A STUDY OF NIGERIAN STOCK EXCHANGE

Abstract
There is little known about the Nigeria stock exchange in terms of its ability to explain changes to the security prices of listed companies on the Nigerian Stock Exchange (NSE). Almost all evidence in this area is obtained from the United States or Western European countries which have sophisticated markets compared to most developing countries. This work investigates the value relevance of accounting data in the Nigerian stock market, with a view to determining whether accounting information has the ability to capture data that affect share prices of firms listed on the NSE. It also examines the difference in perception of institutional and individual investors about the value relevance of various items of financial statements in equity valuation. This study used secondary and primary data to investigate the value relevance of accounting numbers. Secondary data were obtained from the Nigerian Stock Exchange Factbook, Annual Financial reports of companies quoted on the Nigerian Stock Exchange, the Nigerian Stock Market Annual and primary data were obtained through survey questionnaires administered on the respondents. The methods used for gauging information content of various accounting numbers were Ordinary Least Squared (OLS), Random Effects Model (REM), Fixed Effects Model (FEM) and Independent – Samples t-Test. The findings show that there is a significant relationship between accounting information and share prices of companies listed on the NSE. Dividends are the most widely used accounting information for investment decisions in Nigeria, followed by earnings and net book value. The accounting information of manufacturing companies is more informative in the NSE. The study also finds that a significant negative relationship exists between negative earnings and share prices of companies listed on Nigerian Stock Exchange. It equally observes that there is no significant difference between the perception of institutional and individual investors about the value relevance of accounting information. The study therefore suggests that the firms should improve the quality of earnings as manipulated earnings (of which dividends are sub-sets) have large effects on share prices. Moreover, there should be firm and stiff penalty by the national standards setters for manipulating earnings in the Nigerian stock market. It is also recommended that all companies listed on Nigerian Stock Exchange should prepare Simplified Investor’s Summary Accounts (SISA) with emphases on the most widely used accounting information along the required mandatory detailed financial statementsto suit Nigerian peculiarities. This is expected to remove information over-load particularly for non-accountants and non-financial analysts. The afore-mentioned measures are anticipated to increase investors’ confidence in accounting numbers and by extension the economic growth in Nigeria.

Background to the Study
Accounting provides a vital service to broad and diverse users. Investors use financial accounting information for investment decisions; government agencies need it particularly for tax purposes while regulatory agencies use it to determine whether existing statutory pronouncements are complied with, among others (Kajola and Adedeji, 1999). According to Meyer (2007:2),“accounting plays a significant role within the concept of generating and communicating wealth of companies”. Financial statements still remain the most important source of externally feasible information on companies. Nevertheless, in the wake of the recent accounting scandals and economic meltdown where billions of naira of investment and retirement wealth have disappeared, the very integrity and survivability of the value relevance of this service has been called to question.

Value relevance is defined as the ability of accounting numbers contained in the financial statements to explain the stock market measures (Beisland, 2009). Accounting data, such as earnings per share, is termed value relevant if it is significantly related to the dependent variable, which may be expressed by price, return or abnormal return (Gjerde, Knivsfla and Saettem, 2007).

Studies on value relevance of accounting information are motivated by the fact that listed companies use financial statements as one of the major media of communication with their equity shareholders and public at large (Vishnani and Shah, 2008). For instance, in Nigeria, Companies and Allied Matters Act (CAMA), (1990) and the subsequent amendments require the Directors of all companies listed on the Nigerian Stock Exchange to prepare and publish annually the financial statements. Beyond this, the Nigerian Stock Exchange mandates all companies listed on first tier market to submit quarterly, semi-annual and annual statements of their accounts to the Stock Exchange. Companies on second tier market are to submit their statements of accounts annually to Stock Exchange (Osaze, 2007). Accounting information is any data or information obtains from the accounting system of a firm whether contained in a financial statement, a special report, or verbal statement (William, 1968).However, for the purpose of this research, accounting information refers to written information contained in a complete or partial financial report –balance sheet or profit and loss account or fund flow statement. This study investigates whether these various items of financial statements are value relevant in the Nigerian Stock Exchange or not.

The Nigerian Stock Exchange (NSE) commenced operation in 1961with only 19 securities worth N80million. As at May 2009, the number of listed securities had increased to 294, made up of 86 Government Stocks with Industrial Loans Stocks and 208 Equity/ Ordinary Shares(including emerging market) with a total market capitalization ofN9.45 trillion (The Nigerian Stock Exchange, Factbook, 2009). However, the Nigerian Stock Exchange still seems to have a long way to go when compared with developed stock markets (Ologunde, Elumilade and Asaolu, 2006). Nigerian Stock Exchange, as a medium of funds mobilization for economic growth may not function well without relevant and reliable accounting information.

The researcher is thus motivated to study the extent to which accounting information summarizes stock prices inthe Nigerian stock market as an indicator of value relevance.The study of likelihood of the market prices of stock listed in the Nigerian Stock Exchange being a reflectionof accounting information is very essential to investors as well as policy makers.Recent evidence shows that stock markets have positive impact on economic growth (Healy and Williston,2005 andCharles,2008).In a bid to corroborate or repudiate the afore-mentioned, the perception of institutional and individual investors about value relevance of various items of financial statements for equity valuation is also considered.

While there have been a number of studies on this topic in developed countries (Collins, Maydew and Weiss, 1997; Lev and Zarowin, 1999; Francis and Schipper, 1999; Beisland, Hamberg and Navak, 2010), one is not aware of any expansive study that has explored the subject of value relevance of accounting information in Nigeria. It has not been comprehensively researched primarily because of problems with data availability(Negah 2008). Literature on capital research in accounting in Nigeria is so scanty and insufficient that it is difficult to determine value relevance of accounting information in this country. In Nigeria, fairly related literature are 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); relevance of financial statement to stakeholders’ investment decisions(Kantude, 2005);determinants of upward and downward trending of the stock market prices (Nwude, 2010). The above mentioned studies provide no significant validity of existing empirical evidence of value relevance of accounting information in the developing Nigerian Stock Market.

As a result, the study attempts to fill the gap in literature by investigating the abilityof accounting information to capture or summarize information that affects equity value byexamining the relationship between accounting numbers and share prices in the Nigerian Stock Exchange. This in turn is expected to accelerate development of the Nigerian stock market.