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 questionnairesadministered 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.
CHAPTER ONE
INTRODUCTION
1.1    Background to the Study
Accounting provides a vital service to broadand diverse users. Investors use financial accounting information for investment decisions; government agencies need it particularly for tax purposeswhile 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.
1.2    Statement of Research Problem
Stock markets worldwide had turbulent time in 2008 which brought value relevance of accounting information under severe criticisms. There are some concerns that accounting theory and practice have not kept pace with rapid economic and high-technology changes which invariably affect the value relevance of accounting information. The claim is that financial statements are less relevant in assessing the fundamental market value of service-oriented companies, which are by nature    high-technology driven. According to Sutton (1997:1), “while accounting can be an important factor in some decisions, accounting that masks or fails to capture meaningful information for the benefit of all investors is not sound and puts investors at risk”.  This will make those who have money to lend and invest to take it to where their need for accounting information is met (Germon and Meek, 2001). The value and the quality of accounting information are determined by how well it meets the needs of users (Khanagha, 2011). Therefore, the flow of reliable information is crucial to the growth of the Nigerian Stock Exchange- without it, savers would simply keep their hard-earned savings under their mattress.
 It may not be an overstatement to say that Nigerian Stock Exchange will not function well without relevant and reliable accounting information. Deficiencyin Nigerian Stock Exchange will affect Nigerian economy because capital market is the engine of economic growth (Okeke, 2004). Hence, the study of whether the market prices of stock listed on the Nigerian Stock Exchange reflect accounting information is not only important to investors but also crucial to Nigerian economic growth.
 Negah (2008) asserts that studies on the value relevance of accounting numbers in emerging markets are limited. He further claims that the scanty literature replicates works done in mature markets and that closer examination of these works reveals that they face both epistemological and empirical challenges. In other words, accounting for a significant portion of the existing value relevance studies in capital market research are works carried out in the developed economy. However, it is evident that these studies are not free of problems and challenges that call for further examination (Holthausen and Watts, 2001). For instance, most of these studies were carried out in United States of America and United Kingdom that have developed stock markets and focused exclusively on earnings and book value to explain share price behavior.
 Besides, value relevance research is afield in which the empirical results are sometimes mixed. The results presented in the literature are contradictory. The belief is that the divergence of opinions is somewhat due to econometric problems adopted in these studies.  Particularly the deviation of the characteristics of accounting data from the assumptions of the applied methods and the misuse of statistical indicators led to contradicting inferences in these literatures. It is important to investigate whether the result will agree or digress from the previous studies.
 Moreover, there have been arguments about the relevance and suitability of accounting information in many developing countries. The role of accounting information in these economies still remains an unanswered question. There have been declarations that in many of these countries, accounting information tends to have little relevance to the local environment. Instead, they tend to be obsolete and are based on the system of these countries’ colonial past. These happen despite the fact that Briston (1978), had warned the preparers of accounting information in the emerging world to be cautious of assuming that the institutions of the developed countries can be transplanted to their countries. In Nigeria, for instance, International Accounting Standards (IAS) and the accounting standards of UK have had tremendous influence on accounting practices and standards–setting in the country (Wallace, 1988). The afore-mentioned statements were offered as accounting standards governing reporting in Nigeria during our sample period(2002 – 2008) exhibit greater similarity to UK and IAS. To the best of our knowledge, the accounting professions in this country have made no substantial attempts to refute this opinion.
However, are these accounting practices and standards really relevant in Nigerian context? Given the above, it is pertinent to carry out a detailed assessment of the value relevance of accounting information in meeting Nigerian emerging stock market speedy needs for growth and development.
 Although much has been written on the subjects of value relevance of accounting information using United States of America (USA) and United Kingdom (UK) data, empirical research in this area has been less forthcoming in developing countries. Hence, the researchon the relationship between the market prices of stock listed in the Nigerian stock market and accounting information is not only of vital importance to investors but also to policy makers. The implications are enormous for foreign and local investors who make their decisions based on accounting information. Stakes are equally high for policy makers who consider information as very important to capital market development(Ologunde et al, 2006), and the stock market as the primary vehicle for transforming the Nigerian economy to economic prosperity (Okereke-Onyiuke, 2008).
 Furthermore, all the previous studies relate to a certain time frame and given the dynamic nature of accounting, there is a continued need to fill the gaps of what is known about the state of value relevance of accounting information in Nigeria. In the light of the above, the following problems are identified as at the time of this research:
There is yet not a consensus  as to the extent to which accounting information summarizes stock prices  in the Nigerian stock market;
The degree of difference between the perception of institutional and individual investors about value relevance of various items of financial statements to equity valuation is unresolved and
The extent of difference between value relevance of accounting number of manufacturing and service companies is not yet known.
1.3    Objectives of the Study
 The broad objective of this study is to investigate the dynamic relationship betweenaccounting numbers and market values of listed companies on the Nigerian Stock Exchange.  The specific objectives based on the identified problems are to:
Analyze the ability of accounting information to affect share prices of firms listed on the Nigerian Stock Exchange;
Determine the differences between the accounting information of manufacturing and service sectors in Nigeria;
Analyze the relationship between negative earnings and market values of companies listed on the Nigerian Stock Exchange and
Examine the differences in perception of institutional and individual investors about the value relevance of financial statements in equity valuation.
