ABSTRACT
This study examined the effect of International Financial Reporting Standards (IFRS) Implementation on Earnings Response Coefficient (ERC) of listed companies in Nigeria. The study has concerned for poor utilization of capital market, especially equity market for funding of developmental project, both public and private sector entities. The study therefore focused on the effect of IFRS Implementation on earnings response coefficient of listed companies in Nigerian and also assessed the interactive effects between IFRS provisions and investors' protection among others on the Earnings Response Coefficient of listed companies in Nigerian. This study adopted historical-descriptive research design and content analysis research designs. This was conducted using forty six listed companies in Nigerian covering the period of 6 years (2013 to 2018). The data of the study was analyzed using the Partial Least Square. The results of the cross sectional effect model show that ERC is not positively associated with IFRS implementation. This is not inclusive of the fact that IFRS implementation brings about high quality standards which is a prerequisite for high quality information, but it is not sufficient enough to induce a change in the ERC. IFRS reveals its inability to increase the decision usefulness of financial statements to be more earning oriented rather than non-earning oriented. It was discovered that investors and speculators alike pay close attention to the degree to which current period earnings shocks persist in the future, and this outcome propels the IFRS compliance to enhance a high earnings response coefficient of firms in the stock market. ERC also improves with the moderating effect of a strong investors’ protection in an IFRS environment, while ERC is also inversely and significantly affected by the interactive effect between beta and IFRS implementation. It is therefore recommended that firms listed in the Nigerian stock exchange should as a result of necessity improve on their investors' protection in order to promote a high earnings response coefficient under an IFRS environment, and that the financial reports of listed companies in Nigerian should be designed to improve the information contents of accounting earnings in order to include inherent socio-economic risk, full disclosure of net income, past and prospective earnings.
TABLE
OF CONTENTS
Title
page i
Certification ii
Approval
Page iii
Dedication iv
Acknowledgements vi
Table
of Contents v
List
of Figures viii
Abstract ix
CHAPTER 1:
INTRODUCTION
1.1 Background
to the Study 1
1.2 Statement
of the Problem 3
1.3 Objectives
of the Study 5
1.4 Research
Hypotheses 6
1.5 Research
Questions 7
1.6 Scope
of the Study 8
1.7 Significance
of the Study 8
1.8 Operational
Definition of Terms 10
CHAPTER 2: REVIEW
OF LITERATURE
2.1 Conceptual
Review 12
2.1.1 An overview
of IFRS implementation 14
2.1.2 IFRS adoption and implementation in Nigeria 17
2.1.2.1 Benefits
of IFRS Adoption 18
2.1.2.2 Fair value measurement 23
2.1.3. Earnings response coefficient 26
2.1.3.1 Measurement
of the earnings response coefficient 29
2.1.4 Determinants of the earnings response
coefficient 30
2.1.4.1 Earnings persistence 30
2.1.4.2 Beta (systematic risk) 31
2.1.4.3 Investors’
protection, ERC and IFRS 32
2.1.4.4 The effect of IFRS induced fair value
accounting on the ERC 33
2.1.5 Control variables 36
2.1.5.1 Firm size 36
2.1.5.2 Industry
type 38
2.2 Theoretical
Review 39
2.2.1 Theory of value relevance 39
2.3 Empirical
Review 42
2.4 Research
Gap 71
CHAPTER 3:
METHODOLOGY
3.1 Research Design 72
3.2 Population and Sample size 72
3.3 Sources of Data 73
3.4 Method of Data collection 74
3.5 Data
Analysis Techniques and Measurement 74
3.5.1 Summary
of variables measurement 78
3.6 Model
Specification 84
3.7 Method of Data Analysis 84
CHAPTER 4: RESULTS AND DISCUSSION
4.1 Data Presentation and Analysis 87
4.2 Test of Hypotheses 102
4.3 Discussion of Findings 109
CHAPTER 5:
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 111
5.2 Conclusions 112
5.3 Recommendations 114
5.4 Contribution to Knowledge 114
References
Appendices
LIST OF TABLES
Page
2.01 Effective
IAS/IFRS issued to date 15
2.02 Summary
of Results of empirical studies conducted in Developed and
Developing Countries on
