Accounting Numbers and Stock Prices in the Nigerian Stock Market

This research is motivated to study the extent to which accounting information summarizes stock prices in Nigerian stock market as an indicator of value relevance. Piece of accounting data is termed value relevant if it is significantly related to the dependent variable, which may be expressed by the stock price. The methods used for gauging information contents of various accounting numbers were Ordinary Least Squared (OLS), Random Effects Model (REM), and Fixed Effects Model (FEM). The findings show that there is a significant relationship between accounting information and share prices of companies listed on the Nigerian Stock Exchange. Dividends are the most widely used accounting information for investment decisions in Nigeria, followed by earnings and net book value. The study therefore recommends that the firms should improve the quality of earnings as manipulated earnings (of which dividends are sub-sets) have large effects on share prices. The paper also recommends that all companies listed on the Nigerian Stock Exchange should prepare Simplified Investor’s Summary Accounts (SISA) with emphasis on the most widely used accounting information along the required mandatory detailed financial statements to suit Nigerian peculiarities. The study’s findings and recommendations may be of use to National Standard Setters, preparers of accounting information, Nigerian Stock Exchange Regulators, investors and other emerging stock market.


Introduction
Accounting provides a vital service to broad and different 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. 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 value relevance of accounting service has been called into question. Value relevance of accounting information 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, are termed value relevant if they are 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 This research is motivated to study the extent to which accounting information summarizes stock prices in Nigerian stock market as an indicator of value relevance. While there have been a number of studies on this topic in developed countries (Collins, Maydew and Weiss, 1997;Francis andSchipper, 1999 andBeisland, Hamberg andNavak, 2010), the study 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). The specific objective of the paper, based on the identified problems is to investigate whether accounting information has the ability to capture or summarize information that affects share prices of firms listed on the Nigerian Stock Exchange. The paper is divided into a number of sections. Following the introduction to the study are literature review, research methodology, findings and recommendations.

Literature Review
Over four decades ago, value relevant of accounting information became the focus of accounting research. Ball and Brown (1968) provide evidence of security market reaction to earnings announcements. On the basis of their studies, they claim that accounting information is useful to investors in estimating the expected values and risks of security returns. Their result shows that earnings are value relevant. However, in recent times, stock markets research in accounting has witnessed increasing attacks on the value relevance of accounting information. A number of literatures in the developed countries have created a widespread notion that accounting numbers have lost their value relevance (Ramesh and Thiagarajan, 1995;Dontoh, Radhakrishnan and Ronen, 2001). These criticisms were based on theory of life cycle stages, high-technology, fraud, rapidly changing business environment, increasing conservatism and frequent use of coefficient of determination in accounting research as a measure of value relevance without controlling for differences in the coefficient of variation of scale factor (Brown, Lo and Lys, 1999) among others. This belief also developed in response to claims of traditional financial statements losing relevance because of the move from an industrialized economy to a high-tech, service oriented economy (Collins, Maydew & Weiss, 1997). These findings were supported by past studies that investigated the association between accounting numbers and stock prices and showed that, in most cases, the association between counting data and stock prices has been declining over time (Francis and Schipper, 1999;Brown, Lo and Lys, 1999;Lev and Zarowin, 1999).
Nevertheless, such views have met with stiff opposition with studies such as Collins, Maydew and Weiss, (1997) asserting that it is premature to claim that accounting information has lost its value relevance. Balachandran and Mohanram (2006) in a recent study of association between conservatism and the value relevance of accounting information, conclude that there is no evidence that industries with increasing conservatism see a greater decline in value relevance than industries with deceasing conservatism. Furthermore, Callao, Cuellar and Jarne (2006) perform a comparative analysis of the value relevance of reported earnings and their components. Their study provides evidence for the value relevance of net earnings figure. Gjerde, Knivsfla and Saettem (2007) find that the time trend of overall value-relevance has not declined after controlling for changes in underlying economic variables. Frost and Powall (1994) compare the stock market reaction to the annual and quarterly earnings in the U.S. and U.K. They report greater market reactions to earnings in the U.S. and attribute this to high liquidity and more frequent information disclosure in U.S. market. They also report that the market reaction to earnings announcements by the same multinational corporation is different between the U.K .and the U.S. Their results suggest that that the investors in different countries react to the same earnings announcement in different ways.
The importance of financial accounting information in stock market growth can ________________________________________________________________________________ best be appreciated by examining how well accounting information numbers such as earnings explain or impact on stock prices and returns. Research indicates that share price is a factor that is "priced" in the securities market (Blume and Husic, 1973). The share price impact appears to subsume both the earnings yield and size effects upon abnormal security returns. The research also indicates that share price has a strong cross-sectional association with security returns. Covill (1998) investigate relationship between changes in earnings per share and the performance of the market. He employs linear correlation coefficient and inferred that changes in average earnings per share over five years might be a good predictor of average changes in stock prices over the next five years. Salmi, Virtanen, Yli-Olli and Kallunki (1997) claim there is a clear relationship between the firm's accounting and stock-market variables. Ariff, Loh and Chew (1997) also report relationship between earnings and share prices. Their results show that unexpected earnings changes are significantly associated with share price changes.
Nearly all evidence in the area of value relevance of accounting information is obtained from the developed stock markets and these include Ball and Brown (1968), Pankoff and Virgil (1970) and Francis and Schipper (1999). However, Nigerian stock market is an emerging one (Kumo, 2008). The Nigerian stock market is an emerging capital market due to the rate and prospects of its growth (Osaze, 2007). He claims that Nigerian stock market is still poorly developed though emerging. Emerging markets are now a very important key determinant of global growth. The International Finance Corporation in 1980 coins emerging market to refer to developing countries with stock markets that are beginning to demonstrate the features of mature stock markets in the industrial countries. Nellor (2008) defines emerging markets as "countries in sub-Saharan Africa that have financial markets and attract investors' interest". He avers that emerging markets are attractive to investors because they offer rates of return that are high relative to developed markets and proffer for investors to diversify risk. There are a number of researches in Nigeria on relation between Nigerian stock market and economic growth (Babatunde and Mokuolu, 2005, Ologunde, Elumilade and Asaolu, 2006); however, at the time of this research, there is no extensive work on relation between accounting information and Nigerian stock market growth.

