assist in explaining relevance of information are herein reviewed.
2.3.2 Present Value Model
The present value model is very crucial in relevance of information to financial statement users. The model is extensively used in finance and economics and has had significant impact on accounting over the years (Scott, 2003). For the purpose of this model, relevant information is defined as information about the company’s future economic prospects-its dividends, cash flows and profitability. The present value model is discussed under two conditions.
Present Value under Certainty: Present value under certainty connotes an ideal condition where future cash flows of the firm and the interest rate in the economy are publicly known with certainty. The present-value relation says that, under certainty, the value of a capital good or financial asset equals the summed discounted value of the stream of revenues which that asset generates(LeRoy, 2005). According
to Scott (2003), the following additional assumptions are presumed of present value under certainty.
i. Relevant financial statements about the firm’s steam of future dividends are given to investors. The emphasis is on dividend irrelevancy because the investors can invest any dividends they receive at the same rate of return as the firm earns on cash flows not paid in dividends.
ii. Company’s net income plays no role in firm’s valuation. The Balance sheet items contain all relevant information. In other words, market valuation of assets and liabilities can serve as indirect measures of value of the company. This is because the cash flows are known and can be discounted to provide balance sheet valuations. The implication is that, though the net income is “true and correct”, it conveys no information that helps investors predict future economic prospects of the firm. The investors can easily calculate it for themselves.
iii. The financial statements are perfectly reliable. Put differently, the financial statements are precise and free from bias and
iv. The market value of an asset equals the present value of its future cash flows because of the principle of arbitrage.
Present Value under Uncertainty: The main difference between the uncertainty and certainty cases is that expected net income
and realized net income need not be the same under uncertainty. However, financial statements based on expected present values continue to be both relevant and reliable. According to Scott, (2003), Ideal conditions under uncertainty are characterized by a given, fixed interest rate at which the firm’s future cash flows are discounted, a complete and publicly known set of states of nature, state probabilities objective and publicly known and state realization publicly observable.
The following additional assumptions are presumed of present value under uncertainty:
i. Financial statements are both completely relevant and reliable ii. Balance sheet fair values can be determined directly through
expected present values or market values.
iii. Income statement still has no information content when abnormal earnings do not persist.
In practice, present value model faces some severe problems. This is because a theoretically well – defined concept of net income does not exist in real world (Scott, 2003). In order to tackle this problem, there is a need to study an important concept in accounting – the concept of decision usefulness.
Accountants have decided that investors are the major of users and as a result have turn to various theories in economics and finance particularly, to theories of decision and investment, to understand the type of accounting information investors need (Scott, 2003). The real world is not characterized by ideal conditions. Scott, (2003), states that theoretically it is impossible to prepare financial statement that is both reliable and relevant. This is because present value model that is reliable is less relevant. While historical cost based accounting is reliable but not relevant. Relevant financial statement is defined as ones that showed the discounted present values of the cash flows from the firm’s assets and liabilities (Scott, 2003). The decision usefulness concept first appeared in the American Accounting Association (AAA) monograph in 1966. The decision usefulness approach to accounting theory takes the view that if it is not theoretically possible to prepare correct financial statement, at least, it is essential to make historical cost-based statement more useful (Monograph, 1966). This was reinforced by the 1973 True blood Commission. Accountants must now pay much closer attention to financial statements users and their decision needs, since under non – ideal situations it is not possible to read the value of the company directly from the financial statements (Scott, 2003).
According to Beisland (2009), an objective of financial reporting is to assist investors in valuing equity. For financial information to be value relevant, it is a condition that accounting numbers should be related to current company value. He further claims that if there is no association between accounting numbers and company value, accounting information cannot be termed value relevant and, hence, financial reports are unable to fulfill one of their primary objectives.
2.3.4 Market Efficiency
Efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". There are three major forms of the hypothesis: "weak", "semi-strong", and "strong". Weak EMH claims that prices on traded assets (for example, stocks, bonds, or property) already reflect all past publicly available information. Semi-strong EMH states that prices reflect all publicly available information and that prices instantly change to reflect new public information. Strong EMH additionally claims that prices instantly reflect even hidden or "insider" information. Efficient market theory implies that market will react quickly to new information. Thus, it is important to know when the accounting report first became publicly known. The accounting report is informative only if it provides data not previously known by the market.
