IMPACT OF CORPORATE DISCLOSURES ON STOCK PERFORMANCE IN NIGERIAN QUOTED FIRMS
ABSTRACT
The study investigates the relationship between firm performance (proxied by profitability and liquidity) and corporate disclosure in Nigerian listed firms. The data used in the study were obtained from the annual reports of 60 companies listed on the Nigerian Stock Exchange from the various sectors of the country’s economy. The study covers the post International Financial Reporting Standards (IFRSs) adoption period of three years (2012 – 2014). Corporate disclosure (dependent variable) was disaggregated into mandatory, voluntary and total disclosure. The data were analysed using both descriptive statistics and the Ordinary Least Squares (OLS) regression. Findings from the descriptive statistics reveal that, contrary to prior findings, there is a steady improvement in mandatory disclosure by Nigerian companies since the country’s adoption of IFRSs. However, voluntary disclosure still remains relatively low. The regression results show no significant relationship between profitability and the three components of corporate disclosure. But liquidity shows a significant positive relationship with mandatory and total disclosure. The combined effect of profitability and liquidity shows no significant relationship with any of the components of corporate disclosure. The findings suggest that improved performance of companies does not necessarily induce them to disclosure more information as widely reported by previous researchers. These findings notwithstanding, the decision to disclose sufficiently and timely must be accorded priority attention by companies, considering the critical role of adequate and timely information disclosure in the global marketplace.
TABLE OF CONTENTS
TITLE PAGE - - - - - - - ii
DECLARATION - - - - - - - - iii
CERTIFICATION - - - - - - - - iv
DEDICATION - - - - - - - - v
ACKNOWLEDGEMENTS - - - - - - vi
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study - - - - - - 1
1.2 Statement of Problem - - - - - - 8
1.3 Objective of the Study - - - - - - 10
1.4 Research Questions- - - - - - - - 11
1.5 Statement of the Hypothesis - - - - - 12
1.6 Significance of Study - - - - - - 13
1.7 Scope of the Study - - - - - - - 14
1.8 Definition of Key Terms - - - - - - 15
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction - - - - - - - - 18
2.2 Conceptual Framework - - - - - - - 33
2.3 Theoretical Framework - - - - - - - 45
2.4 Empirical Review - - - - - - - 50
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design - - - - - - - 56
3.2 Population of the Study - - - - - - - 57
3.3 Sample Size - - - - - - - - 57
3.4 Sampling Technique - - - - - - - 58
3.5 Method of Data Collection - - - - - - 58
3.6 Technique for Data Analysis - - - - - - 59
3.7 Model Specification and Variable Definition - - - - 59
3.8 Measurement of Variables - - - - - - 59
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation of Data - - - - - - 60
4.2 Discussion of Findings - - - - - - 79
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary - - - - - - - - 80
5.2 Conclusion - - - - - - - 80
5.3 Recommendations - - - - - - - 93
References - - - - - - - - 95
Appendix - - - - - - - - 98
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The stock market works by the nature of information that flows through it on a daily basis, be it information about stocks, firms’ performance, firms’ decisions, firms’ financial disclosures and non-financial disclosures, regulatory pronouncements as well as observations and predictions from financial analysts. These informations help investors and other stock market players make decisions relating to buying/selling/holding of stocks and securities with the ultimate aim of maximizing the returns on their investments (Li, Lin & Zhang, 2018). Generally, stock market return is simply the aggregate returns/yields obtained by investors over a given trading period. It is the value “in stock price” earned by investors as difference between what was spent to acquire a security and what would be received as proceed if such security should be sold today. According to Leuz and Wysocki (2016), an effective stock market is one where stock prices are actively driven by new information, thereby ensuring that firms’ stock prices are accurately valued at every point in time. It is important to highlight the fact that the greatest amount of information upon which stock market activities are driven are financial and non-financial disclosures by publicly traded firms (Qizam & Fong, 2019). Disclosures relating to financial performance and/or profitability, financial position and/or net worth, cash flow and/or fund application, corporate governance and/or leadership, and corporate social responsibilities and/or environmental involvement among others have been emphasized in a number of studies as key areas of disclosures that influence the buy/sell/hold decision of investors and other stock market players.
