ACCOUNTING INFORMATION AND STOCK PRICE
This study is motivated by a desire to examine the auditor independence and firm performance. In light of the empirical review and other discussions, a number of questions arose as to whether there is a significant relationship between auditor independence and firm performance. Using the Ordinary Least Square (OLS) regression technique with the aid of a computer software E-view 7.0, the empirical findings revealed among other things that, there is no positive relationship between auditor independence and firm performance. We recommend among other things that, for auditors to remain strictly independent, they should not be allowed to provide audit clients with any other advisory services, so as to improve firm performance.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Research Problem
Objectives of the Study
Scope of the Study
Significance of the Study
Limitation of the Study
CHAPTER TWO: LITERATURE REVIEW
Value Relevance of Accounting Information in Emerging Stock Market
Significance of Accounting Information in Explaining Market and Book Values
The Impact of Accounting Information on Stock Prices
Empirical Studies on Value Relevance of Accounting Information
CHAPTER THREE: RESEARCH METHODOLOGY
3.2 Research Design
3.3 Data Analysis Technique
3.4 Sample and Variables
3.5 Valuation Model and Model Specification
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.2 Descriptive Statistics
4.3 Correlations Analysis
4.4 Regression Analysis
4.5 Test of Hypotheses
CHAPTER FIVE: SUMMARY, FINDINGS, CONCLUSION AND RECOMMENDATION
5.2 Summary of Findings
BACKGROUND TO THE STUDY
Accounting is an information system that is used for communication purposes and for the purpose of aiding decision making. Bello (2009), explains that accounting is believed to be an information instrument used by economic units to achieve various economic decisions. Corporate organizations use accounting to communicate to all stakeholders about their operating performance and position at a particular time period. The process through which companies communicate to the public about their operations is called financial reporting. Corporate financial reporting is the medium through which companies communicate to the external society about their operational performance in terms of profitability, efficiency, and responsibility (Abubakar, 2010; Nzekwu, 2009). Financial reporting of a corporate entity constitutes a combination of qualitative and quantitative financial reports, which are referred to as a firm’s bill of health. Various stakeholders take their decisions relative to a firm’s performance and position based on the accounting information supplied in its annual financial reports and accounts.
Historically, market data have always prevailed over accounting data when it comes to identifying the factors that affect stock prices. In recent time years, an increasing number of empirical studies indicate that the financial statements of enterprises contain certain parameters that play a critical role in determining stock prices in the market. This finding was not unexpected since after 2000 the international accounting standards were improved and established across the world. Therefore, the information offered to investors is now more accurate and enlightening than before.
The use of accounting data to explain changes in stock prices is frequently referred in the value relevant literature. Collins, Maydew and Weiss (1997) have discovered that the joint explanatory power of earnings and book values has not declined in the last forty years. To the contrary, they asserted that their explanatory power has increased in the same period. This conclusion is reached by several other authors as Barth, Beaver and Landsman (1998) and Keener (2011, while Burgstahler and Dichev (1997) suggested that the function which describes the relationship between stock prices and earnings and book values is convex. Also, Holthausen and Watts (2001) and Negakis (2005), after reviewing the relevant literature, concluded that earnings and book values do not affect in the same manner stock prices.
In board terms, the accounting function has grown to become an integral component of the corporate system. It exists because it satisfies primarily a need for information. Consequently, for more than four decades of accounting research especially capital market based research, emphasis has been placed on market efficiency i.e. testing the information content of accounting numbers, in an attempt to determine whether or not accounting information us value relevant and useful for investment decision making. Researches in this field began from the seminal works of Ball and Brown (1968) and Beaver (1968) that examined empirically the value relevance of accounting earnings and its implications for users of such information.
The term relevance as a quality of accounting information as used in accounting literature is defined by the American Accounting Association (1966), For information to meet the standard of relevance, it must bear on or be usefully associated with the action it is designed to facilitate or the result desired to produce. This requires that either the information or the act of the communicating exert influence on the designated action. Relevance thus implies the ability of the information to influence decisions of both potential and existing investors whether by changing or confirming their expectations about the results or consequences of actions or events. Accounting value relevance is a concept that has admitted a number of definitions and measures.
Gordon and Gordon (2002) in their empirical explanation of “value relevance” posit that Value relevance measures the joint response of earning or some other measures of the accounting and market returns to information arrival. Gordon and Gordon (2002) further explain that value relevance represents the association between the information impounded in the accounts and the information impounded by the market. According to Beaver (1968), Value relevance is the explanatory power of accounting information with respect to security prices. In their empirical study, LO and Lys (2002) state that Value relevance of accounting information or number, is the examination of the association between market value and accounting summary measures such as earning and book values. The usefulness of accounting information or value relevance in equity valuation has been a primary paradigm in financial accounting research.
