FIRM ATTRIBUTES AND FINANCIAL INFORMATION QUALITY OF LISTED DEPOSIT MONEY BANKS IN NIGERIA
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Abstract
This study examines the influence of Firm Attributes on Financial Information Quality of listed Deposit Money Bank in Nigeria. Firm Attributes were proxied with Economic Profit, Firm Size, Dividend, Leverage and Firm Growth, while Financial Information Quality was proxied with Discretionary Loan Loss Provision Model (Chang et al. 2008). The study employed the use of criteria to arrive at the sample size consisting of thirteen (13) listed Deposit Money Banks (DMB’s) in Nigeria out of twenty (20) listed DMB’s as contained in Nigeria Deposit Insurance Corporation’s Annual Report at 31st December 2012. Secondary data was extracted from the Audited annual reports of the sampled firms from 2006–2012. Both normality test and multicolinearity test were conducted to diagnose the result. The findings revealed that, all the firm attributes used in the study has positive and significant influence on the Financial Information Quality of listed Deposit Money Banks in Nigeria. Therefore it is recommended that the Listed Deposit Money Banks should strive to increase their Economic Profit, Total Asset, and have a consistent increase in dividend payment, while using considerable level of debt to finance the firm activities.
TABLE OF CONTENTS
Pages
Title page ………………………………………………………………………….i
Declaration ……………………………………………………………………….ii
Certification ……………………………..……………………………………….iii
Dedication ………………………………………………………………………..iv
Acknowledgments ………………………………………………………………..v
Abstract …………………………………………………………………………..vi
Table of contents …………………………………………………………………vii
| CHAPTER ONE: INTRODUCTION | ||||||||
| 1.1 | Background to the study | – | – | – | – | – | – | 1 |
| 1.2 | Statement of the problem- | – | – | – | – | – | – | 3 |
| 1.3 | Objectives of the study- | – | – | – | – | – | – | 5 |
| 1.4 | Hypotheses of the study- | – | – | – | – | – | – | 5 |
| 1.5 | Significance of the study- | – | – | – | – | – | – | 6 |
| 1.6 | Scope of the study- | – | – | – | – | – | – | 7 |
| CHAPTER TWO: LITEREATURE REVIEW | |||||||||||||||||||||||||
| 2.1 | Introduction – | – | – | – | – | – | – | – | 9 | ||||||||||||||||
| 2.2 | Financial Information quality- | – | – | – | – | – | 9 | ||||||||||||||||||
| 2.2.1 | Earnings Management by Banks- | – | – | – | – | – | 12 | ||||||||||||||||||
| 2.2.2 | Techniques of Earnings Management- | – | – | – | – | 13 | |||||||||||||||||||
| 2.2.3 | Proxy for Measurement of Financial information quality | – | – | 22 | |||||||||||||||||||||
| 2.3 | Review of Empirical Studies | – | – | – | – | – | – | 24 | |||||||||||||||||
| 2.3.1 | Economic Profit and Financial information quality. – | – | – | 24 | |||||||||||||||||||||
| 2.3.2 | Firm Size and Financial information quality. – | – | – | – | 27 | ||||||||||||||||||||
| 2.3.3 | Dividend and Financial information quality. – | – | – | – | 28 | ||||||||||||||||||||
| 2.3.4 | Leverage and Financial information quality- – | – | – | – | 30 | ||||||||||||||||||||
| 2.3.5 | Firm Growth and Financial information quality- | – | – | – | 33 | ||||||||||||||||||||
| 2.4 | Theoretical Framework – | – | – | – | – | – | – | 37 | |||||||||||||||||
| CHAPTER THREE: RESEARCH METHODOLOGY | |||||||||||||||||||||||||
| 3.1 | Introduction – | – | – | – | – | – | – | – | 40 | ||||||||||||||||
| 3.2 | Research Design | – | – | – | – | – | – | – | 40 | ||||||||||||||||
| 3.3 | Population of the Study and Sample Size- | – | – | – | – | 40 | |||||||||||||||||||
| 3.4 | Sources and Method of Data collection – | – | – | – | – | 41 | |||||||||||||||||||