IFRS implementation and Earnings Response
Coefficient 73
2.03 Summary
of empirical review investigating the Association between
Earnings Response
Coefficient and IFRS implementation 78
3.01 Population and Sample Size
Distribution of listed companies 88
4.2 Descriptive
statistics 89
4.3 Correlations
Matrix Table
90
4.4 Lagrangian Multiplier Test of
ERC and IFRS
implementation 92
4.5 Hausman
Specification Test of ERC and IFRS implementation 93
4.6 Results
on the effect of IFRS implementation on ERC
93
4.7 Results on
the moderating effect of investor’s protection on the relationship between IFRS
implementation and ERC 94
4.8 Results on
the moderating effect of earnings persistency on the relationship between IFRS
implementation and ERC 95
4.9 Results on
the moderating effect of systematic risk on the relationship
between IFRS implementation
and ERC 96
4.10 Fixed/random effects regression
results for earnings response coefficient
98
4.11 Fixed/ random
effects regression results for moderating variables and IFRS implementation 99
4,12 Random effects
regression results for moderating variables and ERC 101
LIST
OF FIGURES
Page
1:
Conceptual Framework of IFRS Implementation and Earnings Response
Coefficient 13
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
A well-functioning capital market is essential
for economic development and to realize its full potential, countries must have
a world class capital market that is strong, suitable and plays a central role
by becoming the first port of call for the mobilization of funds and
investment. The Nigerian capital market today is presently gaining important
posture among the community of stock market in the world; and has gone through
series of innovations. There is still a growing need for enhanced investor’s
protection and increased disclosure through the effective use of accounting
information for making economic decisions.
A fundamental issue surrounding the
operation of the market is the availability of relevant information on
potential investment target which has a bearing on efforts to mobilize
investment for financing economic and social development. Relevant and reliable
information on predictable earnings of investible funds is indeed crucial to
induce favorable earning response from potential investors (Adekoya, 2011).
The need for prudential accounting
information propagated by the implementation of the IFRS in Nigeria is already
exhibiting relevant effect in the sub-sector leading to high risk (Adekoya,
2016). This is mostly devoid of highlight on the effect of IFRS on earnings.
Most stakeholders are already coming to term with the potency of the IFRS in
identifying and incorporating all economic transactions and present value of
assets and liabilities in the determination of firms’ returns and future
earnings (Pascan, 2015). However, the resultant effect of IFRS on the decision
usefulness of financial statements information, still remain a mirage among
investors in Nigeria.
Security prices are to completely mirror
all openly accessible information; while the earnings declaration made by a firm
is required to instigate market reactions to the degree of the unforeseen
component of the news. The degree of the adjustment in security price caused by
such unexpected change in earnings is the representation of the earnings
response coefficient (ERC). ERC is, therefore, the estimated relationship
between a firm’s equity and the unexpected portion of a company’s earnings
announcement (Hasanzade, Darabi & Mahfoozi, 2013).
According to Cho and Jung (1991), ERC
captures the return sensitivity to the earnings surprises. These surprises are
estimated by the unexpected earnings characterized as the distinction among
acknowledged and anticipated profit. In other words, ERC represents the market
response, in relations to price change, corresponding to a unit of unexpected
earnings.
Dechow, Ge, and Schrand (2014) show that
ERC is a measure regarding the decision usefulness that assesses market
perception of value relevance of different accounting measurement and
recognition measures. The IFRS implementation is expected to key into the need
for reliable and relevant financial information that is developed based on fair
value for effective decision making across all business jurisdiction (Scott,
2009).
