Value Relevance of Accounting Information and Firm Value
Value Relevance of Accounting Information and Firm Value
Value Relevance of Accounting Information and Firm Value
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Abstract
Studies on the improvement of value relevance of accounting information between IFRS and other accounting
standards’ regimes as well as on value change after the adoption of IFRS have yielded mixed results. This study
investigates the value relevance of accounting information of companies listed on the Nigerian Stock Exchange
(NSE) using modified Ohlson model. The population of the study consists of all the 28 listed firms under the
consumer goods sector. Judgmental sampling technique was used to select ten of the firms. Secondary data
obtained from the annual reports of sampled firms were used to investigate the value relevance of accounting
numbers. Content analysis was used to measure the qualitative values of accounting information (relevance,
faithful representation, understandability, comparability and timeliness). The outcome of Hausman’s test
favoured the use of pooled OLS. ANOVA test was also conducted. The findings showed that there is no
significant difference between the value relevance of accounting information prior and after the adoption of
IFRS. The study therefore, could not support the idea that global adoption of uniform standards lead to
improvements in reporting quality. It was concluded that transition in standards from SAS to IFRS has no
significant influence on the accounting information as a predictor of firm’s value.
Keywords: Value, Information, IFRS, Ohlson model, Accountants, Analyst
1.0. Introduction
It is an obligation for corporate bodies to provide information about the financial position, performance and
changes in financial position of their activities that is useful to a wide range of users in making economic
decisions. This should be in conformity with standards and other stipulated regulatory frameworks. Standards
contain a list of assumptions and qualities that a financial statement should comply with, as well as detailed
regulations for disclosing various kinds of activities, assets and liabilities of an entity (Prather-Kinsey, 2006).
Value relevance is seen as proof of the quality and usefulness of accounting numbers and as such, it can be
interpreted as the usefulness of accounting data for decision making process of investors and its existence is
usually evidenced by a positive correlation between market values and book values (Takacs, 2012).
Since financial information is a medium of communicating the effects of financial transactions, it became
imperative that different countries’ accounting standards be harmonized to form a single set of accounting
standards, to improve the rate at which investment and credit decisions are taken and aid international
comparability of companies’ performance both within and outside the reporting countries (Herbert, Tsegba,
Ohanele & Anyahara, 2013).
It is believed that the transition from local GAAP to IFRS can bring an increase in value relevance if the new
standard is simplified, well executed and understood by intending users. IFRS is formulated to homogenize the
language of investing and are the result of global political economy equilibrium, thus it is not expected to
provide reporting standards that uniquely befit any given country’s circumstances (Leuz & Wysocki, 2008).
IFRSs are expected to provide the stakeholders, with more useful information on the true financial position of
companies, which should bridge the gap between reported accounting data and market value of listed companies
(Escaffre & Sefsaf, 2011).
Alfaraiah (2009) argued that value relevance of accounting information is not a product of adoption of high
quality standards either domestic or international; the quality of standards is not a determining factor of
improving the value of accounting information but good and strictly complied implementation process. It is
therefore professed that appropriate enforcement of high quality standards would provide consistent,
comparable, relevant, reliable financial information and value relevance of accounting information for
considerable decisions, thus meeting the needs of its various users (Khanaga, 2011).
The aim of the International Accounting Standards Board (IASB) is to develop an internationally acceptable set
of high quality financial reporting standards that would depict the overall objectives and usefulness of financial
information to all users (Barth, Landsman & Lang, 2008). Since its establishment, many standards have been
issued, revised or superseded. However, several studies on the value relevance of accounting information have
resulted into contentious conclusions from these standard changes both in the advanced and emerging nations.