| 3.5 | Variables and their Measurement – | – | – | – | – | – | 42 | ||||||||||||||||||
| 3.6 | Model Specification | – | – | – | – | – | – | – | 42 | ||||||||||||||||
| 3.7 | Justification for the Technique Used- – | – | – | – | – | 43 | |||||||||||||||||||
| CHAPTER FOUR: DATA PRESENTATION | AND ANALYSIS | ||||||||||||||||||||||||
| 4.1 | Introduction – | – | – | – | – | – | – | – | 45 | ||||||||||||||||
| 4.2 | Descriptive Statistics | – | – | – | – | – | – | – | 45 | ||||||||||||||||
| 4.3 | Correlation Matrix | – | – | – | – | – | – | – | 46 | ||||||||||||||||
| 4.4. | Inferential Statistics | – | – | – | – | – | – | – | 48 | ||||||||||||||||
| 4.5 | Economic Profit and Financial information quality- – | – | – | 50 | |||||||||||||||||||||
| 4.6 | Firm Size and Financial information quality – | – | – | – | 51 | ||||||||||||||||||||
| 4.7 | Dividend and Financial information quality- – | – | – | – | 51 | ||||||||||||||||||||
| 4.8 | Leverage and Financial information quality- – | – | – | – | 51 | ||||||||||||||||||||
| 4.9 | Firm Growth and Financial information quality- | – | – | – | 52 | ||||||||||||||||||||
| 4.10 | Hypothesis Testing and Robustness Test- | – | – | – | – | 52 | |||||||||||||||||||
| 4.11 | Discussion of Findings | – | – | – | – | – | – | 56 | |||||||||||||||||
| CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMENDATIONS | |||||||||||||||||||||||||
| 5.1 | Summary | – | – | – | – | – | – | – | – | 58 | |||||||||||||||
| 5.2 | Conclusion | – | – | – | – | – | – | – | – | 59 | |||||||||||||||
| 5.3 | Recommendations | – | – | – | – | – | – | – | 61 | ||||||||||||||||
| 5.4 | Limitations of the study- | – | – | – | – | – | – | 62 | |||||||||||||||||
| 5.5 | Areas for further study – | – | – | – | – | – | – | 62 | |||||||||||||||||
| BIBLIOGRAPHY | – | – | – | – | – | – | – | – | 64 | ||||||||||||||||
| APPENDICES | – | – | – | – | – | – | – | – | 73 | ||||||||||||||||
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial information quality is a key concern for all investors and potential investors in any organization. As posited by Biddle et al. (2009), financial information quality is termed as the precision with which financial reporting conveys information about the firm‟s operations, in particular its expected cash flows that inform equity investors. Their definition is consistent with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Concepts No. 1 (1978), which states that one objective of financial reporting is to inform present and potential investors in making rational investment decisions and in assessing the expected firm cash flows. Literature on stewardship accounting posits that an accounting number is deemed value relevant if it has a significant association with equity market value (Barth, Beaver, & Landsman, 2001), and could be used to estimate future returns (Beaver, 1968). Thus, if reported earnings are considered by investors to be value relevant and useful in estimating future returns, market value of shares and earnings should normally be related.
Corporate scandals in organization in the last decade and the collapse of big firms in recent years most especially Enron, Tyco, HealthSouth, Parmalat, WorldCom and Xerox around the world have raised concerns about financial information quality which led to the passage of Sarbanes–Oxley Act which had a focus on the financial aspects of corporate governance. The Nigeria Banking Sector was not also free of these said corporate scandals which led to the various reforms by Central Bank of Nigeria (CBN) that forced some of those affected banks out of Business.