Ewert and Wagenhofer (2005) were of the
view that high quality accounting standards does not only decrease earnings
management and improves reporting quality, but also propels favorable market
reaction. This strong market response to earnings information is reflected in
the high Earning Response Coefficient, suggesting that organizations that
embrace IFRS were less inclined to take part in earnings smoothing and were
bound to report losses in an appropriate manner (Barth, Beaver & Landsman,
2006). However, there also abound several exposures to IFRS implementation that
could impair investors’ decision on earnings forecast which must be critically
considered in relations to other factors that could enhance the decision
usefulness of a firm’s earnings potentials.
Scott (2009) suggested that a number of
reasons could be responsible for differential market response to reported
earnings. These include beta, capital structure, earnings persistency, growth
opportunities and level of investors’ protection among, others. The place of
IFRS implementation to a favorable earning response coefficient is yet to be
unraveled in Nigeria.
The IFRS implementation requiring the use
of fair value accounting among other requirements may also lead to increased
earnings volatility and consequently, less accurate earnings forecasts; hence,
the relevance of this research in determining the level of ERC in the fair
value accounting environment in response to IFRS implementation. This is
because; it is unclear what the IFRS implementation would represent in the
earning response coefficient of listed companies in Nigeria.
1.2 STATEMENT OF THE PROBLEM
The use of the equity market by Nigerian
firms has always been low, unlike some developing countries, where equity tends
to be the primary source of financing. The study has concerned for poor utilization
of capital market, especially equity market for funding of developmental
project, both public and private sector entities.
Funding by banks to listed firms has been
adjudged to be as high as 54 % while that from the equity market is as low as 28
% as at 2018. This low patronage of the Nigerian Stock Exchange as a source of
financing business in Nigeria is attributable to the unfavorable market
response to earnings information that is exclusively dependent on IFRS
exigencies with particular reference to IFRS 13. There are also little or no
information on earnings persistency, investors’ protection and systematic risk
among others in the companies’ annual reports.
Despite the relevance of IFRS to the
financial reporting quality in Nigeria, the focus on IFRS alone has engendered
the inability of the listed firms in Nigerian to increase the decision
usefulness to be more earning oriented rather than non-earning information.
IFRS implementation in Nigeria has led to increase earnings volatility and consequently,
less accurate earnings forecasts, which was not the case in the pre-IFRS
implementation era (Odoemelam, Okafor & Ofoegbu, 2019). These frivolities
have an untold effect on the earning response coefficient of listed firms in
Nigerian; while, a lot of investors still consider other factors besides
earnings in taking their decisions. As such the construct validity of ERC is
not fully known. There is also a relative paucity of research on ERC
determinants in Nigeria and their influence in the Nigerian stock exchange
market. It is equally unclear if the IFRS implementation would result in the
decision usefulness to investors in their response to equity returns and
unexpected earnings from the financial statement of listed companies in the
Nigerian stock exchange, while the issues of investors’ protection have also
been grossly undermined in the firms’ annual reports.
Investors in Nigeria are equally not
quickly moved upon receipt of new information on market value of the securities
which according to them could be a sham (Oji, 2019). This is because most
prices of securities traded in the market might not fully reflect all
information that is publicly known about these securities. It is against this
background that the study examines the moderating
effect of investors’ decision on the relationship between International Financial Reporting Standards (IFRS)
Implementation and Earnings Response Coefficient (ERC) of investors in the
equity market.
1.3
OBJECTIVES OF THE STUDY
The major objective of this research
was to ascertain the moderating effect
of investors’ decision on the relationship between IFRS Implementation and ERC
of listed Companies in Nigeria. However, the following are the specific
objectives of the study:
1. To
investigate if IFRS implementation affects the earnings response coefficient of
listed companies in Nigeria.
2. To
assess the moderating effect of investors'
protection on the relationship between IFRS implementation and earnings
response coefficient of listed companies in Nigeria.
3. To
examine the extent to which earnings
persistency moderates the relationship between IFRS implementation and
earnings response coefficient of listed companies in Nigerian
4. To
evaluate the moderating effect of beta on the relationship between IFRS and earnings response coefficient of
listed companies in Nigeria.
