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.