Accounting Earnings Persistence And Security Valuation Among Quoted Firms In Nigeria

International Journal of Economics and Management Studies

© 2019 by SSRG - IJEMS Journal

Volume 6 Issue 12

Year of Publication : 2019

Authors : Okpa, Inah Bassey, Ejoh, Ndifon Ojong, Okpala, Vivian Chinenye

10.14445/23939125/IJEMS-V6I12P123

How to Cite?

Okpa, Inah Bassey, Ejoh, Ndifon Ojong, Okpala, Vivian Chinenye, "Accounting Earnings Persistence And Security Valuation Among Quoted Firms In Nigeria," SSRG International Journal of Economics and Management Studies, vol. 6,  no. 12, pp. , 2019. Crossref, https://doi.org/10.14445/23939125/IJEMS-V6I12P123

Abstract:

The study examined the implications of accruals and cash flows on earnings persistence among selected manufacturing firms in Nigeria. Specifically, the work examines the persistence of accruals and cash flows on earnings persistence and security pricing among selected manufacturing firms. The work is anchored on Earnings Fixation Theory (EFT) and Efficient Market Theory (EMT). The work employed the Ex-post facto research design, with data obtained from published financial statements of twenty-one selected manufacturing firms listed in the Nigerian Stock Exchange from 2009-2018. Descriptive statistics, correlation matrix and regressions analyses were performed on the data using Eviews. The results from the test of hypotheses revealed that accruals and cash flows component of current earnings significantly affect future earnings predictability of manufacturing firms in Nigeria, with the effect of cash flows being greater than that of accruals. The study further revealed that there is significant security mispricing associated with accruals and cash flows persistence information of manufacturing firms in Nigeria. The study concludes that there is serious security mispricing of the persistence information of cash flows and accruals in the manufacturing space, with investors underestimating both cash flows and accruals. The study therefore recommend that management of manufacturing firms should increase disclosure of the information of accruals and cash flows, as it plays a role in equity markets by reducing information asymmetries.

Keywords:

Earnings Persistence, Security Pricing, Accruals, CashFlows, Earnings Fixation Theory, Efficient Market Theory

References:

