1.1 Background to the Study
Financial reporting is undergoing a global transformation toward a single set of accounting standards – the International Financial Reporting Standards (IFRS) – as promulgated by the International Accounting Standards Board (IASB). IFRS incorporates more information into the financial statements by essentially promoting the fair value approach to presentation with shareholder-orientation (Hung & Subramanyam, 2007).
The IASB has designed these standards with the objective of reducing information asymmetries amongst users of the financial statements across countries (Barth, Landsman & Lang, 2008) and principally, investors (Haller, Ernstberger & Froschhammer, 2009). Hence, the adoption of IFRS is based on the fact that accounting quality should be improved in terms of financial reporting (Munteanu, Brad, Ciobanu & Dobre, 2014; Pascan, 2015). Sequel to the above premise, several countries subscribed to IFRS (Greuning, 2010).
In Nigeria, the local accounting standards were issued by the Nigerian Accounting Standard Board (NASB) up till 2011 (Umoren & Enang, 2015). On 28 July 2010, the Nigerian Federal Executive Council approved the effective date for replacing the Nigeria local Generally Accepted Accounting Principles (GAAP) with IFRS (Onalo, Lizam & Kaseri, 2015) by following a phased transition programme starting from January 1, 2012. The first phase of the programme covered publicly listed and significant public interest entities which were mandated to apply IFRS in their financial statements by January 1, 2012. Other public interest entities were covered in the second phase and were to adopt IFRS by January 1, 2013 while phase three covered Small and Medium-Scale Enterprises (SMEs) which were given up to January 1, 2014 to adopt IFRS (Umoren & Enang, 2015).
Interestingly, the banking sector in Nigeria which falls under the first phase is one of the pillars of economic development (Umoren & Enang, 2015). The sector’s intermediation function ensures that essential funds are channeled from the savings surplus to the savings deficit unit of the economy which needs funds for investment, thus promoting economic growth and development. Essentially, a strong banking sector as perceived by investors will not only enhance depositors’ confidence but will also lead to improved performance of the economy. However, in order to achieve these desired intents in the banking sector, quality accounting information is essential.
Extant literature on IFRS adoption has demonstrated a mixed result. For instance, Bartov, Goldberg and Kim (2005) found that the value relevance of earnings increased when firms switch from GAAP to IFRS. These findings differ from those of Hung and Subramanyam (2007) and Stergios, Athanasios and Nikolaos (2007) who found that the combined value relevance of book value and earnings decreases after adopting IFRS. Using the Ohlson (1995) model, Kargin (2013) found that the overall book value relevance of accounting information improved in the post-IFRS period (2005-2011) while no improvements was observed in the value relevance of earnings. Maggina and Tsaklanganos (2011) however, found no effect on value relevance after the adoption of IFRS. These inconsistencies in empirical literature provide a research gap for an empirical research from our jurisdiction.
This research is influenced by the agency theory because investors (shareholders), who are usually different from the management, rely on the information supplied by management in the financial statements in assessing the value of a firm before deciding either to invest or disinvest. The ability of IFRS adoption to effectively and satisfactorily guide investors in their investment decisions depends on the value relevance of the information in the financial statements. It is against this backdrop that this study intends to empirically investigate the impact of IFRS adoption on the value of deposit money banks in Nigeria.
1.2 Statement of the Problem
Accounting literature gives evidence that accounting quality has serious consequences on the economic, cost of capital and value of the firm (Sun, 2006; Bushman & Piotroski, 2006; Leuz & Verrecchia, 2000). Following the adoption of IFRS by over 100 countries across the world (Greuning, 2010), there has been an increasing debate around policy and academic circles on the potential effect of such move. In many countries where IFRS has been adopted, empirical evidence on the benefits has been largely mixed. However, some studies such as (Ofoegbu & Okaro, 2014) have discusses the procedure of IFRS adoption in Nigeria but paucity of empirical research from our jurisdiction has limited our contribution to the debate. This, therefore, creates an important research gap on the impact of IFRS adoption since January 1, 2012. In an attempt to provide insight into the effects of the change from the local GAAP, this study sought to fill this research gap by empirically investigating the impact of IFRS adoption on the value of deposit money banks in Nigeria.