Now, having highlighted the importance of information in stock market, the absence of information causes a great disconnection between investors and preparers of financial reports- this is referred to information asymmetry. When the problem of information asymmetry is not addressed speedily, it culminates into a more complex problem known as the agency conflict. According to Sahore and Verma (2017), corporate disclosures have played a very key role through its attempt to address the problems of information asymmetry and agency conflict. Corporate disclosure is aimed at ensuring that more information is made available in order to ensure lesser risk and greater protection for investors and other stock market players. The concept of corporate disclosure in this context covers all forms of statutory and voluntary financial reporting disclosures made by firms (Tian & Chan, 2019). Studies like Walter (2016), Velashani and Mehdi (2018) among others have argued that corporate disclosures are critical for the effective working of an efficient stock market. The market forces of demand and supply usually exerts pressure on managers and preparers of corporate reports, such that are compelled to disclose only relevant and accurate information that will in turn, drive reasonable prices for their stocks, while the hope for higher returns by investors will be leveraged by these firms in order to get capital from the market (Lim, 2016).
Given that corporate disclosure is the totality of what is reported, how it is reported and when it is reported, as well as the fact that corporate disclosures drive stock market activities in an emerging economy, it is safe to agree with the argument of Nwangi and Nwiti (2015) that, the greater a firm’s level of disclosures about its true state of affairs, the greater its chances of mitigating obligations to existing and potential investors, hence, driving higher stock returns to investors, as well as higher performance for the stock market as a whole. Qizam (2021) argued that disclosed financial information is key to timely and accurate investment decision by investors, as they are able to efficiently allocate their scarce resources, as well as assess various investment options. Firms in Nigeria are statutorily required by regulators to follow the national disclosure standards (i.e. Nigerian GAAP) as well as the IFRS reporting template in order to safeguard the interest of the investing public. However, the demand for greater disclosures from the investing public has driven firms to adopt “voluntary disclosure” in a bid to ensure increased transparency and decreased information asymmetry and agency conflict. According to Guillaume (2017), this step by firms is aimed to reduce the agency cost which is a product of information asymmetry a problem whereby investors (existing and potential) undervalue a firm’s stock as a result of perceived information inadequacy.
1.2 Statement of Problem
Corporate disclosures play a very vital role in defining stock market behaviours and the interaction between market players. The totality of what is disclosed by firms (i.e. reported information), how it is disclosed (i.e. information quality) and when it is disclosed (i.e. timeliness) all work together in a manner that influence the buy/sell/hold decision of investors and other players in the market. However, the increase in investors’ demand for more information in recent years have revealed the existence of a large information gap between preparers and users of corporate reports- owing to the problem of information asymmetry, at least at its very simplest form. This problem is simply the disconnection between what is disclosed by firms (i.e. available information) and what is required by investors for efficient participation in the stock market.
From the perspective of the investors, information is key to making efficient investment decisions that will drive the best returns, hence, their demand for greater disclosure; while from the perspective of the managers, what is disclosed is key to attracting investors to the firm’s stock, thereby driving up their stock prices as well as their chances of raising greater capital from the market. At the point where these two perspectives meets raises the research question about how corporate disclosures influence stock market returns, and what relationship exists between corporate disclosures and stock price performance. Empirically speaking, why investors expect a wide range of corporate disclosures in relation to their stock market-related decisions remains a mystery despite the attempts by existing literatures to explain this so far.
In the case of emerging economies like Nigeria, a number of studies have been conducted in relation to corporate disclosures by firms and how these disclosures influence overall stock market returns and the performance of individual firms’ stock prices. However, the existing literatures have shown that most of the existing studies have focused only on “voluntary disclosures”, while others have only provided evidence attempting to connect corporate disclosures to firms’ performance. Hence, the literature for emerging economies like Nigeria has not adequately addressed the relationship between corporate disclosures and stock market returns especially in recent years. For this aforementioned observations, this study is therefore set to investigate how corporate disclosures by publicly traded firms in Nigeria influences overall stock price as well as the performance of individual firms’ stocks.
1.3 Research Questions
For the purpose of this study, the following research questions are addressed in line with the objectives of the study.
1. To what extent do profitability-related disclosures influence stock performance?
2. What influence do governance-related disclosures have on stock performance of quoted firms in Nigeria?
3. To what extent do dividend-related disclosures affect stock performance of quoted firms in Nigeria?
4. What is the effect do social responsibility related disclosures have on stock performance of quoted firms in Nigeria
1.4 Objectives of the Study
The aim of this study is to investigate how corporate disclosures influence overall stock performance, but the specific objectives include the following;
1. To examine the influence of profitability-related disclosures on stock performance of quoted firms in Nigeria.
2. To determine the influence governance-related disclosures influence stock performance of quoted firms in Nigeria.
3. To examine effect of dividend-related disclosures on stock performance of quoted firms in Nigeria.
4. To examine the effect of social responsibility related disclosures on stock performance of quoted firms in Nigeria.
1.5 Research Hypotheses
For the purpose of this study, the following research hypotheses have been formulated in line with the objectives of the study.
