ABSTRACT
The study sets to examine the effect of financial statement contents on investment decision making of oil and gas companies in Nigeria. The study employed Ex post facto research design as the research design and adopted the use of a multiple linear regression for analysis of data and test of hypotheses. The results revealed that; liquidity ratio has a positive significant effect on return on assets of listed oil and gas firms in Nigeria. The second hypothesis tested revealed that market value of shares has a negative insignificant effect on return on assets of listed oil and gas firms in Nigeria while the third hypothesis tested revealed that turnover ratio has a negative significant effect on return on assets of listed oil and gas firms in Nigeria. The final hypothesis tested revealed that leverage ratio has a positive insignificant effect on return on assets of listed oil and gas firms in Nigeria. Thus, the study recommended that; Oil and gas firms should give adequate care and due diligence in preparing the financial statements to avoid faulty content which could lead to loss of funds and possible litigations by stakeholders. Also, Oil & gas firms and professional bodies should instigate policies that will increase the knowledge of stakeholders on published financial statement especially the market value of shares such that it will attract investors that will enhance more funds for investment purposes and subsequent returns.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table
of Contents vi
List
of Tables ix
Abstract x
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 1
1.2
Statement of the Problem 3
1.3
1.3 Objectives of the Study 5
1.4 Research Questions 5
1.5 Research hypotheses 6
1.6
Scope of the Study 6
1.7
Significance of the Study 6
1.8
Limitations of the Study 7
1.9 Definition
of Terms 7
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1
Conceptual framework 10
2.1.1
Definition of Financial Statement 10
2.1.2
Definition and Nature of Investment Decisions 10
2.1.3
Financial Reporting and Users 12
2.1.4
Accounting Profession in Nigeria 12
2.1.5
Performance Evaluation Using Financial Ratios 13
2.1.6 Nature and objective of financial statement 14
2.1.7 Purpose of financial statements by business entities 14
2.1.8 Standards and credibility of published financial statements 16
2.1.9 Limitations of published financial statement 17
2.1.10
Significance of financial reporting 18
2.1.11 Elements of financial statement 19
2.1.12 Audit and legal implications 20
2.1.13
Basic accounting financial statements 21
2.1.13.1
Income Statement 21
2.1.13.2Balance
Sheet 22
2.1.13.3
Footnotes 23
2.1.14 Published financial statement and investment decision 24
2.1.15
Process of preparing financial information 26
2.1.16
Types of investment decision 28
2.1.16.1
Expansion and Diversification 28
2.1.16.2
Replacement and Modernization 29
2.1.17
Risk of an investment 30
2.1.17.1
Type of Risk 30
2.1.18
Ratios of financial statement analysis and the business decision 33
2.1.19
Oil and gas companies in Nigeria 36
2.1.20
Performance assessment of oil and gas companies 36
2.1.21
Financial measures on national oil companies 37
2.2
Theoretical Framework 40
2.2.1
DuPont Mean-Variance of Portfolio Investment Theory 40
2.2.2
The Modern Portfolio Theory (MPT) 41
2.2.3 Capital Asset Pricing Theory 43
2.2.4 Signalling Theory 43
2.3
Empirical Review 44
2.3.1 Summary and Gaps in Literature Review 48
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design 50
3.2 Area of Study 50
3.3 Population of the Study 50
3.4 Sources of Data 51
3.5 Data
Analysis Techniques 51
3.6 Description
of Research Variables 51
3.6.1 Dependent
variable 51
3.6.2 Independent
variables 52
3.7 Model Specification 53
CHAPTER FOUR: DATA
PRESENTATION AND ANALYSIS
4.1
Data Presentation 55
4.2
Data Analysis 55
4.2.1
Data Validity Test 55
4.2.2
Descriptive Statistics 56
4.2.3
Regression of the Estimated Model Summary 57
4.2.4
Regression Results 59
4.2.5
Test of Research Hypotheses 60
4.2.5.1Test
of Research Hypothesis One 60
4.2.5.2
Test of Research Hypothesis Two 60
4.2.5.3Test
of Research Hypothesis Three 61
4.2.5.4
Test of Research Hypothesis Four 61
4.3
Discussion of Findings 61
CHAPTER FIVE: SUMMARY,
CONCLUSION AND RECOMMENDATION
5.1 Summary of
Findings 64
5.2 Conclusion 65
5.3 Recommendation 65
5.4 Suggestions
for Further Research 66
References
Appendix
LIST OF TABLES
Table
4.1 Presents the descriptive statistics of all the variables 57
Table 4.2 Presents the
regression result between LIQR, TOR, MV LEVR and ROA. 58
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial
reporting is the process of communicating economic information to the
stakeholders that is, the management, shareholders, and public, to facilitate
informed judgment and decision-making, (Peter, 2013). It deals with the
presentation of financial and other relevant statements to show the extent to
which the objectives of the organization have been achieved. They are
instruments without which certain operational decision cannot be made,
especially those that deal with investment, expenditure and assets management
(Better, 1998).
