DETERMINANTS ON SHARE PRICES IN THE NIGERIAN STOCK MARKET

DETERMINANTS ON SHARE PRICES IN THE NIGERIAN STOCK MARKET

CHAPTER ONE

INTRODUCTION

1.1     Background to the study

Non-accounting dynamics are those numbers not reported in financial statements of firms.  These may include exchange rates, inflation rates, interest rates, political instability, speculation, forced sales, gambling, rumour, forces of demand and supply, and so on. Glezakos, Mylonakis and Kafouros (2012) believed that investors in the capital market make use of these dynamics in choosing which firm they will invest or not.  Murinde (2006) posits that investors rely on accounting and non-accounting statistics while trading long-term financial securities (such as ordinary shares, debentures, unsecured loan stock and convertible bonds), government bonds and other public sector securities such as treasury bills and gilt-edged stocks. Thus, these dynamics (accounting and non-accounting information) are good enough in determining share prices of companies.

Germon and Meek (2001) state that those who have funds to invest or lend may decide where to place their resources based on the information they obtain.  Generally, investors usually depend on financial reports prepared by the management of such organizations.  The financial report is one of the best sources of accounting information about a firm listed on the floor of the stock exchange.  The primary purpose of financial statements is to provide information concerning the financial position of the company, its operational results, and any changes of control in the company cash flow.  In spite of the pivotal role accounting information plays, there are still certain dynamisms (such as inflation, interest, exchange rates, government policies ) that may downturn or upturn the prices of share (Terfa, 2010).

In developed countries, studies have shown that accounting and non-accounting information have the tendency to determine share prices of companies (Collins, Maydew & Weiss, 1997; Hamid & Sumit, 1998; Beaver, 2002; Terfa, 2010).  Studies on share price determinants are aggravated by the fact that investors use both accounting and non-accounting information in choosing which firm they will invest.  Thus, the researcher intends to investigate whether accounting and non-accounting information affect share prices of publicly quoted companies in Nigeria.

1.2     Statement of the problem

The factors that determine share prices remains an issue of concern in the capital market, especially in developing capital markets (Jeroh & Okoro, 2015). Negah (2008) asserts that studies on share price determinants in developing capital markets are limited.  He further claims that the scanty literature replicates works done in developed markets and that a closer examination of these works reveals that they face both epistemological and empirical challenges. According to Sutton (1997), while investors make use of accounting information in some investment decision, non-accounting information still have a central place in share price determination. Investors that masks or fails to consider non-accounting information may put itself at risk (Ologunde, Elumilade &Asaolu, 2006).

Empirical evidence suggests that non-accounting information (such as inflation, exchange rates, interest rates, political instability, government policies and so on) are the most significant variables that affects share prices (Udegbunam &Eriki, 2001; Ologunde, et.al, 2006; Terfa, 2010; &Malaolu, Ogbuabor & Orji, 2013). On the contrary, some studies suggest that accounting information (such as Earnings Per Share, Book Value Per Share, Dividends Per Share, Net Assets Per Share, Dividend Cover, Return On Equity, Earnings Yield and so on) are the major variables with the most significant effect on share prices in the capital market (Pirie & Smith, 2003; Mondal & Imran, 2010; Malik, Qureshi &Azeem 2012; and Ejuvbekpokpo & Edesiri, 2014).   These contradictory views have led to the inconclusive nature of various studies on the factors that determine share prices in the capital market.

Given the above, it is pertinent to carry out a detailed evaluation of the accounting and non-accounting variables that affects share prices in emerging capital market while considering the combined effect of these variables on share prices.  Also, it is germane to assess the differences in the perception of institutional and individual investors on the factors that affect share prices of companies so as to see if their level of perception in any way determines the company they invest.  In the light of the above, the identified-problem as at the time of this study are that there is no study on the combined effect of accounting and non-accounting dynamics on share prices in Nigeria.  This forms the main thrust of this study.

1.3     Objectives of the Study

The main objective of this study is to analyze the factors that determine share prices of companies listed on the Nigerian Stock Exchange.  The intended specific objectives are:

(i)      to identify the major accounting variables that have significant effect on share prices of companies.

(ii)     to investigate the non-accounting variables that affect share prices of companies.

(iii)    to determine the relationship between the major accounting variables and share prices of companies.

(iv)    to determine the association between the non-accounting variables and share prices of companies.

(v)     to investigate the combined effect of the accounting and non-accounting variables on share prices of companies.

(vi)    to assess the differences in perception of institutional and individual investors on the factors that affect share prices of companies.


 

1.4     Research questions

Arising from the foregoing objectives, the study will be guided by the following research questions.

(i)      What are the major accounting variables that have significant effect on share prices of companies?

(ii)     What are the non-accounting variables that affect share prices of companies?

(iii)    Is there a relationship between the major accounting variables and share prices of companies?

(iv)    Is there association between the non-accounting variables and share prices of companies?

(v)     What is the combined effect of the accounting and non-accounting variables on share prices of companies?

(vi)    Are there significant differences in perception of institutional and individual investors about the factors that affect share prices of companies?

1.5     Research hypotheses

The following are the intended hypotheses expressed in null form:

Hypothesis I

Ho:     There is no significant relationship between accounting variables and share prices of companies

Hypothesis II

Ho:     Share prices of companies are not significantly influenced by non-accounting variables.

Hypothesis III

Ho:     There is no significant variation in the impact of accounting and non-accounting variables on the share prices of companies

Hypothesis IV

Ho:     There are no significant differences in perception of institutional and individual investors about the factors that affect share prices of companies.

1.6     Scope of the study

This study intends to empirically examine the factors (accounting and non-accounting variables) that determine share prices of companies.  Thus, the study will be limited to the Nigerian Capital Market and the study period of ten years from 2005 – 2014. The period under investigation is based on the fact that this period experienced improvement in financial reporting across the globe and high demands for quality financial statements in the capital market.

1.7     Significance of the study

The findings generated in this study will be used to identify the major variables that affect share price movements on the Nigerian Stock Exchange.  This study will provide a guide as to which accounting and non-accounting variables is or is not valued by investors. The work is important to the Financial Reporting Council as it acts as a feedback channel to the council on which accounting variables (earnings, book value, dividend and dividend cover) is most widely used for equity valuation in Nigeria.

The findings generated in this study may be used to test the existing theories under extreme conditions not present in developed economies where most of the prior studies were carried out as well as enabling the national standards setters to know the nature of demand placed on accounting and non-accounting information by their local investment community, stakeholders and public.  Finally, this study contributes to literature on the variables that determines share prices in the Nigerian capital market. The results provide useful evidence to other emerging stock markets.

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