CAPITAL INVESTMENTS, FIRMS’ STRUCTURES AND FINANCIAL REPORTING QUALITY
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
    The relevance, faithful representation of reported accounting earnings of entities has been questioned as a result of the global financial crises, corporate governance failures and financial scandals around the world and particularly the current discovery by the Central Bank of Nigeria in the Banking sector (Hassan & Farouk,2014).
     Biddle, Hilary and Verdi (2009) views investment efficiency of a firm as one in which potentials projects with positive net present value (NPV) are undertaken which are not subject to information asymmetry constraints such as adverse selection and moral hazard. Financial reporting quality is a topic of attraction to management, stockholders, professionals and to financial accounting researchers, and the reasons and effects of differences in financial reporting quality have been researched extensively.  Biddle et al (2009) view financial reporting quality as the accuracy with which financial reporting delivers information about the firm’s operations, specifically its anticipated cash flows, for the purpose of informing stakeholders.Further, it’s obvious that the law making authorities as well as investors have the same perception about ensuring a high-quality financial reporting(Karam & Akghar, 2014), arising from the belief that the quality of financial reporting directly affects capital markets (Levitt, 1998). The purpose of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential stakeholders such as investors, lenders and other creditors’ etc.,which influences their decisions as concerning investing or dis-investing in the entity (IASB, 2008). Financial reports are usually prepared in line with Generally Accepted Accounting Principles (GAAP) being operated in a country, this in essence, is to avoid  financial reporting fraud and scandals that might hamper effective investment decision making process by management and others users of financial reports (Afolabi,2013). This indicates that financial reporting methods in terms of transparency, information auditing, disclosure reporting pattern, standards, regulatory control and flexibility, corporate governance, and financial scandals have influence on investment decision making in any organisation.
 High quality financial reporting minimises information asymmetry by increasing information made available to users of annual report on the value of the firm's investment projects, thus, lowering adverse selection at the issuing of securities (Bushman &Smith, 2001). Further, high quality financial reporting combats moral hazard problems by fostering contracting and monitoring (Healy &Palepu 2001). Therefore, firms with higher quality financial reporting have increased access to external finance and are therefore unlikely to trade-off positive Net Present Value (NPV) investment projects for the payment of dividends (Santhosh, Wang &Yu 2012).
    The importance of financing decisions cannot be over accentuated since many of the causes of business failure can be dealt with using strategies and financial
decisions that facilitates  growth and aids companies in achieving their objectives (Salazar, Soto &Mosqueda, 2012). The finance factor is the main cause of financial distress (Memba &
Nyanumba, 2013). Financing decisions influence capital structure and is also a focal point of managerial decisions, therefore, fallible financing decisions can lead to corporate failure. The objective of all financing decisions is wealth maximisation and the immediate way of measuring the quality of any financing decision is to examine the effect of such a decision on the firm’s performance.
    Firm attributes are paramount to explaining the quality of earnings reported by a firm. Firm attributes refers to incentive variables that have impact on the firm’s decision both internally and externally (Shehu, 2012). The incentive variable includes leverage, firm size, among others (Hassan & Farouk, 2014)
Financial leverage refers to the proportion of debt in the capital structure. Capital
structure has indubitably been a significant yardstick from a financial economics
view point since it is linked with a firm's ability to satisfy the demands of various stakeholders (Jensen, 1986). Firms can source for funds externally or internally. Internal sources of funds include retained earnings while external sources include loans from financial institutions, trade credit, issue of loan stock, and issue of equity shares. The establishment of a capital structure can influence the governance structure of a firm which, in turn, may influence the strategic decisions selected by a firm(Jensen, 1986).     
1.2    STATEMENT OF THE RESEARCH PROBLEM
          Financial reporting quality can be related to capital investment in at least two ways. Firstly, it is usually debated that financial reporting curbs suboptimal capital investment decisions by lowering information asymmetry that exists between entities and investors, and among investors (Verrecchia, 2001).
