Corporate Governance And Value Relevance Of Accounting Information In Quoted Nigerian Banks

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Corporate Governance And Value Relevance Of Accounting Information In Quoted Nigerian Banks


Abstract


This study aims to investigate corporate governance and value relevance of accounting information in quoted Nigerian banks for the time period of 9 years from 2005 to 2014. The study uses dependent variable share price and independent variable, board independence, board size and audit quality as a proxy of corporate governance, Earnings per share and Book value per share as a proxy of value relevance of accounting information. The study also use some control variables, like firm size, sale growth, firm leverage and profitability that are affecting the study. The study has used the data of 4 banks for the analysis. The study use panel data estimation technique and used fixed effect model. The findings of the study revealed that corporate governance have significant affect on value relevance of accounting information i.e. Board independence and Board size have positively and significant impact on Earnings per share. Audit quality have insignificant impact on Earnings per share while the Board independence, Board size and audit quality have insignificant affect on Book value per share. Moreover, the result of control variable conclude that profitability and firm leverage are negatively to the Earnings per share and firm leverage and sales growth is has no affect on Earnings per share and Book value per share.
Keywords: Corporate governance, value relevance, accounting information


Chapter One


Introduction

1.1 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 of N9.45 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 in the 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 reflection of 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 and Charles, 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 ability of accounting information to capture or summarize information that affects equity value by examining 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 the Problem

The present study examines the corporate governance and value relevance of accounting information in quoted Nigerian banks. 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.

However, the impact of corporate governance on the value relevance of accounting information remains unexplored in Nigeria. Presented the significance regarding economic statements that emblemizes organizations details to investors as well as public. The matter regarding value-relevance becomes really worth looking in case of firms listed in Nigeria.


1.3 Objectives of the Study

The overall aim of this study is to critically examine corporate governance and value relevance of accounting information in quoted Nigerian banks. Hence, the study will be channeled to the following specific objectives;

  1. Discuss the relevance of corporate governance on accounting information.
  2. Ascertain the relationship between corporate governance mechanism and the value-relevance of accounting information in quoted Nigerian banks.
  3. Investigate the effect of the growth, profitability, firm size, and leverage on earnings per share and Book value per share.

1.4 Research Question

The study will be guided by the following questions;

  1. What is the relationship between corporate governance mechanism and the value-relevance of accounting information in quoted Nigerian banks?
  2. What is the effect of the growth, profitability, firm size, and leverage on earnings per share and Book value per share?

1.5 Research Hypothesis

The following hypothetical statements will be validated in the course of this study;

H01: There is no significant relationship between corporate governance mechanism and the value-relevance of accounting information in quoted Nigerian banks?

H02: Growth, profitability, firm size, and leverage have no effect on earnings per share and Book value per share.


1.6 Significance of the Study

The significance of this study is in many folds. This study could not only provide the needs of manager or academicians but also provide valuable insight to regulatory bodies in governance structure. First of all, this study will help managers to understand agency conflict. Corporate governance is considered as a value- destructive strategy; hence, the emphasis is likely to be on improving corporate governance mechanisms to ensure that managers focus on their firms’ core competencies to increase the value. Information relevancy is the most important factor for making effective economic decisions and heterogeneity of economic decisions base on the individual’s level of information relevancy. Entire information consists of all the information and details required by any individual to understand this phenomenon explained.

Corporate governance has great importance close to the mechanisms through which the firm are directed and controlled in a sensible manner. The impetus for corporate governance is for the allocation of rights and responsibilities among the different participate of the firm, the Board, management, and other stakeholders. Corporate governance structure provides a basic theme through which the company’s objectives are set and the resources of attaining those objectives and also monitoring the performance (OECD, 2004).

This study will help managers in managing agency relationship shareholders minimizing the agency problems. This will also help management as well as board of the company to make such decision that is in the best interests of shareholders of the company.