Stock market thrives on information. This is because information plays an essential role in reducing the investors' challenges in the capital market. Information is important to investors in helping them evaluate investment opportunities to decide how to allocate their savings. In addition, it is also important because it enables investors to monitor whether their resources have been used wisely by managers. Markets where information is irregular give opportunities for investors who are more informed to take advantage of those who are less informed, and make it more expensive for investors to buy or sell a security without affecting its price.
As a result of the important role of information to the market, stock exchanges word-wide, set listing and post-listing requirements for companies seeking quotation. For instance in Nigeria, the post-listing requirements of the NSE laid emphasis on the timely release of information. Quoted companies are required to provide the market with information about their operations to the public. This information includes quarterly, half-yearly and yearly financial accounts. However, the investors in Nigeria have suffered untold hardship due to lack of regular and reliable information from the listed companies on NSE (Goddy, 2010).
In Nigeria, Nigerian stock market is efficient in the weak form and follows a random walk process (Olowe, 1999 and Okpara, 2010). The implication is that all information conveyed in past patterns of a stock’s price is reflected in the current price of the stock. Therefore, it is ineffectual to select stocks based on information about recent trends in stock prices. Olowe (1999) uses data of an end of the month quoted stock prices of 59 randomly selected from January 1981 to December 1992 on the Nigeria stock exchange and employs a sample autocorrelation test. The study concluded that the Nigeria stock market appeared to be efficient in the weak form. Kukah et al. (2006) focus their study on market indices in local currencies rather than prices of individual stocks. They use the capitalization weighted index of all listed stocks. They use both parametric and non-parametric test in determining the efficiency of the Nigerian stock market, according to them, the results of the parametric tests show that the Nigerian capital market is weak form efficient while the parametric tests showed that the market is not weak - form efficient. Their results are somewhat mixed.
The role of an efficient market cannot be overemphasized. According to Olawale (2004), it creates an enabling environment for a faster, sustainable and socially equitable economic growth. Elakama (2004), states that an efficient stock market mobilizes and allocates
greater proportion to those companies with the highest prospective rates of returns after giving due allowance for risk. The allocating function is critical in determining the overall growth of the economy. It is also a conduit for channelling long term funds to productive sectors. Efficient stock market promotes the control of the economy by constituting itself into a stabilization agent of the government. It also performs the role of a protector to the investors.
2.5 Empirical Review
Oabisi (2009) examined the quantum of influence the financial information has on decisions to invest in a particular stock. The study focused on selected public quoted banks in Lagos metropolis. The study population comprised of all the middle management and management staff in the registrar’s departments of the six selected banks. A well-structured Likert Scale questionnaire (a3 point rating scale) was designed to collect data for the study. Hypotheses were tasted using Chi-square statistical method. I was discovered that adequate, authentic and accurate financial information is a major ingredient for decision to invest or not in stocks of quoted companies.
Perera & Thrikawala (2009) researched on relevance of accounting information on investor’s stock market decisions in commercial banks registered under the Colombo Stock Exchange (CSE) in Sri Lanka. The
relevance of accounting information was measured by correlation coefficient between Market Price per Share (MPS) and selected accounting information such as Earnings per Share (EPS), Return on Equity (ROE) and Earnings Yield (EY). The data analysis was based on the accounting information in the published financial statements of commercial banks registered under Colombo Stock Exchange (CSE). It covered between five years.
According to the findings, there is a relationship between accounting information and Market Price per Share. It further revealed that investors still consider accounting information which is contained in the published financial statements of commercial banks registered under Colombo Stock Exchange (CSE) for the stock market decisions in Sri Lanka.
Osuala et al. (2012) worked on the effect of information content of financial statement on shareholders’ investment decision in some selected firms. In order to determine the relationship between information contents of financial statement and shareholders’ investment decisions, the researchers used some of the key contents of financial statement including profitability, Dividend Per Share (DPS), Earnings Per Share (EPS), leverage and liquidity as proxy variables while shareholders investment decision was represented by change in number of shares.
Data for the study was obtained from the published annual reports of selected firms. Regression model was employed to establish the relationship between the variables.
