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DETERMINANTS ON SHARE
PRICES IN THE NIGERIAN STOCK MARKET
CHAPTER ONE
INTRODUCTION
1.1 Background to
the study
In the wake of the financial scandals and economic
disintegration witnessed in Nigeria where billions of naira worth of investment
and retirement wealth has been lost (Oyerinde, 2009), the very integrity and
survivability of the capital market has been called to question. The capital market experienced a turbulent
time in 2008 which led to downward trend in the movement of share prices. This downward trend as noted by Jeroh and
Okoro (2015), is attributed to severalforces or dynamisms that have the
tendency to determine the prices of share in the capital market. In line with the above view, Tan and Lim
(2007) opined that share prices in the capital market are either influenced by
accounting or non-accounting dynamics. Accounting dynamics refers to those
statistics, facts, figures (often called ‘accounting numbers’) reported in the
statement of comprehensive income, statement of financial position and cash
flows of firms such as earnings per share, dividend per share, price earnings
ratio, dividend yield, book value per share, return on equity, market value per
share, net assets per share, dividend cover, profitability, and so on
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 get. 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.
Inspite of the pivotal role accounting information plays, there are
still certain dynamisms (such as inflation, interest, exchange rates,
government policies etc) 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 or not. Thus, the researcher
intend to investigate whether or not these dynamics (accounting and
non-accounting information) affect share prices of publicly quoted companies in
Nigeria. This is in a bid to corroborate
or repudiate existing empirical works on share price determinants.
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 (Olgunde, et.al, 2006).
Empirical evidence suggests that non-accounting information
(such as inflation, exchange, 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 factor that
determine share prices in the capital.
Most studies that evaluated factors that determine share
prices considered either accounting information without considering non-accounting.
The question is, are there no other variables apart from accounting variables
that may have the tendency to affect 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. In the light of the above,
the problem identified as at the time of this study are that there is no
consensus on the combined effect of accounting and non-accounting dynamics on
share prices in Nigeria. This forms the
main thrust of this proposal.
1.3 Objectives of
the study
The main objective of this study is to examine the factors
that determine share prices of companies listed on the Nigerian Stock
Exchange. The intended specific
objectives are: To:
(i) identify the
major accounting variables that have significant effect on share prices of
companies.
(ii) ascertain the
non-accounting variables that affect share prices of companies.
(iii) determine the
relationship between the major accounting variables and share prices of
companies.
(iv) examine the association
between the non-accounting variables and share prices of companies.
(v) investigate the
combined effect of the accounting and non-accounting variables on share prices
of companies.
(vi) 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) To what extent
is there a relationship between the major accounting variables and share prices
of companies?
(iv) To what extent
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 research hypotheses, which are
formulated in line with the objective of the study:
Hypothesis I
Ho: There is no
significant relationship between accounting variables and share prices of
companies
Hi: There is
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.
Hi: Share prices of
companies are significantly influenced by non-accounting variables.
Hypothesis III
Ho: Accounting and
non-accounting variables do not have combined effect on share prices of
companies
Hi: Accounting and
non-accounting variables have combined effect on 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.
Hi: There are
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 (i.e.
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 is from 2005 – 2014
(i.e. a period of 10years). 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
There is little known about the role of accounting and
non-accounting information in terms of its ability to explain movements in the
prices of shares of listed companies in Nigeria and the world over.Almost all
evidence in this area are obtained from United States of America (USA) or
Western European countries which have sophisticated markets compared to most
developing countries like Nigeria. Investors from all over the world may
eagerly aspire to do business in Nigeria if the information obtained meets the
needs of both small and institutional investors. This is because information
obtained from the market is pivotal in making informed investment
decisions. Thus, 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 fills the gap in
literature by investigating 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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