[1] Abdelghany, K. (2005). Measuring the quality of earnings. Managerial Auditing Journal, 20(9), 1001-1015.
[2] Abubakar, S. (2011). Dividend payout ratio and share price movement of listed Non-service firms in Nigeria: Empirical study. A paper presented at African Accounting and Finance Association (AAFA) Ghana.
[3] Adamek, C. &Kaserer, C. (2005). Lifting the veil of accounting information under Different Accounting Standards – Lessons Learned from the German
Experiment American Accounting Association Conference.
[4] Ahmadpoor, A. &Ahmadi, A. (2008). Using qualitative characteristics of Financial Data in Assessing Profit Quality. Accounting and Auditing Studies, 15(52), 3-16.
[5] Ali, A., Hwang, L. S. &Trombley, M. A. (2000). Accruals and future stock returns: tests of the naive investor hypothesis. Journal of Accounting, Auditing & Finance, 15 (2): 161-181.
[6] Altamuro, J. & Beatty, A. (2006). Do internal control reforms improve earnings quality? Working Paper.
[7] Barragato, C. A. &Markelevich, A. (2003). Earnings quality following corporate acquisition, presented at long Island university-CW post-campus 720 northern boulevard.
[8] Berk, J. &DeMarzo, P. (2007). Corporate Finance. Pearson International Edition.
[9] Chan, K., Chan, N. J. &Lakonishok, J. (2006). Earning quality and stock returns. Journal of business, 10(1),12-41
[10] Chan, K., Chan, L., Jegadeesh, N. &Lakonishok, J. (2001). Accrual quality and stock returns: the evidence from accruals. Working Paper, National Taiwan University and University of Illinois.
[11] Chan, K., Chan, L., Jegadeesh, N. &Lakonishok, J. (2004). Earnings quality and stock returns. The Journal of Business, 79 (3), 1041-1082.
[12] Charitou, A., Clubb, C., &Andreou, A. (2001). The effect of earnings permanence, growth and firm size on the usefulness of cash flows and earnings in explaining security returns: empirical evidence for the UK. Journal of Business Finance and Accounting, 28(5-6), 563-594.
[13] Cohen, D., Darrough, M. N. Huang, R. & Zach, T. (2011). Warranty reserve: contingent liability, strategic signal, or earnings management tool? The Accounting Review, 86(2), 569-604.
[14] Dechow, P., &Schrand, C. (2004). Earnings quality. The Research Foundation of CFA Institute.
[15] Dechow, P., Ge, W. &Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and consequences. Journal
of Accounting and Economics 50, 344-401.
[16] Dechow, P.M. &Dichev, I. D. (2002). The quality of accounting and earnings: The role of accrual estimation errors. The Accounting Review 77, 35-59.
[17] Deegan, C. (2009). Financial Accounting Theory. Mc-Graw Hill. Australia. Third Edition.
[18] Deegan, C., and Unerman, J. (2011). Financial Accounting Theory: second European Edition. McGrawHill Education. Berkshire, United Kingdom.
[19] Ekoja B. E. (2004). A cross-sectional analysis of discretionary accruals. Nigerian Journal of Accounting Research 3(2), 36-44.
[20] Fairfield, P. M., Whisenant, S. &Yohn, T. L. (2003). The differential persistence of accruals and cash flows for future operating income versus future
profitability. Review of Accounting Studies, 8 (2-3) 221-243.
[21] Francis, J., Schipper, K., & Vincent, L. (2003). The relative incremental explanatory power of earnings and alternative (to earnings) performance measures for returns. Contemporary Accounting Research, 20,121-164.
[22] Healy, P. M. &Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting, Accounting Horizons, 13, 365-383.
[23] Jeter, M. &Shivakumar, V. (1999). Cross-sectional estimation of abnormal accruals using quarterly and annual data: effectiveness in detecting event-specific earnings management accounting and business research 29, 299-319.
[24] Lev, B. (1989). On the usefulness of earnings and earning research: lessons and directions from two decades of empirical research. Journal of Accounting Research, 27, 153-192
[25] Liu, J., D. &Nissim, J. (2002). Thomas equity valuation using multiples. Journal of Accounting Research, 40 (1), 135-172.
[26] Marquardt, C.A. &Wiedman, C.I., (2004). How are earnings managed? An examination of specific accruals, contemporary Accounting Research, 21, 46-61.
[27] Mohammady, A. (2012). Earnings quality constructs and measures. School ofEconomics, Kingston University London.
[28] Okolie O. A. (2006). Corporate profitability and earnings quality management. ICAN Journal October/December, 2006.
[29] Okpa, I. B. (2018). Do stock prices fully reflect information in Cash flows and Accruals about future earnings in the UK: A study of FTSE 350 firms.
Unpublished Dissertation
[30] Penman, S. &X. J. Zhang, (2002). Accounting Conservatism, the Quality of Earnings, and Stock Returns. The Accounting Review, 77(2), 237-264.
[31] Richardson, S., Sloan, R., Soliman, M. & Tuna, I. (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics 39: 437-485.
[32] Schipper, K. & Vincent, L. (2003). Earnings Quality. Accounting Horizons, 17, 97-111.
[33] Sloan, R. (1996). Do Stock Prices Fully Impound Information in Accruals about Future Earnings? The Accounting Review 71, 289-315.
[34] Stolowy, H. & Breton, G. (2004). Accounts Manipulation: A Literature Review and Proposed Conceptual Framework, Review of Accounting and
Finance, 3 (1), 5-66.
[35] Sun, M. &Rath, K. (2008). Fundamental determinants, opportunistic behavior and signaling Mechanism: An Integration of Earnings Management Perspectives International. Review of Business Research Papers, 4(4), 406-420.
[36] Watts, R. (2003a). Conservatism in Accounting, Part I: Explanations and Implications. Accounting Horizons, 17, 207-221.
[37] Watts, R. L., & Zimmerman, J.L (1978). Towards a positive theory of the determination of Accounting standards. The Accounting Review 53, 112-134.
[38] Watts, R. (2003b). Conservatism in Accounting, Part II: evidence and research opportunities. Accounting Horizons, 17, 287-301.
[39] Xie, H. (2001). The mispricing of abnormal accruals. The Accounting Review 76, 357–373.
[40] Zhang, X. F. (2007). Accruals, investment, and the accrual anomaly. The Accounting Review 82, 13331363.