Efficient and profitable firm are important for the development of corporation in which different sector are involved. In the wake of recent financial turmoil, globalization brings severe changes and the regulation and technological advancement are enhancing the risk in the corporate sector as well as financial sector. The shareholder and stakeholder are fervently focusing on their investment in terms of return as well as the implicit performance of the company. In this situation, the corporate governance structure provide a unique solution and enable the companies to overcome the market perception, investor’ confidence that is helpful in managing the agency problems between the management and the shareholder. After the recent financial tsunami and financial instability, OECD has issued a set of comprehensive corporate governance parameter for the corporate and financial sector to overcome their governance problem and for sustainable growth as the good corporate governance is the fundamental of stable and sustainable financial system (Ahmed,Duellman, and Meguid, 2006). This study will be helpful for the regulatory to formulate proper governance regulatory frameworks for Nigerian banks.


1.7 Scope of the Study

The study is generally structured to investigate corporate governance and value relevance of accounting information in quoted Nigerian banks. The study will take in account some control variable such as growth, profitability, firm size, and leverage. The study will cover a period of 9years from 2005 – 2014.


1.8 Limitation of the Study

Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.


1.9 Definition of Terms

Corporate Governance

Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is preceding towards. Its emphasis is on the relationship between the owners and the managers in an organization.

Financial Statement

Financial statement represents the medium of communications between the reporting entity and the investing public and a range of users of accounting information.


1.10. Organization of the Study

The study is organized as follows: The two chapters provide a detailed review of literature on corporate governance and accounting information in developed, developing and Pakistani market. The chapter three explains the methodology. Whereas results that are discussed in chapter four and finally the last chapter five will concludes the study.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

This chapter summarizes the findings on corporate governance and value relevance of accounting information in quoted Nigerian banks. The chapter consists of summary of the study, conclusions, and recommendations.


5.2 Summary of the Study

In this study, our focus was on corporate governance and value relevance of accounting information in quoted Nigerian banks. The study is was specifically set discuss the relevance of corporate governance on accounting information, ascertain the relationship between corporate governance mechanism and the value-relevance of accounting information in quoted Nigerian banks, and investigate the effect of the growth, profitability, firm size, and leverage on earnings per share and Book value per share.

The panel data used in this study were obtained from financial statements, the annual reports and audited accounts of the banks under assessment. The study made use OLS, panel data technique for the purpose of analysis.


5.3 Conclusion

This study examines the impact of corporate governance on value relevance of accounting information. In this study we check Earnings per and Book value per share effect on stock price. The study also used the corporate governance measure and value relevance of accounting information which indicates that the corporate governance has positive association with accounting information. When any change comes in corporation or boards the value relevance of accounting information will be shrinking. This study focus on corporate governance and value relevance of accounting information that is there is any increase comes in corporate governance measure then the accounting information should be fair in the Pakistani market listed at Pakistan Stock Exchange for the periods 11 years of non-financial firm. The analysis of changes in board composition and operating performance, indicate the addition of outside directors to corporate board coincided with an improvement in operating performance. In corporate governance higher board independency leads to the higher earnings per share of the non-financial firm. Earnings are most important factor of Pakistani markets to valuation of share of investor. Equity valuation has two important roles in the market one is to provide information about future earnings and the other is the present of fewer earnings or in case of liquidation the book value of equity is value relevant Collins et al. (1999). Higher market valuation increases when Earnings is increases. The association between Earnings per share assuming and governance has strong relation to perform if the governance structure of the firms is becoming strong. The firm corporate governance consists of audit quality, board size and board independence is mechanism to offer good quality information constrains management activities managerial- earnings. The regression results also show a significant association with accounting information. The explanatory power of base equation also show increases when compare with the valuation model (basic regression model).


5.2. Recommendations

Policy maker should therefore hunt to ensure that the big sources of information to the investing public, and also those that seem to control the security valuation process, should replicate the true essential values and not be ‘‘cooked’’ for the purpose of unreliable or ambiguous the market, as this would result in the allocation of limited resource on the financial market to incompetent businesses. Different corporate governance measures like managerial compensation along with different corporate control mechanism and the effect of financial accounting information, and how the corporate governance structures show a discrepancy restrict to financial accounting information. Another direction for future research is the impact of financial accounting information on economic performance, that how the accounting information affects the economic performance when the financial accounting data is available.


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