The findings indicated that shareholders in the Nigerian Capital Market do not rely much on financial statements as a major determining factor for their investment decision. It was observed that other factors or variables outside firms’ annual reports such as regularity of dividend payment and market price of shares are vital to shareholders in their investment decision
Ekwe (2013) carried an investigation on the degree of reliance of published financial statements by corporate investors. The study employed survey research design by which data was generated by means of questionnaire administered on one hundred and fifty corporate investors and senior management officials of selected banks. The descriptive statistics and percentage analysis were used for the data analysis and the hypotheses were tasted using t-test statistic. The result revealed that one of the primary responsibilities of management to the investors is to give a standardized financial statement evaluated and authenticated by a qualified auditor or financial experts. It also showed that investors do understand the financial statement well before making investment decisions. The result analysis indicated that investors depend
heavily on the credibility of auditors/financial expert approval of financial statement in making investment decisions and as such published financial statement is very important in the investors’ decision making.
Popoola et al. (2014), investigated on published financial statement as a correlate of investment decision among commercial bank stakeholders in Nigeria. A correlation design was used in the study. 180 users of published financial statement were purposively sampled from Lagos to Ibadan. Data generated were analysed using Pearson Correlation and Regression. The findings of the study revealed that balance sheet is negatively related with investment decision, while income statement, notes on the accounts, cash flow statement, value added statement and five year financial summary are positively related with investment decision. The findings also revealed that components of published financial statement significantly predict good investment decision so it was suggested that Nigerian banks and professional bodies should instigate programmes that will increase the knowledge of stakeholders on published financial statements.
This study therefore fills the gap in literature by investigating the extent to which key information in the financial statement affects the investment decision of shareholders in the banking sector.
The main objective of this study is to examine the role of financial statement in shareholders’ investment decision. To ensure that the set objectives of the study are achieved, this chapter examine the methodology employed in the investigation. In this regard, this chapter focuses on research design, the population of the study and the study
sample. The chapter also covers sources of data collection, data analysis techniques, definition of variables and the model of the study.
3.2 Research Design
An ex-post facto research design is adopted for the study. Ex-post facto research design involves ascertaining the impact of past factor(s) on the present happening or event. The choice of the ex-post facto research design for this study is borne out of its strengths as one of the most appropriate design for studies that use secondary data involving dependent and independent variables.
3.3 Population of the Study
The population of the study covers the 15 deposit money banks currently listed on the Nigerian Stock Exchange.
3.4 Sample Size of the Study.
The Study only concentrates on six selected quoted banks and their activities for a period of 5 years (2009-2013). These banks include; Zenith Bank Plc, Fidelity Bank Plc, First Bank Plc, United Bank for Africa Plc, Access Bank Plc and First City Monument Bank Plc.
3.5 Sampling Technique
The study adopts a purposive sampling technique. The six selected banks were selected due to the availability of data required for the study.
3.6 Sources of Data
Data used in this study were obtained from the yearly published annual reports and accounts of the selected banks.
3.7 Definition of Variables
This study incorporates the following variables which are briefly explained below.
3.7.1 Dependent variable
Number of Shareholders (NOS): This includes the number of individuals, groups, or corporate organisations that legally owns one or more shares in a company at a particular period of time. This shall be obtained from the directors report column in the annual reports and accounts of the selected banks.
3.7.2 Independent Variables
Earnings Per Share (EPS): It shows the earnings available to the owners of each share of common stock. Earnings per share is determined as follows;
EPS=(Profits after taxes−Preferred stock dividends) Number of shares of common Stock outstanding
Return on Equity (ROE): Return on equity is the bottom line measure for the shareholders, measuring the profits earned for each amount invested in the firm's stock. Return on equity is measured as follows;
ROE= Net Income Shareholder Equity
Dividend Per Share (DPS): This represents the fraction of money paid to the stockholders out of the income after taxed. Dividend per share is determined as follows;
DPS=Totalcash dividends Net income
3.8 Techniques of Data Analysis
This study is set to examine the causal influence of financial statement on investment decision. In order to achieve this objective, several data analytical techniques descriptive statistics, regression and correlation analysis were deployed in the investigation. The study uses descriptive statistics to summarize the collected data in a clear and understandable way using numerical approach.
The study further adopts the use of correlation analysis to ascertain the relationship between the dependent and explanatory variables, and to investigate the direction of such relationship.Furthermore, linear regression was used to define the dependent variables using the
explanatory variables with the t-test statistics used to test the study’s hypotheses.