5. To
assess the effect of International
Financial Reporting Standards (IFRS) Implementation on investors' protection of listed Companies in Nigeria.
6. To
examine the effect of International
Financial Reporting Standards (IFRS) Implementation on earnings persistency of listed Companies in Nigeria.
7. To
evaluate the effect of International
Financial Reporting Standards (IFRS) Implementation on beta of listed Companies in Nigeria.
8. To
assess the effect of investors' protection
on ERC of listed Companies in
Nigeria.
9. To
examine the effect of earnings persistency
on ERC of listed Companies in
Nigeria.
10. To
evaluate the effect of beta on ERC of
listed Companies in Nigeria.
1.4 RESEARCH
QUESTIONS
The following research
questions were set to guide the study:
1. To
what extent does IFRS implementation affect earnings response coefficient of
listed Nigerian companies?
2. How
does investors' protection moderate
the relationship between IFRS
implementation and earnings response coefficient of listed companies in
Nigerian?
3. To
what extent does earnings persistency
moderate the relationship between IFRS implementation and earnings
response coefficient of listed Nigerian companies
4. To
what extent does Beta moderate the
relationship between IFRS implementation and earnings response
coefficient of listed companies Nigerian?
5. To
what extent does International
Financial Reporting Standards (IFRS) Implementation affect investors' protection of listed Companies in Nigeria?
6. To
what extent does International
Financial Reporting Standards (IFRS) Implementation affect earnings persistency of listed Companies in Nigeria?
7. To
what extent does International
Financial Reporting Standards (IFRS) Implementation affect beta of listed Companies in Nigeria?
8. To
what extent does investors' protection affect
ERC of listed Companies in
Nigeria?
9. To
what extent does earnings persistency affect
ERC of listed Companies in
Nigeria?
10. To
what extent does beta affect ERC of
listed Companies in Nigeria?
1.5
RESEARCH HYPOTHESES
In
order to answer the research questions and to achieve the objectives of the
study, the following hypotheses were developed:
1.
IFRS implementation has
no significant effect on earnings response coefficient of listed companies in
Nigeria.
- Investor’s protection
does not significantly moderate
the relationship between IFRS
implementation and Earnings response coefficient of listed
companies in Nigeria.
3.
The interaction between IFRS implementation and Earnings
response coefficient is not significantly moderated by earnings persistency of listed companies in Nigeria.
4.
Beta
does not significantly
moderate the relationship between IFRS
implementation and Earnings response coefficient of listed companies in Nigeria.
- International Financial Reporting Standards (IFRS)
Implementation does not significantly affect investors' protection of listed Companies in Nigeria.
- International Financial Reporting Standards (IFRS)
Implementation does not significantly affect earnings persistency of
listed Companies in Nigeria.
- International Financial Reporting Standards (IFRS)
Implementation does not significantly affect beta of listed Companies in Nigeria.
- Investors' protection does
not significantly affect ERC of listed Companies in Nigeria.
- Earnings persistency does
not significantly affect ERC of listed Companies in Nigeria.
- Beta
does not significantly
affect ERC of listed Companies in
Nigeria.
1.6 SCOPE
OF THE STUDY
The topic of this study is on the moderating effect of investors’ decision
on the relationship between International Financial Reporting Standards (IFRS) Implementation and Earnings
Response Coefficient (ERC) of listed Companies in Nigeria. It focuses on
the moderating effect of investors’ protection, earnings persistence and
systematic risk on the relationship between International Financial Reporting
Standards implementation and Earnings Response Coefficient of listed Nigerian
companies.
The sample size of the study was drawn
from companies listed in the Nigerian Stock Exchange (NSE). This entails the
use of the annual reports & accounts and share prices of the listed firms.
The time period of the study was between 2013 to 2018 coverings all aspects
dealing with the data needed for the statistical analysis.