The studies on value relevance are broad and diverse. It is important to define the structure of concept of value relevance for this study. Some researchers may regard ability of accounting information to summarize business transactions and other events (the measurement view of value relevance) as sufficient proof of value relevance of accounting data, others may place greater emphasis on earnings prediction (the information view of value relevance), or information content of accounting data (the information view of value relevance), and so on. Therefore, the approach used for this study to determine the value relevance of accounting data in Nigeria. This is ability of financial statement to capture or summarize information that affects equity value. However, the empirical results on the subject of value relevance in contemporary researchers especially across emerging stock markets tend to be inconclusive. Numerous literatures in the developed countries have created the impression that accounting information and numbers have lost their value relevance (Core, Guay & Buskirk, 2003; Dontoh, Radhakrishnan and Ronen 2001).the criticisms leveled are based on the following; the transformation in firm’s structure and activities, Fraud, window dressing of financial report and rapidly changing business environment, although, other studies (Collins, Maydew and Weiss 1997, Balachandran and Moharan 2006), notes that the claims that accounting information has lost its value relevance may be quite premature. In our perspective, the issues go beyond the fundamental analysis of the adequacy of accounting information with regards to its value relevance on one hand issues of user trust and public confidence on the accounting information provided. Accounting informativeness becomes relevant to the extent that it forms the basis for investment decision and explains an appreciable level of investor behavior. Thus, in a situation of investor apathy resulting from destruct and declining user and public confidence on corporate claims as presented in public financials and other means of communicating to the market, the value relevance of accounting information would thus be unpredictable.
This study attempts to examine the accounting information and stock prices.
STATEMENT OF THE RESEARCH PROBLEM
In recent times, there has been criticism by capital market researchers in accounting with regards to the value relevance of accounting information. Numerous literatures in the developed countries have created the impression that accounting information and numbers have lost their value relevance (Dontoh, Radhakrishnan and Ronen 200, Core, Guay & Buskirk, 2003). The criticisms leveled are based on the following; the transformation in firm’s structure and activities, Fraud, window dressing of financial report and rapidly changing business environment. On the contrary, studies (Collins, Maydew and Weiss 1997, Balachandran and Moharan 2006), notes that the claims that accounting information has lost its value relevance is premature. Balachandran and Moharan(2006) in a recent study of the value relevance of accounting information, concludes that there is no evidence that there is increasing decline in value relevance. Furthermore, Callao, Cuellar and Jarne (2006) perform a comparative analysis of the value relevance of reported earnings and their components. Their study gave evidence of value relevance of net earnings figure. Gjerde, Kaivsla and Saettem (2007) find that the time trend of overall value-relevance has not declined after controlling for changes in underlying economic variables.
This inconclusive evidence in literature has created a gap and suggests the importance for more analysis on the subject. Thus, there is a need to examine the issue from different research context and data sets.
It is against this background that the following research questions are raised:
Is there significant relationship between earnings and stock price?
Is there significant relationship between dividend and stock price?
Is there significant relationship between book value and stock price?
OBJECTIVES OF THE STUDY
The main objective of the study is to examine the relationship between accounting information and stock prices in Nigeria.
The specific objectives of this study are:
To examine the relationship between earnings and stock price.
To find out the relationship between dividend and stock price.
To determine the relationship between book value and stock price.
This study has the following hypotheses
Ho: There is no relationship between earnings and stock price.
H1: There is a relationship between earnings and stock price.
Ho: There is no relationship between dividend and stock price.
H1: There is a relationship between dividend and stock price.
Ho: There is no relationship between book value and stock price.
H1: There is no relationship between book value and stock price.
SCOPE OF THE STUDY
This research work is an empirical study on accounting information and stock prices in Nigeria.
The population of the study is entire quoted companies in the Nigeria Stock Exchange, while the sample size is selected banks operating in Nigeria.
The length of period covered by the study was three years (2007 – 2011).
Geographically, the study will be conducted in Benin City, Edo State.
SIGNIFICANCE OF THE STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the relationship between accounting information and stock prices. The study would also facilitate the examination of the effects of accounting information and stock prices and thus boosting the empirical evidence from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected variables examined in the study.
The result of the study would be of benefits to investment analysts, investors and corporations in examining the effectiveness of the liquidity and firm performance. It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economies like Nigeria. Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study.
LIMITATION OF THE STUDY
A study of this nature cannot be carried out without constraints.
A major limitation in this research work is the time duration which is insufficient to cover more geographical locations.
The low response rate from respondents is also a limiting factor including the imprecise measurement of variables.
The sample size and the inability to obtain a completely random sample is also a limiting factor to this research work.
Abubakar, S. (2010). Regulation and the economics of corporate financial reporting in Nigeria. Journal of Management and Enterprises Development, 7 (2), 65 – 72.
Barth, M., Beaver, W. and Landsman, W. (2001). The relevance of the value relevance literature for financial accounting standard setting: another view. Journal of Accounting and Economics, 31, 77-104.
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