Studies have yielded mixed results on the improvement of value relevance of accounting information between
IFRS and other accounting standards as well as on value transformation after the adoption of IFRS. Some studies
report increase of value relevance after adoption of IFRS (Bartov, Goldberg & Kim 2005; Barth, Landsman &
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Lang 2008; Karampinis & Hevas 2009), while others fail to find any statistically significant improvements
(Hung & Subramanyam, 2007; Karampinis & Hevas, 2011; Macias & Muiño, 2011); some even suggest decline
of value relevance (Khanagha, 2011). This study examined the effect of the transition in accounting standards
from Nigerian GAAP to IFRS on the value relevance of accounting information of Nigerian corporate bodies.
As a result of the mixed results from previous studies and the paucity of such studies conducted in Nigeria,
specifically on the Consumer goods manufacturing sector, there existed a knowledge gap that necessitated this
study. The main objective of this study was to conduct a comparative and analytical review of the level of
improvements in the value relevance of accounting information prior and after the implementation of IFRS. The
paper argues that the adoption of IFRS in Nigeria has not improved the value relevance of financial information
provided by manufacturing companies as no statistically significant difference is found between the value
relevance of accounting information before and after the adoption of IFRS.
The rest of this paper is organized as follows: In section 2, we review related literature and highlight the
theoretical base for the study. Section 3 presents the methodology of the study. The empirical results and
discussions are presented in section 4, while we conclude the study in section 5.
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the company. This is because the cash flows are known and can be discounted to provide balance sheet
valuations. The implication is that, though the net income is “true and correct”, it conveys no information that
helps investors predict future economic prospects of the firm. The investors can easily calculate it for
themselves;
3. The financial statements are perfectly reliable. Put differently, the financial statements are precise and free
from bias and
4. The market value of an asset equals the present value of its future cash flows because of the principle of
arbitrage.
This study is established on both the Residual Income Valuation Model and present value model theory which is
more suitable for the value relevance study as used in the studies of Bernard, (1995); Burgstahler and Dichev,
(1997); Penman and Sougiannis, (1998); Dechow, Hutton and Sloan, (1999); and Scott, (2003).
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On the other hand, the study by Tsalavoutas, Andr´e & Evans (2012) using a sample of Greek listed companies,
examined IFRS value relevance relative to Greece GAAP. Their findings suggest that there was no change in the
combined value relevance of book value of equity and earnings, thus accounting quality did not improve after
IFRS adoption contrary to its longstanding preposition. The result of the study was in line with the findings of
Callao, Jarne, & Lainez (2007), Tsalavoutas (2009) and Kousernidis & Ladas (2010).
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3.0. Methodology
Both qualitative and quantitative methods were adopted in this study. The 28 firms listed under consumer goods
sector on the Nigerian stock exchange constituted the population for this study, out of which ten firms were
sampled for the study. The accounting data used were collected primarily from the financial statements of the
sampled firms, Nigerian Stock Exchange Fact books and Nigeria Stock Exchange daily price quotations for a
period of eight (8) years – four years prior and four years after IFRS adoption. Also, content analysis was carried
out using a modified model of Beest, Braam and Boelens (2009). Empirical and content analysis were conducted
over the period of 8 years covering 4 years prior adoption and 4 years post-adoption era of IFRS.
Both descriptive and inferential statistical techniques were employed to test the hypotheses raised. Value
relevance has been extensively measured as the statistical relationship between figures in the financial statement
and the market values of the firm (Suadiye, 2012). It is deduced that the more closely the relationship, the higher
the valuation (Barth et al, (2008) and the usefulness of the financial information disclosed by firms, thus
enhancing the value of decision taking by the stakeholders (Lee, Walker and Zeng, 2013). Also, the analysis is
based on the reformed Ohlson (1995) valuation model, using market value model. Included in independent
variables are such proxies as cash flow from operating activities, dividends and liquidity in line with the studies
of Ortega (2006), Brief (2000) and Christensen, Lee & Walker (2013).