3.9 Model Specification
The following multiple regression model has been formulated to guide the researcher in the investigation.
Number of Shareholders = ƒ (Financial statement) NOS = ƒ (EPS, ROE, DPS)
NOS = α + β1EPS + β2 ROE+ β3DPS + u
NOS = Number of Shareholder
EPS = Earnings Per Share ROE = Return of Equity DPS = Dividend Per Share
‘ α ’ = alpha, represent the model constant
β1 – β3 = Beta, representing the coefficients of variables
u = is the stochastic variable representing the error term in the model. It is usually estimated at 5% (0.05) level of significance.
3.10 Decision rule
This study shall accept and reject the null and alternative hypotheses using the following set criteria.
Accept the null hypothesis if the critical value of t under 0.05 for a two tail test in the t-table is greater than the calculated value.
Reject the null hypothesis if the critical value of t under 0.05 for a two tail test in the t- table is less than the calculated value.
DATA PRESENTATION AND ANALYSIS
This chapter presents analysis and interpretation of the data generated for the study, test of hypotheses and discussion of findings.
4.2 Data Presentation
In an attempt to provide answers to the research questions raised, achieve set objectives and test hypotheses for this study, data was collected on the number of shareholders (NOS), earnings per share (EPS), return on equity (ROE) and dividend per share (DPS) from the annual reports of six deposit money banks including Zenith Bank Plc, Fidelity Bank Plc, First Bank Nigeria Plc, United Bank for Africa Plc, Access Bank Plc and First City Monument Bank Plc for the period of 5 years (2009-2013) which gave rise to 30 data points used for the study (see Appendix).
4.3 Data Analysis
For the purpose of testing the hypotheses formulated for the study, the data were analyzed using the Statistical Package for Social Science (SPSS) version 20. The results are presented below.
4.3.1 Data Validity Test
In order to ensure that the results obtained are robust, diagnostic tests are performed. In an attempt to detect multicollinearity, the Variance Inflation Factor (VIF) statistics was computed. A VIF greater than
10 is usually considered problematic (Gujarati & Sangeetha, 2007). Therefore, since the VIF of all the independent variables as shown in table 4.4 were consistently less than 10, it indicates the complete absence of multicollinearity among the variables.
Table 4.1: Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
NOS 30 5.18 6.12 5.6886 .26635 EPS 30 -.707 3.051 .84937 .896922 ROE 30 -.980 .219 .04830 .206198 DPS 30 .050 1.750 .58297 .438880 Valid N (list wise) 30
Source: SPSS output, Version 20
The Descriptive statistics displays a univariate summary statistics for the variables used in the study. It shows the number of observation, maximum, minimum, mean and standard deviation of the data used for the study as shown in table 4.1.
Table 4.1 presents the descriptive statistics for both the dependent and explanatory variables of the study. N which denotes the number of observations for the study reflects a value of 30 indicating that the number of observation for the study is made up of 6 Banks for a period of 5years (2009-2013).
The number of shareholders (NOS) shows a minimum value of 5.18 and a maximum value of 6.12. This means that minimum number of
shareholders from the 5 banks under investigation stood at 151,356 (antilog of 5.18) while the maximum stood at 1,318,257 (antilog of 6.12). The table also shows a mean of 5.6886 with a standard deviation of 0.26635, indicating that on average, the number of shareholders stood at 488,203 (antilog of 5.6886) with a fluctuation of 0.26635 during the period under investigation.
The earnings per share (EPS) reflect a minimum value of -0.707 and a maximum of 3.051. It also reveals a mean value of 0.84937 and a standard deviation of 0.896922, indicating that on average EPS stood at 0.84937 with fluctuations at the tune of 0.896922.