 In the light of the above, the following specific research questions are formulated:
How well does accounting information affect share prices of firms listed on the Nigerian Stock Exchange?
Arethere differences between thevalue relevance of accounting information of manufacturing and service sectors in Nigeria?
Are there relationship between negative earnings and market values of companies listed on the Nigerian Stock Exchange?     
Are there significant differences in perception of institutional and individual investors about the value relevance of financial statements in equity valuation?
 1.5    Research Hypotheses
In order to validate data analysis, the following null hypotheses were tested:
H0:      Share prices of firms listed on the Nigerian Stock Exchange are not significantly affected by the accounting information;
 H0:      There are no significant relationship between negative earnings and market values of companies listed on the Nigerian Stock Exchange and
H0:      There are no significant differences in perception of institutional and individual investors about the value relevance offinancial statements in equity valuation        .
1.6    Significance ofthe Study
Nigeria is the most populous country in Africa with a population of 146.3 million (Ibidapo-Obe, 2009) and its stock exchange (Nigerian Stock Exchange(NSE)) is the third largest in the continent with market capitalization of US $82 billion at end of 2007(Kumo, 2008). Thus far, there is little known about the role of accounting information in terms of its ability to explain changes to the security prices of listed companies on the Nigerian Stock Exchange. Almost all evidence in this area is obtained from the US or Western European countries which have sophisticated markets compared to most developing countries.
Okonjo-Iweala and Osafo-Kwaako (2007), declare that Nigerian economic growth rates averaged about 7.1 percent annually for the period 2003 to 2006. This is a notable improvement on the performance over the decade when annual rates averaged 2.3 percent. It is important to state that this can furtherimprove since the country has the potential to lead the region as a result of its economic growth. Investors from all over the world may eagerly aspire to do business in Nigeria if her accounting information meets the needs of both small and institutional investors. This is because the development of accounting infrastructure of any country is a necessary requirement for sustainable economic growth (Emenyonu, 2007). In addition, the financial history and forecast of a company expressed in figures extracted from standard accounting statement are the beginning and the end of every professional investment analysis and investment (Parker, 1967). The significance can thus be summarized as follows:
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;
The investors are supplied with information to help them make good investment decisions;
The findings and conclusion may enable the national standards setters to know the nature of demand placed on accounting information by their local investment community, stakeholders and public before they rush into adapting a unified set of accounting standard;
The work is important to the Nigerian Accounting Standards Board as it acts as a feedback channel to the board on which accounting number is most widely used for equity valuation in Nigeria and
This study fills the gap in literature by investigating the value relevance of accounting data in the Nigerian stock market. The results provide useful evidence to other emerging stock markets.
This research provides a guide as to which accounting data is or is not valued by investors, which should help the preparers of accounting information and standards setters to further enhance value relevance of the most widely used accounting number. As a result, in preparing accounting for investment decision, they should reduce information overload by publishing a Simplified Investor Summary Accounts (SISA) besides the mandatory financial statements.
1.7    Scope of Study
This study provides insight into value relevance of accounting information in the Nigerian stock market and it covers a period of 7 years from 2002 to 2008.
The choice of this period is necessitated by rapid growth in the Nigerian stock market from 2002 to 2007 and the abrupt collapse in 2008. In 2007, the Nigerian Stock Exchange (NSE) hit an all time high market capitalization of US $82 billion at end of 2007(Kumo, 2008). The amount is double the foreign reserve of Nigeria at the time. In addition, during those years, the Nigerian Stock Market recorded a significant rise in activity and share prices rose considerably only to collapse in the second half of 2008. Before this collapse, investors were all enjoying the boom in the Nigerian stock market, making tremendous returns as stock prices soared to unprecedented levels. The study therefore focuses on the period before and immediately after this collapse.
 In addition, there are two schools of capital market research in accounting-information and measurement perspectives. This study covers measurement perspective by focusing on long term association between accounting information and market values of companies listed on the Nigerian Stock Exchange while the information perspective is investigated using primary data. Stock market refers to entire market of equity for trading in the shares and derivatives of the various companies, but this study is just on the equity for trading in shares of the listed companies.
 In order to determine the aggregate Nigerian stock market reaction (measurement perspective) to accounting numbers –earnings, dividends and net book value, the population is all the companies listed on the Nigerian Stock Exchange between 2002 and 2008. The sample consists of 68 companies out of the total companies listed on the Nigerian Stock Exchange each year between 2002 and 2008.
The companies are selected based on the following criteria:
The company had been listedon the Nigerian Stock Exchange during the period and
The firm has the necessary financial statement data.
Furthermore, the perception of institutional and individual investors about value relevance of accounting information is considered.   Investment analysts working with stock brokerage firms represent the institutional investors, while the opinion of others represents individual investors. The investment analysts are chosen because accounting information is one of the most significant sources of financial information for analysts and valuing the companies is one of the most important applications to which they address themselves (Rees, 1995). Besides, investment analysts are the primary users of financial accounting reports and if accounting information is value relevant to them, then, it would be considered as value relevant to other individual investors (Mangena, 2004).