        Secondly, prior extensive research in accounting suggests that financial reporting performs a significant role in abating agency problems. Low financial reporting quality is an indicator of the presence of information asymmetry. For instance, financial accounting information is commonly used as a direct input into compensation contracts (Lambert, 2001) and it’s a valuable source of information used by shareholders to monitor managers (Bushman &Smith, 2001). Furthermore, stock markets that serve as a valuable source of firm precise information can be better monitored via the aid of financial accounting information (e.g., Holmstrom & Tirole, 1993; Bushman & Indjejikian, 1993; Kanodia &Lee, 1998). Thus, if financial reporting quality reduces agency problems, it can then improve capital investment efficiency by increasing the ability of stakeholders to monitor managers thereby improving project selection and reduce financing costs which is the main crux of this research work.
The above analysis thereby leads to the following questions being asked:
1.    What is the relationship between capital investment, and the quality of financial reporting?
2.    What is the relationship between firms’ structures and quality of financial reporting?
3.    What is the impact of leverage on financial reporting quality?
1.3    OBJECTIVES OF THE STUDY
     The main objective of this study is to determine the effect of capital investment and firm structure on financial reporting quality. In order to achieve this, the following objectives will also be considered.
1.    To determine the relationship that exists between capital investments and financial reporting quality.
2.    To determine the relationship that exists between firms’ structures and financial reporting quality.
3.    To determine the impact of leverage on financial reporting quality.
1.4    RESEARCH HYPOTHESIS
    H1    a relationship exists between capital investment and financial reporting quality
    H2    a relationship exists between firms’ structures and financial reporting quality
H3       leverage has an impact on financial reporting quality
1.5    SIGNIFICANCE OF THE STUDY
The significance of this study in Nigeria can thus be summarized as follows:
1.    The findings generated in this study may be used to test the existing theories under extreme conditions not present in developed economies where most of the prior studies were carried out;
2.    It will aid investors in evaluating and assessing the extent to which optimal investment decisions are made by management that yields adequate return on their investment, reduce their investing risk as well as information asymmetry.
3.    Managers also would be able to make optimal capital investment decisions that improve the rate of return necessary to meet up with their expectations and that of shareholders thus increasing shareholders wealth and profitability.
4.    The findings and conclusion may enable the national standards setters to know the nature of demand placed on  the quality of accounting information by their local investment community, stakeholders and public before they rush into adapting a unified set of accounting standard;
5.    The research is important to the Financial Reporting Council of Nigeria (FRCN) as it acts as a feedback channel to the board on which accounting number is most widely used for equity valuation in Nigeria.
6.    This study fills the gap in literature by investigating the effect of capital investment decisions and firm structure on financial reporting quality.
7.    It will also serve as a guide for future research to be done in this area.
8.    The overall effect of this on the economy is improved GDP from efficient capital investments, firms structure and higher financial reporting quality
1.6    SCOPE OF THE STUDY
       This research aims to study the effects of capital investment, firm structure on financial reporting quality among 30 companies quoted on the stock exchange between 2008-2014. It would involve the use of secondary data collected from annual reports of these companies. The companies are selected based on the following criteria:
1.    The company had been listed on the Nigerian Stock Exchange during the period and the firm has the necessary financial statement data.
2.    Investment analysts are the primary users of financial accounting reports which serves as a major source of information to them, hence, it is relevant to them, and would be considered relevant to other individual investors.
1.7    LIMITATIONS OF THE STUDY
    Limitations encountered in this study are;
1.    Market inefficiencies: this can be as a result of shares being overpriced or under priced at the time frame used for the research which can be caused through internal or external factors.
2.    The fact that results may not be generalized to other countries
3.    Time frame: This implies that the long term effects of IFRS are not being examined.
4.    Significant economic events occurring during the period of time under examination.
5.    Inherent weaknesses due to the sample size being used, its selection and the volatility of the data (e.g. share price)
6.    The assumption of a normally distributed population with equal variables.
7.    The precision of the measurement scale used cannot be guaranteed.