Accounting information is relevant to the extent that it is capable of influencing a decision maker by helping him/her to predict the outcomes of present event or to confirm or correct prior expectations (Bushman, Chen, Engel and Smith, 2004). In order for information to be relevant, it must be timely, and it must have predictive value or feedback value or both (Bello, 2009).
Accounting information is reliable to the extent that users can depend on it to judge the economic conditions or events that it purports to represent. Reliability has the qualities of neutrality, representational, faithfulness and verifiability. Verifiability on the other hand means the ability through consensus among measurers to ensure that information represents what it purports to represent or that the chosen method of measurement has been used without error or bias. It has three key aspects namely; consensus among observers, assurance of correspondence to economic events, and direct and indirect verification (Johnson, 2005).
There are numerous principal firm attributes that varies systematically across organisations. Past research work has revealed that organisations that embark on earnings management activities are often smaller in size (Kinney and McDaniel, 1989), less profitable (Defond and Jiambalvo,1991), lower growth rate, while having higher leverage than their industry average (Callen et al., 2002) and high dividend payment. These studies hypothesize that the degree of earnings management will depend on the firm‟s operating performance. When operating performance is unusually high, managers tend to decrease earnings by saving it for a rainy day, this may through depreciation of asset to reduce profit. When operating performance is poor, managers tend to increase earnings through untimely sales of assets.
Firm attributes have been found by various researches such as (Shehu, 2012; Ahmed & Courtis, 1999; Ahmed & Nicholls, 1994; Alsaeed, 2006) to have significant role in explaining degree of financial information quality. Firm attributes are referred to as those incentive variables that relatively sticky at firm‟s level across time. They are variables that affect the firm‟s decision both internally and externally (Shehu, 2012). The incentive variable ranges from Economic profit, Firm Size, Dividend, Leverage, Firm Growth amongst others. It is to this end that the study examines the influence of Firm attributes and financial information quality of listed deposit money banks in Nigeria. The Deposit Money Banks is one of the most vital sectors in Nigeria economy such that whatever happens to it may affect other sector within the economy and as such it is important to study these internal and external variables that may affect the quality of financial information quality of Banks.
1.2 Statement of the Problem
Corporate financial reporting has become a global concern particularly in recent time due to the reported cases of corporate failures arising from improper, false and misleading financial reporting in firms which hitherto had enjoyed good reputation due to the track record of great success in their lines of business (Agrawal and Chadha, 2005). A financial statement is said to be misleading if it lacks the qualities of accuracy, relevancy, comparability, reliability, compatibility and it contains fundamental errors or is prepared with the intention to deceive and/or confuse the users. Such deception can be carried out in a number of ways, among which are distortions of accounting records, falsification and omission of transactions, or misapplication of accounting principles (Higgs, 2003). Several motives may be attributed for the preparation of misleading financial statements. As argued by the various convergence views in literatures. There are views that misleading financial statements are prepared for the demand of high returns by shareholders on their investments. This expectation from investors, that is, the providers of capital places management of some organisations under undue pressure that they (managers) resort to indulging in unethical practice of financial information smoothening, preparation and reporting. Other view is the pursuit to retain and sustain a giant corporate status in the eyes of the business community despite some crippling internal problems, odds in the business terrain or sporadic changes in competitiveness. The craze to satisfy the greed of company’s insiders by manipulating the financials, understating or reclassifying expenses is another argument. These arguments of course set the stage for the failure of the firm with time. The consequences of these unethical accounting practices include, but not limited to a yawning gap between reality and the reported position of the firm such that any person placing reliance on such reports for decision making will be misled. The erosion of investor’s confidence in corporate entities, attrition of revenue to the government via evasion or avoidance of taxes, reduction in the inflow of foreign direct and portfolio investment are easily achieved through earnings management (Shehu, 2012).