1.7 SIGNIFICANCE OF THE STUDY
The study was significant on two
grounds, namely, theory and practice. On the theoretical ground, this study
essentially contributes to the existing body of knowledge of earnings response
coefficient in Nigeria. In addition, very few studies have centred on
International Financial Reporting Standards Implementation and Earnings
Response Coefficient in Nigeria. As such, this work provides a different view
from what were obtainable in emerging economies, and also offer a better
understanding of the extent of International Financial Reporting Standards
Implementation on Earnings Response Coefficient in Nigeria. Previous studies have
also failed to mention the moderating effect of investor’s protection, earnings
persistency and beta play in enhancing a favourable earnings response
coefficient. In view of this, the study emphasizes on the relevance of
investors’ protection, earnings persistency and beta as prerequisite or
complementary variables to enhance International Financial Reporting Standards
Implementation on Earnings Response Coefficient. The facts on the relevance of
investors’ protection, earnings persistency and sysmatic risk on International
Financial Reporting Standards Implementation enable models to be developed
which map the catalytic effect of the components of beta, investors’ protection
and earnings persistency on the relationship between IFRS Implementation and
ERC.
The study encouraged companies to assess
the current state of their reporting practices, in the light of the factor that
this study identified and examined. This would enable them make the necessary
changes for corporate structure and practices that may improve the effect of
IFRS Implementation on ERC.
The study also serves as reference materials to
researchers in accounting and management sciences. It was additionally
important to scholars that might need to embark on research on comparative and
related area of study, and ultimately the work will be of huge assistance to
the inquisitive general reader who may be keen on having a little information
on the topic.
The discoveries of this investigation will
likewise help them in foreseeing the effect of IFRS implementation on the
response of investor to returns on equity and unexpected earnings of listed
companies. This likewise improves their capacity to plan and do those
strategies that will increase the value of the organizations as well as enhance
favourable ERC.
This study gives the applicable
information that empowers government and its organizations build up regulatory
framework for reporting in the yearly report that suits the Nigerian
environment. This exploration is of immense importance to Financial Reporting
Council of Nigeria (FRCN), Security and Exchange Commission and the Nigerian
Stock Exchange. This study fills in as a reminder for these bodies to set up
machineries for expanded reporting and guidelines.
This study was
likewise important to professional accountancy bodies such as the Institute of
Chartered Accountants of Nigeria (ICAN) and Association of National Accountants
of Nigeria (ANAN). This is on the grounds that as one of the contemporary
issues in accounting it could improve their obligatory proceedings. Speculators
will likewise find the results to be helpful while offering proficient
assistance to their clients in the area of listing activities.
1.8
OPERATIONAL DEFINITION OF TERMS
Beta: It is also known as systematic
risk. This is about unpredictability influence on numerous ventures, stocks and
resources. It assesses the openness of risk a particular stock has according to
the market. It estimates the exposure of risk a specific stock has in relation
to the market.
Cumulative Abnormal
Return: This is the distinction between the
actual returns and the daily market returns of a company’s stock.
Earnings persistency: It estimates
how much flow period current earnings stuns persist in the future and in this
way influence future income assumptions.
Earnings Response Coefficient: This is the estimate of the connection
between stock returns and earnings around the time the earnings are reported.
It also involves an outline on the nature of the expected earnings, measured by
their capacity to reflect market assumption. It
is an estimate of the change in a company’s stock price due to the information
provided on an organization's profit declaration.
Fair value accounting:
This is the sum for which resources/assets could be traded or a liability
settled, between knowledgeable willing parties in an arm’s length transactions.
IFRS Implementation: This
is the act of putting into operation, the International Financial Reporting
Standards in the drawing up of companies’ financial statements.
International Financial
Reporting Standards: This is
a body of accounting and financial reporting standard proclaimed by the
International Accounting Standards Board.
Investors’ Protection: These are mechanisms adequately established to
serve as a shield to provide sense of belonging and protect all investors
against overbearing influence from other investors.
Unexpected
Earnings (UE): This is
the contrast between accounting profit realized and the accounting profit
expected by the market.
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