ABSTRACT
This study examined the impact of Financial Reporting on investment decision of equity holders in Breweries and Banking Industries. The purpose of the study was to determine the impact financial reporting has on investment decisions of shareholders and other investors. Using residual equity theory and enterprise theory upon which the study is anchored and the body of literature on financial reporting pedagogies as conceptual guides, a five year data from five selected firms namely: Nigerian Breweries plc, Guinness Nigeria Plc, Zenith Bank plc, First Bank plc and Guaranty Trust Bank Plc were used in the study conducted in south east, Nigeria. Financial reporting and equity holders were operationalized and measured. Data from the five selected firms were analyzed using regression and correlation statistics. The findings of the study show that: Profitability has a significant positive impact on equity holders’ investment decision. Dividend per share payout does not significantly affect equity holders’ investment decisions. There is a significant positive relationship between Earnings per share and investment decision. There is an insignificant positive relationship between leverage and investment decision. Liquidity of a firm has a significant positive effect on equity holders’ investment decision in the firm. The study concludes that financial reporting has a significant positive impact on equity holders’ investment decision. The study recommends that financial reporting statutory regulators should ensure credible financial reporting that would ensure reliable decision making.
CHAPTER ONE
INTRODUCTION
- BACKGROUND OF THE STUDY
The fundamental aim of financial reporting is to provide high-quality financial reporting information concerning economic entities or units, primarily financial in nature, useful for economic decision making (FASB, 1999; IASB, 2008). Providing high quality financial reporting information is important because it will positively influence capital providers and other stakeholders in making investment, credit, and similar resource allocation decisions enhancing overall market efficiency (IASB, 2006; IASB, 2008). The importance of reliable financial reporting as a vehicle for financial decision making cannot be over- emphasized and one of the fundamental problems in prior researches is the operationalization of the concept. The quality of financial reporting includes different context- specific domains and as such involves differences among constituents (Schipper & Vincent, 2003; Dechow & Dichev, 2002). In addition, the users within a user group may also perceive the usefulness of similar information differently given its context (Beest, Braam and Boelens, 2009).
Quoted organizations have as a matter of fundamental condition, the responsibility of making known those matters that concern their operations in order to help the investing public in their investment decision-making. Firms of different sizes aside their statutory obligation, endeavour to retain their shareholders and investors so as to attract new ones. A satisfying methodology of accomplishing the above is to make or publish the information concerning the organization as financial reporting. Such financial statement is essential in aiding the decision making abilities of accounting information users. Financial statement provides important information for a wide variety of decisions, and investors draw information from the statement of the firm in whose security they contemplate investing (Anaja & Onoja, 2015) ‘‘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’’ (p.2.). Dividends and increase in the value of shares of firms depend on the future profitability of the enterprise. Financial statement is a formal and comprehensive statement describing financial activities of a business organization such as the financial institutions. For such a business entity, financial statement 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) and also to decision making pertaining to cost planning, investment planning, expected returns and performance evaluation.
Anaja and Onoja (2015:2) posits ‘‘that the financial statement comprises balance sheet (for determining financial position), profit and loss statement (describes statement of comprehensive income), statement of equity changes (explain the changes of the company’s equity), and cash flow statements (reports on a company’s cash flow activities, particularly its operating, investing and financing activities). Although, these statements are often complex and may include an extensive set of notes to the financial statement and explanation of financial policies and management discussion and analysis (IASB, 2007b). The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statement are considered an integral part of the financial statements. However, the approaches that the notes and financial statement are presented and reported are critically for investment decision making by existing and prospective investors in order to earn optimal returns on their investments.
This indicates that financial statement methods in terms of information disclosure pattern, transparency, auditing, reporting standards, regulatory control and flexibility, corporate governance, and financial scandals have influence on investment decision making in any organization, especially in financial institutions with extensive range of investment activities that requires comprehensive financial facts that can be obtained from a financial reporting. Though, these financial statements are often prepared according to national standards, corporate governance, professional ethics, and code of ethics. It has been stressed that there is need for corporate ethics in the preparation of financial report. This to avoid financial reporting fraud and scandals that might hinders effective decision making process by management and other users of reports. The purpose of ethics in financial accounting reporting with expected standards is to re-orientate corporate organization on the need to abide by a code of conduct that facilitates public confidence in their services (Okafor, 2006).
It was observed that the roles of financial statement on investment decision making of financial institutions 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 financial organizations. The incidence of corporate failures, for instance, Enron Corporation and World.com in the year 2002, and other accounting scandals compounded by the global energy, food and financial crises leading to credit squeeze across the globe, have partly been attributed to impact of financial statement manipulations which portrayed some ailing companies as if they were sound. In Nigeria also, corporate failures and distresses have been witnessed in the banking sector. Evidence was the huge collapse of the commercial banks all due to massive accounting related frauds. This problem resulted in the establishment of Asset Management Company of Nigeria (AMCON) to prevent corporate failures particularly in the Nigerian banking sector by acquiring financially distressed companies.