Firm attributes plays a vital role in constraining managers (account information preparers) from manoeuvring the accounting numbers which will ultimately improve the quality of reported accounting information. There has been inconclusive findings and divergent views in prior literatures as to whether firm attributes have impact on financial information quality. To the best of our knowledge, researches conducted in various sectors both Nigeria and Other Countries do not have the combinations of the Firm attributes variables used in this work, Such as (Shehu, 2012; Farouk & Shehu, 2014; Barako, 2006, 2007; Alsaed, 2006.) Therefore the study seek to find out the level of contributions that Firm attributes have on Financial information quality of listed Deposit Money Banks in Nigeria.
1.3 Research Questions
- Does Economic Profit influence financial information quality of listed Deposit Money Banks in Nigeria?
- To what extend does firm size impact on financial information quality of listed Deposit Money Banks in Nigeria?
- Does dividend influences financial information quality of listed Deposit Money Banks in Nigeria?
- Does leverage influence financial information quality of listed Deposit Money Banks in Nigeria?
- To what extend does firm growth impact on financial information quality of listed Deposit Money Banks in Nigeria?
1.4 Objectives of the Study
The Major objective of the study is to investigate the Influence of firm attributes on financial information quality of Listed Deposit Money Banks (DMBs) in Nigeria.
In order to achieve the overall objective, the following specific objectives are set forth.
- To determine the influence of Economic Profit on Financial information quality of listed Deposit Money Banks in Nigeri
- to examine the Impact of Firm Size on Financial information quality of listed Deposit Money Banks in Nigeria;
- to determine the effect of Dividend on Financial information quality of listed Deposit Money Banks in Nigeria;
- to assess the Influence of Leverage on Financial information quality of listed Deposit Money Banks in Nigeria; and
- to determine the Impact of Firm Growth on Financial information quality of listed Deposit Money Banks in Nigeria.
1.5 Hypotheses of the Study
With respect to the objectives highlighted above, the following hypotheses have been formulated:
H01: Economic Profit has no significant influence on financial information quality of Listed Deposit Money Banks in Nigeria.
H02: Firm Size has no significant impact on financial information quality of Listed Deposit Money Banks in Nigeria.
H03: Dividend has no significant effect on financial information quality of Listed Deposit Money Banks in Nigeria.
H04: Leverage has no significant influence on financial information quality of Listed Deposit Money Banks in Nigeria.
H05: Firm Growth has no significant impact on financial information quality of Listed Deposit Money Banks in Nigeria.
1.6 Significance of the Study
First, the use of Economic profit in place of accounting profit is aimed at establishing the contribution of economic profit other than accounting profit on the financial information quality of listed Deposit Money Banks in Nigeria. The findings will help establish its own impact on financial information quality.
Second, the result will in no doubt provide an insight into the complex issues of financial information quality and Attributes of banking industry. The result is expected to have an important policy implication for Nigerian Stock Exchange (NSE), Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN) and other stakeholders in banking regulation to strive hard in improving transparency, informativeness and quality assurance of annual reported earnings for Deposit Money Banks in Nigeria.
The results of this study can be used as a consideration for investors in deciding to invest and for the creditor in making lending decisions.
In addition, It also provide information and contribute to the development of science, especially research related to financial accounting and management behavior, particularly in earnings management.
The result has an important policy implication for country‟s reformers and regulators who are striving to improve transparency and quality of financial reporting in the country. That is, the degree of firm attributes is an important determinant of a country‟s financial reporting quality and lower earnings manipulations.
Finally, in addition to confirming the findings of previous researches in describing the role of Firm attributes of banks as an important determinant of financial information quality, findings of this research would in no doubt add to the existing literatures.
1.7 Scope of the Study
This study is limited to only those Banks that are quoted on the Nigerian Stock Exchange (NSE) between January, 2005 and remain listed up till December 2012. The study is centred on assessing the influence of Economic Growth, Firm Size, Dividend, Leverage and Firm Growth on Financial information quality of Listed Deposit Money Banks in Nigeria.
The study covers the period between 2006 – 2012. This period is considered appropriate as it falls within the period there was financial scandals around the world which Nigerian banking sector was not completely exonerated.
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