The return on equity (ROE) reflects a minimum value of -0.980 and a maximum of 0.219. It further reveals a mean of 0.04830 and a standard deviation of 0.206198, indicating that with fluctuations to the tune of 0.206198, the average ROE stood at 0.04830
The dividend per share (DPS) reflects a minimum value of 0.05 with a minimum of 1.75. It further reveals a mean of 0.58297 with a standard deviation of 0.43888, indicating that on average, DPS stood at 0.58297 with a fluctuation of 0.43880
Table 4.2: Correlation Analysis
NOS Pearson Correlation 1 .590 ** .453* .417* Sig. (2-tailed) .001 .012 .022 N 30 30 30 30 EPS Pearson Correlation .590 ** 1 .596** .768** Sig. (2-tailed) .001 .001 .000 N 30 30 30 30 ROE Pearson Correlation .453 * .596** 1 .297 Sig. (2-tailed) .012 .001 .111 N 30 30 30 30 DPS Pearson Correlation .417 * .768** .297 1 Sig. (2-tailed) .022 .000 .111 N 30 30 30 30
**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).
Source: SPSS output, Version 20
Table 4.2 above, measures the relationship between the dependant variable (NOS) and the explanatory variables (EPS, ROE and DPS).
EPS shows a correlation coefficient of 0.590, indicating that there is positive relationship between NOS and EPS. The relationship is significant at 1% and not significant at 5% level of significance as revealed in table 4.2 above.
ROE shows a correlation coefficient of 0.453, indicating that there is a positive relationship between NOS and ROE. However, unlike EPS, the relationship between NOS and ROE is statistically significant at 5% level of significance.
DPS shows a correlation coefficient of 0.417, indicating a positive and significant relationship between NOS and DPS at 5% level of significance.
Table 4.2 above also shows the absence of multicollinearity among the explanatory variables because all the correlation values in respect to the study variables are less than 0.8 which is considered harmful for the purpose of analysis (Gujarati & Sangeeta, 2007).
Regression analysis is the main tool used for data analysis in this study. Regression analysis shows how one variable relates with another. The result of the regression is hereby presented in this subsection of the study.
Table 4.3: Model Summary
Model R R Squar e Adjuste d R Square Std. Error of the Estimate
Durbin-Watson R Square Change F Change df 1 df 2 Sig. F Change 1 .736a .542 .526 .22411 .542 4.988 3 26 .007 1.104
a. Predictors: (Constant), DPS , ROE, EPS b. Dependent Variable: NOS
Table 4.3 above displays the model summary of the explanatory variables: earnings per share (EPS), return on equity (ROE) and dividend per share (DPS) regressed with a common dependent variable number of shareholders (NOS).
From Table 4.3, the R value stood at 0.736. The R value measures the relationship between the dependent and independent variables. Thus an R value of 0.736 (73.6%) indicates that, there exist a strong relationship between the dependent and the independent variables.
The table also reflects a R2 value of 0.542. R2 which the coefficient of determination, measures the percentage of the total change in the dependent variable; number of shareholders (NOS) that can be explained by the independent or explanatory variables; earnings per share (EPS), return on equity (ROE) and dividend per share (DPS). Thus the R2 value of 0.542 indicates that earnings per share (EPS), return on equity (ROE) and dividend per share (DPS) account for 54.2% of the total variation in the number of shareholders (NOS) while the remaining 45.8% (100-54.2) of the variation could be explained by other variables not considered in this model. Such variables may include earnings yield (EY), leverage, liquidity and return on assets (ROA).
The adjusted R as shown in table 4.3 reflects a value of 5.26, indicating that if the entire population is considered in this model, the result will deviate by 1.6% (54.2-5.26). The significant F change as revealed in table 4.3 reflects a value of 0.007 which is less than 0.05, indicating that the whole model is statistically significant at 5% level of significance. Table 4.4: Coefficients Model Unstandardiz ed Coefficients Standardize d Coefficients
T Sig. Correlations Collinearity
Partial Part Toleranc e VIF 1 (Constant) 5.68 9 .041 139.02 9 . 000 EPS .066 .042 .249 1.591 . 124 .249 .298 . 249 1.000 1.00 0 ROE .089 .042 .335 2.142 . 042 .335 .387 . 335 1.000 1.00 0 DPS .117 .042 .438 2.800 . 009 .438 .481 . 438 1.000 1.00 0 a. Dependent Variable: NOS
Source: SPSS output, Version 20
Table 4.4 above presents the model coefficients in respect to the independent variables: earnings per share (EPS) return on equity (ROE) and dividends per share (DPS). The regression results as presented in table 5 above to determine the influence of earnings per share (EPS) return on equity (ROE) and dividends per share (DPS) on the number of