Financial
reports are used by investors and creditors in deciding where to invest their
limited resources in a particular organization or not (Akintoye, 2002).
Corporate organizations owe a duty to fully
disclose matters concerning their operations so as to aid investors in making
investment decisions (Amedu, 2012). Both large and small organizations in
addition to satisfying the legislating requirement tend to retain existing
investors and to attract potential ones through the publication of their
financial statements where the capital stock of a corporation is widely held
and its affairs are of interest to general public relations. The discussions of
this work will be centered on the financial statement presented to shareholders
and also available for potential investors, bond holders and trade creditors as
a tool of information for investment decision. Financial statement based on
result of past activities are analyzed and interpreted as a basis for
predicting future rate of returns and assessment of risk.
Decision makers who contemplate acquiring
total or partial ownership of an enterprise expect to secure returns on their
investment such as dividends and increase in the value of their investment
[capital gain]. Both dividends and increase in the value of shares of company depend
on the future profitability of the enterprise. So investors are interested in
future profitability.
However,
in order to have an effective financial report for planning and decision
making, financial managers must have an in- depth knowledge of the instruments
used for decision making. Issues of fraud, mismanagement, insolvency and
liquidity problems have remained unabated over the years in most organizations
in Nigeria, despite the fact that most organizations presented true and fair
reports. Also, there have been lapses in some financial reporting regulations,
some of which include weaknesses during the preparation of financial reports
due to human errors (Peter, 2013).
Individuals
make personal decisions based on the amount of cash they have and their
expectations about future cash flows. Similarly, current cash balances and
forecasts of future cash flows are at the heart of many business decisions.
Managers, investors, and creditors all need information about cash and cash
flows so they can make decisions (Afolabi, 2013).
Financial
statements also have impact on new investors. When a company issues new shares
of stock, it will most likely distribute financial statements to potential
investors. The potential investors will examine the financial statement to
determine if they want to put money into the company. Low earning could
negatively impact the number of investors willing to put money into the
company. In some cases, financial statements can even affect other business,
(Osuala, Ugwumba & Osuji, 2012). This work examined the type of information
provided in the financial statement and then examined how it is used in
decision making.
Financial
report is a formal and comprehensive statement describing financial activities
of a business organisation such as the banks. For such a business entity,
financial report is a statement that reports all relevant financial
information, presented in a structured manner and in a form easy to understand
for managerial use for taking prompt and informed decision making related to
investment (IASB, 2007a) in (Afolabi, 2013) and also to decision making
pertaining to production planning, investment planning, expected returns and
performance evaluation.
Investment
decisions are very crucial and caution must be taken because huge, scarce and
hard earned resources are involved, irreversible in nature, risky and have long term implication which no investor would
want to be confronted with if negative results occurred. Therefore there is
every need for investors to have good knowledge and understanding of the cash
flow statement, value added statement, income statement, the price, earnings,
value and dividend per share and other relevant financial statements to avoid
irrationality in investment decision making. It must be noted that the
financial information prepared by management as a responsibility has to be
reviewed by independent external auditors and dulyanalyzed by professional
financial experts prior to investment decision making.
The
perceived relevance of financial information is to provide reliable information
about the true and actual financial position, performance (profitability), and
changes in financial position of a business investment opportunity that could
be useful to a wide range of prospective investors, managers, directors,
financial institutions, financial analysts, government, regulatory agencies,
the media, vendors and the general public in making informed or rational
investment decision.
1.4
Statement of the Problem
It is observed that the roles of financial
statements in investment decision making in Nigeria has some problems to both
investors and managers of business organizations who are either not aware of
the importance of interdependence relationship that exist between investors and
business organizations. Such problems include: how to ascertain the effect
between return on assets and investment decision making of an Oil and Gas
Company; how return on equity affects the investment decision making of an Oil
and Gas Company; how to determine the effect of return on revenue on investment
decision making of an Oil and Gas Company using the financial ratios.
The above listed problems are the issues to
look into in this research work, which tend to scare away both existing and
potential investors. Despite the expanded information made available to investors, studies
indicates that annual reports are still considered to be the most important
source of information by investors and securities analysts (Fulkerson, 1996;
Pratt, 1996). Nevertheless this research proffers possible
solutions to these problems because financial statement in investment decision
making in Nigeria is the important sources of information to the potential
investor.
In past
years most investors and other financial statement users see the financial
statement prepared by a given company and they either invest or give loans to
the company and after a period of time, the company fold-up and their money is
gone. This could be partly because the investor and other financial statement
users do not have the knowledge of accounting which enables them to analyze and
appraise the financial performance of the company through their published
financial statement. The problem is the inability on the part of investors,
shareholders and other users of financial statements to analyze the financial
statement of companies. The financial performance of companies cannot be
understood from their published financial statement by investors by mere
looking at the financial transactions that are contained in the financial
statement. This makes some investors become confused whether to invest or not
in a company.
