ABSTRACT
This work titled effects of the contents of financial statements on investment decision making of oil and gas companies in Nigeria examines the contents of financial statements that affects the investors decision making in Oil and Gas companies in Nigeria. Data used were obtained from the (listed oil and gas companies in Nigeria Stock Exchange) published annual financial reports from the year 2010 - 2014. The financial ratios computed from the annual reports were analyzed using panel regression model. The analyses were done with eview 7.0 statistical software. The independent variables used are leverage ratio, liquidity ratio, market value ratio and turnover ratio. The dependent variables Return on Assets (ROA), Return on Equity(ROE), and Return on Revenue (ROR) were proxied by investment decision making. The analyses shows that ROE and ROR have statistical significant effect on investment decision making, and ROA were not significant. The study recommends adequate care and due diligence should be maintained in preparation of the financial statements to avoid faulty investment decision which could lead to loss of funds and possible litigation. Also the financial statements should be used as bedrock for investment decision making.
TABLE OF CONTENTS
Title i
Certification ii
Declaration iii
Dedication iv
Acknowledgements v
Abstract xii
CHAPTER 1 - Introduction
1.1 Background to the
Study 1
1.2 Statement of the
Problem 2
1.3 Objectives of the Study 4
1.4 Research Questions 5
1.5 Research Hypotheses 5
1.6 Scope of the Study 6
1.7 Significance of the Study
6
1.8 Limitations of the Study
7
1.9 Operational Definition of Terms
CHAPTER 2 - REVIEW OF
RELATED LITERATURE
2.1 Conceptual Framework 10
2.1.1 Definition of financial statement
10
2.1.2 Nature of investment decision 10
2.1.3 Financial reporting and users 12
2.1.4 Accounting profession in
Nigeria 13 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 15
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 19
2.1.11 Elements of Financial Statement 21
2.1.12 Basic accounting financial statement 21
2.1.12.1 Income statement 21
2.1.12.2 Statement of financial position 22
2.1.12.3 Footnotes 24
2.1.13 Published financial statement and investment decision. 23
2.1.15 Process of preparing
financial information 27
2.1.16 Types of investment decision 29
2.16.1 Expansion and diversification 29
2.16.2 Replacement and modernization 30
2.17 Risk of an investment 31
2.1.18 Type of risk 32
2.18 Ratios of financial statement
analysis and business decision 35
2.1.19 Oil and gas
companies in Nigeria 38
2.1.20 Performance
assessment of oil and gas companies 38
2.1.21 Financial
measures on national oil companies 39
2.2 Theoretical Framework 42
2.2.1 Dupont mean –variance of
portfolio investment theory 42
2.2.2 The modern 43
2.16 Empirical Review 45
2.3.1 Summary and gaps in literature review 50
CHAPTER 3 - RESEARCH METHODOLOGY
3.1 Research Design 52
3.2 Population of the Study 52
3.4 Sample Size Determination 52
3.4 Sources of Data 52
3.5 Data analysis techniques 55
3.6 Description of
research variables 53
3.6.1 Dependent Variable 53
3.6.2 Independent
Variables 55
3.7 Model Specification 57
CHAPTER 4-RESULTS AND
DISCUSSIONS
4.1 Data Presentation 59
4.2 Unit Root Test 62
4.2.1 Panel unit root test for
dependent and independent variables 62
4.3 Cointegration test. 64
4.3.1 Cointegration test for the
series ROA, LEVR, LIQR, MVR, and TOR. 64
4.3.2 Cointegration test for the
series ROE, LEVR, LIQR, MVR, and TOR. 66
4.3.3 Cointegration test for the
series ROR, LEVR, LIQR, MVR, and TOR. 67
4.4 Test of Constant Variance
(Heteroskedasticity) 68
4.4.1 Test of constant variance for
model 1 68
4.4.2 Test of constant variance for
model 2 69
4.4.3 Test of constant variance for
model 3 70
4.5 Test of Hypotheses 70
4.6 Discussion of
Findings
82
CHAPTER 5 - SUMMARY OF
FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 84
5.2 Conclusion 84
5.3 Recommendations 85
References 86
Appendices
LIST OF TABLES
Table 4.1 Descriptive statistics of dependent and
independent variables 60
Table 4.2.1: Result of panel unit
root tests for the dependent variables 63
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Table 4.3.1: Cointegration
test – Engle-Granger
64
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Table 4.3.2:
Cointegration test - Engle-Granger
66
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Table 4.3.3:
Cointegration test - Engle-Granger 67
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Table 4.4.2:
Heteroskedasticity test: White
69
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Table 4.4.3:
Heteroskedasticity test: White 70
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Table 4.5.1.1:
Correlated random effects - Hausman Test 71
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Table 4.5.1.2: Estimates of the
panel random effect (Model 1) 72
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Table
4.5.2.1:Correlated random effects – Hausman Test 74
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Table 4.5.2.2: Estimates of the
panel random effect (Model 2) 75
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Table 4.5.3.1:
Correlated random effects – Hausman Test 78
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Table 4.5.3.2: Estimates of the
panel random effect (Model 3) 79
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Financial reporting is
the communicating processes of economic information to the investors 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 how far the objectives of the organization
have been achieved. According to Better 1998, financial reports are instruments
that are needed for certain operational decision to be made, especially those
that deal with investment, expenditure and assets management.