HO1: Profitability-related disclosures have no significant influence on stock performance of quoted firms in Nigeria
HO2: Governance-related disclosures do not significantly influence stock performance of quoted firms in Nigeria
HO3: Dividend-related disclosures have no significant influence on stock performance of quoted firms in Nigeria
HO4: Social responsibility related disclosures have no significant influence on stock performance of quoted firms in Nigeria.
1.6 Scope of the Study
This study focused on investigate the how corporate disclosures influence the performance of stock market. Given the peculiarity of the aim of this study, emphases were laid on four areas of disclosure including profitability-related disclosures (proxy by the ratio of profit disclosures to total disclosures), governance-related disclosures (proxy by the ratio governance disclosures to total disclosures), dividend-related disclosures (proxy by the ratio of dividend disclosures to total disclosures), and social responsibility related disclosures (proxy by the ratio of CSR disclosures to total disclosures). For the purpose of capturing stock market performance emphases were laid on the overall stock market returns as well as stock price performance. To achieve the set objectives, this study focused on firms publicly traded on the Nigerian Stock Exchange (NSE). This study covers a period of ten (10) years, spanning from 2012 to 2021. Firms were selected across all key sectors represented on the NSE.
1.7 Significance of the Study
This study is significant in a number of stakeholders including the following;
Investors:
This study enlightens investors, brokers and other stock market players on how corporate disclosures interact with the stock market variables that define demand and supply in an open stock market. The outcome of this study helps to demystify the working of the stock market in relation to corporate disclosures among participating firms.
Regulators:
This study uniquely highlights various aspects of corporate disclosures into profitability-related, governance-related, dividend related and social responsibility-related. This is aimed at providing evidence on how market indicators react to various aspects of corporate disclosures, and this will help regulators and analysts to understand and estimate market expectations.
This study, if completed, will provide national regulators like the SEC and the FRCN with the basic requisite knowledge of how the stock market works; the indicators of stock market activities and the relationship between these indicators and corporate disclosures. An understanding of how market returns are defined by corporate disclosures will inspire regulators towards ensuring higher and more quality disclosures.
Future Researchers:
The completion of this study adds significantly to knowledge by providing empirical evidence on the relationship between corporate disclosures and stock market performance in Nigeria. The scope of this study is designed to provide evidence on the relationship between corporate disclosures and stock market returns as well as stock price performance for quoted firms.
1.8 Limitations of the Study
In the course of carrying out this study, the researcher encountered some external and unavoidable factors that may pose limitations on the study and its findings. Highlighted below are some of the factors deemed by the researcher as limitations to the study;
The adoption of quantitative data from the annual reports of the selected firms is not without certain the risks of accounting errors. However, the number used for computing and deriving data adopted for the purpose of data analysis in this study is limited to accuracy of the accounting figures reported in the financial statements of the selected firms.
Another factor here is the limitation on the generalization of findings from this study. This is because the sample was drawn from only quoted firms in Nigeria. Hence, findings from this study may not validly apply to all firms in Nigeria as a whole. It is limited to firms quoted on the Nigerian Exchange Group(NGX).
1.9 Operational Definition of Key Terms
Corporate Disclosures:
This is the communication of information about the firm’s performance, position, and governance to people outside the firm through financial and non-financial reports at specific intervals.
Profit-related Disclosures
These are disclosures related to the firm’s financial performance in terms of profits earned over a given period of time. This disclosure can be done on a quarterly basis or halt-year basis depending on each firm.
Governance-related Disclosures
These are disclosures related to governance structure in terms of its leadership and changes in leadership over a given period of time. This disclosure are often done on a yearly basis, except during period of crises where emergency changes must be communicated.
Dividend-related Disclosures
These are disclosures related to the firm’s dividend to investors over a given period of time. This disclosure is usually dependent on the firm’s profitability; hence, it is often made on a half-year or yearly basis.
Social Responsibility Disclosures
These are disclosures related to the firm’s social responsibilities in terms of how the firm is contributing towards the development of the environment within which it operates over a given period of time.
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