Also, the study examined the value relevance of non-financial disclosures in terms of the enhancement of
qualitative features (i.e. relevance, faithful representation, understandability, comparability, and timeliness). This
information is embedded in other segments of the financial reports such as the auditor’s report, chairman’s
report, director’s report, notes to the accounts and other explanatory details as published in the financial report
(Atanassova (2009). A 21-item index constructed helped to examine the extent financial reports meet each of the
qualitative characteristics separately and in combination.
δ0 is the intercept;
δ1, δ2, δ3, δ4 and δ5 are the partial slope coefficients of variables (InE, InBV, InDIV, InLIQ and InCFO);
i represents the number of firms in the study and t represents the period covered by the study;
ε is the stochastic error term which represents other independent variables not included in the model.
The data instrument used for this study is the annual reports and accounts of all the ten (10) sampled firms. This
instrument is considered to be valid and reliable because it is prepared in accordance with Accounting standards
(SAS and IFRS) and the Companies and Allied Matters Act (CAMA). Also, it has been reviewed, audited and
approved by various bodies and regulators such as Corporate Affairs Commission (CAC), and the Financial
Reporting Council of Nigeria.
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Empirical checks on data and the estimation of the model assessment validity and reliability
To test whether the difference in value relevance is significant, the study conducted Hausman test to determine
the appropriate estimator between fixed and random effect and Pooled Ordinary Least Square (OLS).
The significance or otherwise of the isolated effect of independent variable on dependent variable will be
evaluated at 5% level of significance employing the t-statistics. It is expected that there will be no improvement
in the value relevance of accounting information of the conglomerates firms in Nigeria due to adoption of IFRS.
Hence, δ1pre = δ1post, δ2pre = δ2post, δ3pre = δ3post, δ4pre = δ4post and δ5pre = δ5post
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From table 2, PAT, LIQ, DIV and CFO positively influenced the market value of firms (MV) although only PAT
and LIQ have significant effect while DIV and CFO insignificantly influenced the MV within the post-adoption
period covered by the study (2011-2014). BV has significant negative effect on MV. The F-stat of 75.36(P-value
= 0.0000) showed that the explanatory variables (PAT, LIQ, DIV, CFO and BV) combined have significant
influence on the dependent variable (MV) at 5% level of significance. The adjusted R-squared revealed that
91.62% change in the value of MV is caused by the combined change in the explanatory variables (PAT, LIQ,
DIV, CFO and BV) while the remaining 8.38% is caused by factors not captured in this model.
Table 3. Comparative analysis of value relevance - pre and post adoption of IFRS
MV Pre-adoption Post-adoption Pre vs. Post
Coef P(t-stat) Coef P(t-stat)
PAT 1.21 0.000* 0.65 0.001* Sig
LIQ 0.86 0.017* 1.08 0.000* Sig
DIV -0.13 0.054 0.13 0.141 Insig
CFO 0.06 0.321 0.21 0.180 Insig
BV -1.0 0.015* -0.64 0.034* Sig
Adj R-Squared 0.898 0.9162
Prob. (F-stat) 0.0000 0.0000
Authors’ Computation, 2016.
Table 3 gives a comparative analysis of value relevance of financial information of sample companies, pre- and
post- adoption of IFRS. The results indicate that PAT, LIQ and BV were statistically significant both prior and
after the adoption. The degree of influence of PAT on MV before and after the adoption is averagely the same at
approximately 1%; likewise that of LIQ and BV. DIV has positive but insignificant effect on MV before the
adoption but a positive and insignificant influence after the adoption though the degree of influence is menial
and at the same time insignificant both prior and after the adoption. CFO on the other hand has positive but
insignificant influence on MV prior and after the adoption and the degree of effect is relatively low at
approximately 0.1% and 0.2%. While considering the relativity of the degree of influence of the explanatory
variables prior and after the adoption and their level of significance, it is apparently clear that transition in
standards has not drastically influenced the quality of the financial information as a predictor of value.