1.3 Research Objectives
The overall objective of this study was to empirically investigate the impact of the adoption of IFRS on the value of deposit money banks in Nigeria since its introduction in 2012. To achieve this objective, the study specifically sought to accomplish the following:
(1.) To determine the impact of book value of equity per share on the market value per share of deposit money banks in Nigeria.
(2.) To ascertain the impact of accounting earnings per share on the market value per share of deposit money banks in Nigeria.
1.4 Research Questions
This study sought to provide answers to the following research questions drawn in line with the objectives of the study:
(1.) What is the impact of book value of equity per share on the market value per share of deposit money banks in Nigeria?
(2.) How does accounting earnings per share impact on the market value per share of deposit money banks in Nigeria?
1.5 Research Hypotheses
In order to achieve the above stated objectives and also provide answers to the research questions, the following a priori assumptions were investigated:
(1.) Book value of equity per share does not have significant impact on the market value per share of deposit money banks in Nigeria.
(2.) Accounting earnings per share does not have significant impact on the market value per share of deposit money banks in Nigeria.
1.6 Scope of the Study
This study sought to investigate the impact of IFRS adoption (book value of equity per share and accounting earnings per share) on the value of deposit money banks in Nigeria. The study covered a 6-year period, three years pre-IFRS adoption (2009 – 2011) and three years post-IFRS adoption (2012 – 2014). It borrowed extensively from previous works along this line, especially, the Ohlson (1995) model.
The study covered 15 banks in Nigeria for the period 2009 – 2014, forming a panel data for the 6-year period. This period was chosen in order to enhance comparability in line with previous studies. Data was collated from secondary sources that included the annual reports of the banks and the Nigerian Stock Exchange daily official list.
1.7 Significance of the Study
In order to achieve the intended benefits of IFRS adoption, IFRS application should be able to improve the quality of accounting information by reducing (eliminating) asymmetric information to end users (investors) and enhancing value relevance.
Hence, a study of this manner will prove to be specifically significant to both stakeholders and researchers alike in the following ways:
From the agency theory perspective, investors/shareholders use accounting information to make an informed investment decision. The result of this study will assist them in understanding the impact of IFRS adoption on the market value of banks in Nigeria. This knowledge will help investors/shareholders make better use of accounting information from IFRS compliant firms.
- Regulators/Policy Makers
Good accounting information engendered by IFRS adoption should help reduce information asymmetry. Sequel to this, all publicly quoted firms in Nigeria were mandated to adopt IFRS by 2012. The result of this research, therefore, will assist regulators and policy makers understand the effectiveness of the IFRS compliant policy in Nigeria and encourage enforceability.
This research will contribute to the current debate on IFRS adoption. The study will add to the existing literature by providing evidence from the Nigerian banking industry and will be of great value to further studies relating to IFRS adoption – stock value nexus.
1.8 Limitations of the Study
This research would not have been completed without some limitations. One of the limitations is the use of secondary data. Since this study relied exclusively on already existing data sources, any error or mistakes in the reporting of these data would ultimately affect the validity of the results. Nevertheless, companies in Nigeria are required by law to keep proper books of account and the production of an account that gives a true and fair view of the affairs of the company. This provision is aimed at improving the reliability of the accounting records. Hence, it is believed that such secondary data would not have any negative effect on the validity of the result. The researcher endeavoured to collect the correct data from financial statements of the entities involved and from stock market information.
1.9 Operational Definition of Terms
Value Relevance: refers to the ability of accounting information disclosed by financial statements to capture or summarize share price of firm listed on the stock market.
IFRS Adoption: refers to the implementation of the International Financial reporting Standard aimed at improving the quality of accounting data o information.
Accounting Earnings per Share: refers to the after-tax net income (earnings) available for the common stockholders divided by the weighted-average number of common shares outstanding during that period.
Book Value of Equity per Share: refers to the financial measure which indicates in a snap shot of a firm’s present situation, the per share estimation of the minimum value of an entity’s equity.
Market Value per Share: refers to the “going price” of a share of stock. That is, the price at which a stock can be readily bought or sold in the current market place.
Agency Theory: suggests that managers will seek to maximize their own utility at the expense of corporate shareholders because of their ability to operate in their own self-interest rather than in the best interests of the firm (shareholders) because of asymmetric information.