1.3 Objectives of the Study
The main
objective of this study is to determine the effect of financial statement
contents on investment decision making of oil and gas companies in Nigeria. The
specific objectives therefore are as follows, to;
i.
Determine the extent Leverage ratio affects return
on assets of oil and gas companies in Nigeria.
ii.
Examine the effect of Liquidity ratio onreturn
on assets of oil and gas companies in Nigeria.
iii.
Ascertain the extent Market value of shares affects return
on assets of oil and gas companies in Nigeria.
iv.
Determine the extent turnover ratio affects return
on assets of oil and gas companies in Nigeria.
1.4 Research Questions
This
research work tends to provide answers to the following questions;
1)
To what extent Leverage ratio affects return
on assets of oil and gas companies in Nigeria?
2)
What is the effect of Liquidity ratio onreturn
on assets of oil and gas companies in Nigeria?
3)
To what extent does Market value of shares affects return
on assets of oil and gas companies in Nigeria?
4)
What is the effect of turnover ratio onreturn
on assets of oil and gas companies in Nigeria?
1.5 Research hypotheses
The
following null research hypotheses were tested.
1)
Leverage ratio has no significant effect on return
on assets of oil and gas companies in Nigeria.
2)
Liquidity ratio has no significant effect on return
on assets of oil and gas companies in Nigeria.
3)
Market value of shares has no significant effects on return
on assets of oil and gas companies in Nigeria.
4)
Turnover ratio has no significant effects on return
on assets of oil and gas companies in Nigeria.
1.6
Scope of the Study
The study will focused on the effects of
financial statements contents on oil and gas companies in Nigeria. It covers
quoted oil and gas companies listed on the Nigeria Stock Exchange (NSE), and
annual financial reports of the companies.
The choice of selecting oil and gas companies is because oil and gas
contributes majorly to Nigerian economy.
This study was restricted to measurable
variables (that is financial ratios) that will computed from the financial
report. The selected financial ratios were Leverage ratio, Liquidity ratio,
Market Value ratio and Turnover ratio, as stated by Paul (2008), as the better
ratio for assessing the performance of oil and gas companies in Nigeria.
1.7
Significance of the Study
The main
purpose of this research is to ascertain the effect of financial statement
contents (financial ratios) on the performance of oil and gas companies in
Nigeria. This work will be of help to existing and potential investors and also
creditors in deciding where to invest their resources in a particular
organization or not. The study will enhance effective analytical understanding
of the instruments used for decision making.
This study will be of immense benefit to oil
and gas companies in Nigeria by improving the performance, financial analysts,
investors, and creditors. This is because the study intends to help these
stockholders in decision making. The study will help in widening knowledge
about the contents of financial statement in investment decision making, it
will also make the companies to appreciate the importance of sound financial
statement.
Finally this research will equally serve as a
reference to students in this noble institution and other schools, who may be
interested to embark on a further research study of this nature. Above all,
findings of this study shall definitely add to existing knowledge in research.
1.8 Limitations of the Study
In
the course of undertaken this study, there are limitations that dogged the
study.
1.
The time lag for this research work considering
its complexity.
2.
Limited resources; numerous expenses were
involved, more especially in sourcing for the data and running of the analysis
cost much because there are few analysts that are conversant with E-View
Software.
1.9 Definition of Terms
The following terms were used in this study as defined to facilitate the
effective communication of the study;
Financial statement: These are document prepared by the management of a
company to communicate its performance to the shareholder and other users.
Investment: This means the forfeiture of the
present resources for the future. It is the commitment of present resources for
future return.
Management: These include board of directors, the general management,
the functional manager and divisional managers.
Ratio: This is the term that expresses the relationship between two
financial data that is useful in the assessment of a company performance
Financial ratio: This is a relative magnitude of two selected numerical
values taken from enterprises financial statements.
Profitability Ratio: It is measured as net
income after tax divided by total assets.
Leverage Ratio: It is measured as total
liabilities divided by total assets.
Liquidity Ratio: It is measured as current
assets divided by current liabilities.
Market Value Ratio: It is measured as net
earnings divided by number of shares.
Turnover Ratio: It is measured as net sales
divided by total assets.
CAMA, 1990: These are act or statute that regulates the operational
activities of companies.
NASB: Nigeria Accounting Standard Board.
SAS: Statement of Accounting Standard.
IASB: International Accounting Standards
Board.
IAS: International Accounting Standard.
IFRS: International Financial Reporting
Standards.
FRCN: Financial Reporting Council of Nigeria
GAAP: Generally Accepted Accounting
Principles.
CAMA: Companies and Allied Matters Acts
SEC: Security Exchange Commission.
CAPEX: Capital Expenditure
NOCS: National Oil Companies.
IOCS: International Oil Companies.
LNG: Liquefied Natural Gas
OPEC: Organization of Petroleum Exporting
Countries.
NSE: Nigerian Stock Exchange.
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