Therefore, the result of this study suggests that there is no significant difference between the coefficients of the
variables studied both prior and after the adoption of IFRS. Therefore, the results of the study is in line with it’s a
priori expectations that δ1pre = δ1post, δ2pre = δ2post, δ3pre = δ3post, δ4pre = δ4post and δ5pre = δ5post.
The result of the ANOVA Bartlett’s test of P-value = 0.492 indicated that the two groups (pre and post adoption)
have equal variance which implies that there is no significant difference in the qualitative factors of accounting
information before and after the adoption of IFRS. Thus, Ho2 which states that IFRS adoption does not
significantly improve the quality of financial information is equally upheld.
The results reported in table 1, table 2, table 3 and table 4, support the position of Kao & Wei (2014) that no
consistent empirical findings reveal whether the adoption of IFRS produces information quality superior to other
accounting standards. Evidence from literature tend to support the thinking that countries’ institutional and
market setting can significantly shape its financial reporting. Apparently IFRS convergence is considered more
useful in countries with more developed stock markets and better institutional framework than in countries
without these attributes. It is then expected that less benefit from IFRS is likely to accrue to developing countries
with ostensibly weak and questionable enforcement mechanisms and where IFRS relevance and applicability is
doubtful. But there are also divergent opinions in the reviewed literature where studies found IFRS to be value
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relevant in developing countries and reject the affirmation by Lee et al, and support the report of Karampinis &
Hevas (2009) that IFRS can benefit even unfavorable reporting context. Though the period of this study post-
adoption (2011 to 2014) is not sufficiently long enough to conclude on the benefits and impact of IFRS adoption
on value relevance of financial information, the results tend to align with the “IFRS adoption irrelevance
school”. The findings of this study supported the propositions of Residual Income Valuation Model and the
Present Value Model which explained that information about the company’s future economic prospects - its
dividends, cash flows and profitability help investors predict future economic prospects(market value) of the
firm.
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Appendix A
OUTLINE OF THE measures used IN OPERATIONALIZING the fundamental qualitative characteristic
OF ACCOUNTING INFORMATION (including the measurement scales)
Relevance
R1 To what extent does the presence 1 = No forward-looking Predictive McDaniel et al., 2002;
of the forward looking statement information value Jonas and Blanchet, 2000;
help forming expectations and Bartov and Mohanram, 2004
predictions concerning the future 2 =Forward-
of the company? looking information not an apart
subsection
3 = Apart subsection
4 = Extensive predictions
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R2 To what extent does the presence 1 = No non-financial information Predictive Jonas and Blanchet,
of non-financial information in value
terms of 2 =Little non- 2000; Nichols and
financial information, no useful f
Business opportunities and risks c or forming expectations Wahlen, 2004
omplement the financial
information? 3 = Useful non-financial
information
4 = Useful non-financial
information, helpful for
developing expectations
5 = Non-financial information
presents additional information
which helps developing
expectations
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Faithful representation
report?
F3 To what 1 = Negative events only mentioned in footnotes Neutrality Dechow et al., 1996;
extent does McMullen, 1996;
the 2 = Emphasize on positive events
company, in Beasley, 1996; Razaee,
the 3 = Emphasize on positive events, but negative
discussion of events are mentioned; no negative events occurred 2003; Cohen et al., 2004;
the annual Sloan, 2001
results, 4 = Balance pos/neg events
highlight the
positive 5 = Impact of pos/neg events is also explained
events as
well as the
negative
events?
F4 Which type 1 = Adverse opinion Free from Maines and Wahlen, 2006;
of auditors’ material error, Gaeremynck and Willekens,
report is 2 = Disclaimer of opinion verification, 2003; Kim et al., 2007;
included in neutrality, and Willekens, 2008
the annual 3 = Qualified opinion completeness
report?