Financial reports are
used by potential 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 their annually financial reports to investors and public so
as to help them in making decisions on how to invest their resources, (Amedu,
2012). Through the publication of company’s financial statements, both large
and small companies satisfy their legislating requirement to retain their
existing investors and to attract new ones. The discussions of this work
centered on how the contents of the financial statement presented to public
will affects the decision of the investors. According to Amedu (2012), the
results of the analysis and interpretation of the past activity in the
financial statement is a basis for predicting future rate of returns and
assessment of risk. Amedu (2012) added that investors 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. The
future profitability of an organization determines both dividends and the
increase in the value of shares of the company.That is more reason the public
and investors are interested in future profitability of any organization they
are interested in investing their resources.
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, inasmuch as most organizations
presented true and fair reports. Peter 2013 indicates there are lapses in some
financial reporting regulations, some of which include errors 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 returns. Similarly, cash at hand and expectations of future
returns are at the mind of many business investors. Managers, investors, and
creditors all need information about cash and cash flows so they can make
decisions (Afolabi, 2013).
It helps financial
statement users answer diverse business related questions. Such questions include
the following; is how extent do company generates cash from normal operations
to continue operating and clear their debts? Will the company will be able to
generate enough cash for future expansion? How sufficient will the company
generates cash to pay off their future dividends?
Financial statements
also have impact on new investors. According to Afolabi (2011), company issues
new shares of stock alongside with the financial statements to potential
investors. The potential investors will examine the financial statement
critically to decide if they will invest their money in the company. Low
earning numbers 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 will examine
the effect of the financial statements contents on investment decision making
of oil and gas companies.
1.2
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
set 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
of organization 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;
i. To determine the extent
financial statement contents (Leverage ratio, Liquidity ratio, Market value
ratio, and Turnover ratio) affects return on assets of oil and gas companies in
Nigeria.
ii.
To determine the extent financial statement
contents (Leverage ratio, Liquidity ratio, Market value ratio, and Turnover
ratio) affects return on equity of oil and gas companies in Nigeria.
iii.
To determine the extent financial statement
contents (Leverage ratio, Liquidity ratio, Market value ratio, and Turnover
ratio) affects return on revenue 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 does financial statement contents
(Leverage ratio,
Liquidity ratio, Market value
ratio, and Turnover ratio) affects return on assets of
oil and gas companies in Nigeria?
2)
To what extent does financial statement contents
(Leverage ratio, Liquidity
ratio, Market value ratio, and Turnover
ratio) affects return on equity of oil and gas
companies in Nigeria?
3)
To what extent does financial statement contents
(Leverage ratio, Liquidity
ratio, Market value ratio, and Turnover
ratio) affects return on revenue of oil and
gas companies in Nigeria?
1.5 RESEARCH HYPOTHESES
The following null
research hypotheses were tested.
1)
Financial statement content (Leverage ratio,
Liquidity ratio, Market value
ratio, and Turnover ratio) has no
significant effect on return on assets of oil and gas
companies in Nigeria.
2)
Financial statement content (Leverage ratio,
Liquidity ratio, Market value
ratio, and Turnover ratio) has no
significant effect on return on equity of oil and
gas companies in Nigeria.
3)
Financial statement content (Leverage ratio,
Liquidity ratio, Market value
ratio, and Turnover ratio) has no
significant effects on return on revenue of oil and
gas companies in Nigeria.
1.6 SCOPE OF
THE STUDY
The study was 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 from the year 2010 - 2014. The choice of selecting oil and gas companies
is because oil and gas contributes majorly in Nigerian economy.
This study was restricted to
measurable variables (that is financial ratios) that were 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 factor was a limitation based on the
fact that there was no much time,
but the researcher tried to come up with this work despite the constraint.
2.
Limited resources: numerous expenses were
involved, more especially in sourcing for the data.
3.
There was a little challenge in getting the
annual financial reports for the selected
Oil and Gas Company for the range of ten years that were considered.
More so there
were inconsistencies in the currency measuring unit of financial transactions
in the financial report. Financial transactions in some years are measured in US dollars while some years are measured in Naira.
Despite the challenges, the researcher tried as much as possible
not to allow the limitations to affect the findings or the reliability of this
work.
1.9 OPERATIONAL
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.
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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