Research Methodology
Two major approaches were used in the previous related studies to evaluate the value relevance of accounting information -aggregate stock market reaction and individual investors' reaction to accounting information. These are synonymous with measurement and informational perspectives respectively. This study adopted the aggregate stock market reaction. The study made use of secondary data to investigate the aggregate Nigerian stock market reaction to accounting numbers following Bernard (1995); Brief and Zarowin (1999); Barth, Beaver and Landsman (2000) and Beisland (2009 missing data are peculiar with almost databases, but deemed to be worse in developing economies (Negah, 2008).
Panel data were used to overcome the problems associated with missing data (Negah, 2008). The panel data of 68 companies over a period of 7 years resulted in 476 observations. The firms were selected based on the following criteria: (1) The company was listed on the Nigerian Stock Exchange during the period and (2) The firm has the basic financial statement data.
The study employed multi-phase sampling method (Phillip and Fetter, 1999). In multiphase sampling, some of the same sampling units are employed at the different phases of sampling. In its simplest form, multiphase sampling is a method in which certain items of information are drawn from the whole units of a sample and certain other items of information are taken from the subsample. In this study, first and foremost, the firms were selected if they were listed and active on the Nigerian Stock Exchange (between January, 2002 and December, 2008). Applying this criterion, the initial sample size was 144, but reduced further to 68 firms when the criterion of data availability was applied.

Model Specification
To analyze the importance of accounting information in determining share price in the Nigerian stock market, the model by Ohlson 1995 was adapted. Changes of share price were specified to be explained by earnings per share, dividend per share and net book value. Ohlson (1995) depicts in his work that the value of a firm can be expressed as a linear function of book value, earnings and other value relevant information.

Model 1: Aggregate Market Reaction to Accounting Earnings and Book Value in Equity Valuation
The functional relationship between share price and the independent variables is specified as:

Model 2: Aggregate Market Reaction to Accounting Dividends and Book Value in Equity Valuation
The model is specified in an implicit form: APriori Expectation is such that β >0 (i =1-

2).
Positive relationship was assumed between accounting information and equity valuation because accounting information is presumed to be a crucial input into share valuation, it would be a surprise if no relationship or reaction could be measured (Penman,1998).
Equations (1) and (2) (4) for i =1,2…, N cross-section units and periods t = 1,2….T Where LDSP is the dependent variable; β0, β1, β2 , are regression coefficients with unknown values to be estimated; VRD and VRBV are the independent variables and the error term (eit ) is used as surrogate for all other variables not included.

Method of Analysis
In this study, our method of gauging information content of various accounting numbers panel as stated in equations (3) and (4) (Holthausen and Watts, 2001). F statistics is 0.000 which is highly significant. This may provide support for the proposition that: first, there is a positive relationship between earnings, book value and stock market in the Nigerian Stock Exchange (NSE). Second, earnings has great information content. The results of Hausman test are: chi2 2 is 29.88 and P is 0.0000. This implies that Random Effect (RE) is more efficient than Fixed Effect (FE). Hausman Test is performed to determine the model that is more efficient. If Probability (P) value is significant, then, RE is more efficient than FE. Also, Wald test provides a likelihood-ratio test of the model's adequacy. The Wald test using Stata presents p-values instead of reporting the critical values (Baum, 2006:93).

Conclusion
The study finds out that there is a significant relationship between accounting information (earnings per share, dividends and net book value) and share price of companies listed on the Nigerian Stock Exchange. Dividends are the most widely used accounting information for investment decisions in Nigeria, followed by earnings and Net Book Value. Accounting number is typically deemed to be value relevant if its estimated regression coefficient is significantly different from zero (Holthausen and Watts, 2001). This may provide support for the proposition that: first, there is a positive relationship between earnings, dividends, book value and equity value in the Nigerian Stock Exchange (NSE). These results are consistent with the findings of previous studies such as Pourheydari, Aflatooni and Nikbakhat (2008) and Beisland, Hamberg and Novak (2010) among others. Second, dividends have great information content (comparable to earnings and net book value). This is, however, contrary to the result of studies in the developed world where it was found out that analysts used Earnings per Share (EPS) as the main basis for valuing shares (Blume andHusic, 1973 andFrost andPowall, 1994).

Recommendations and Policy Implications of the Empirical Findings
Evidence indicates that accounting information plays a significant role in investment decision making and by implication, stock market development. Then, following the study's findings these recommendations are presented which may be of use to the National Standard 2. National accounting standard setters and preparers of accounting information should gear effort toward improving the quality of earnings of which dividendsthe most widely used accounting numbers in Nigeria for investment decision-is a sub-set. This could be done by properly defining and reducing earnings management by the national accounting standard setters and preparers of accounting information respectively. This is because earnings management can be defined in different ways thereby making room for creative accounting.