4 = Unqualified opinion: Financial figures
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5 = Comprehensive description of CG
Understandability
U1 To what extent is the annual Table of contents, headings, Understandability Jonas and
report presented in a well components, summary and
organized manner? conclusion at the end of each Blanchet, 2000
section
U2 To what extent are the notes 1 = No explanation Understandability Jonas and Blanchet, 2000;
to the balance sheet and the Courtis, 2005
income statement 2 = Very short description,
sufficiently clear? difficult to understand
4 = 6-10 graphs
5 = > 10 graphs
U4 To what extent is the use of 1 = Much jargon (industry), not Understandability IASB, 2006; Jonas and
language and technical explained Blanchet, 2000; Iu and
jargon in the annual report Clowes, 2004
2 = Much jargon, minimal
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5 = No jargon, or extraordinary
explanation
4 = 1-2 pages
5 = > 2 pages
Comparability
C1 To what extent do 1 = Changes not explained Consistency Jonas and Blanchet, 2000
the notes to
changes in 2 = Minimum explanation
accounting policies
explain the 3 = Explained why
implications of the
change? 4 = Explained why + consequences
C2 To what extent do 1 = Revision without notes Consistency Schipper and Vincent, 2003;
the notes to Jonas and Blanchet, 2000
revisions in 2 = Revision with few notes
accounting
estimates and 3 = No revision/ clear notes
judgements explain
the implications of 4 = Clear notes + implications (past)
the revision?
5 = Comprehensive notes
C3 To what extent did 1 = No adjustments Consistency Cole et al., 2007; Jonas and
the company adjust Blanchet, 2000
previous 2 = Described adjustments
accounting
period’s figures, 3 = Actual adjustments (one year)
for the effect of the
implementation of 4 = 2 years
a change in
accounting policy 5 = > 2 years + notes
or revisions in
accounting
estimates?
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C5 To what extent is Judgment based on: Comparability IASB, 2008; Jonas and
the information in Blanchet, 2000; Cole et al.,
the annual report - accounting policies 2007; Beuselick and
comparable to Manigart, 2007
information - structure
provided by other
organizations? - explanation of events
other organizations
5 = > 10 ratios
Timeliness
T1 How many days Natural logarithm of amount of days Timeliness IASB, 2008
did it take for the
auditor to sign the 1 = 1-1.99
auditors’ report
after book year 2 = 2-2.99
end?
3 = 3-3.99
4 = 4-4.99
5 = 5-5.99
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Appendix B:
Descriptive Analysis of the Fundamental Qualitative Characteristic of Accounting Information (PRE
ADOPTION 2007 - 2011)
Relevance
Faithful representation
Fr1 To what extent are valid arguments provided to support the decision for 2.5 0.506 2 3
certain assumptions and estimates in the annual
Fr2 To what extent does the company base its choice for certain accounting 2.5 0.506 2 3
principles on valid argument
Fr3 To what extent does the company, in the discussion of the annual results, 3 0 3 3
highlight the positive events as well as the negative events?
Fr5 To what extent does the company provide information on corporate 2.5 0.506 2 3
governance?
Understandability
U1 To what extent is the annual report presented in a well organized 3.25 0.439 3 4
U2 To what extent are the notes to the balance sheet and the income 2.5 0.506 2 3
statement sufficiently clear?
U3 To what extent does the presence of graphs and tables clarifies the 3.23 0.439 3 4
presented information?
U4 To what extent is the use of language and technical jargon in the annual 2.275 0.452 2 3
report easy to follow?
U5 What is the size of the glossary? 3.5 0.506 3 4
Comparability
C1 To what extent do the notes to changes in accounting policies explain the 2.5 0.506 2 3
implications of the change?
C2 To what extent do the notes to revisions in accounting estimates and 2.25 0.439 2 3
judgements explain the implications of the revision?
C3 To what extent did the company adjust previous accounting period’s 2 0.716 1 3
figures, for the effect of the implementation of a change in accounting
policy or revisions in accounting estimates?
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ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.8, No.24, 2016
C4 To what extent does the company provide a comparison of the results of 2.5 0.506 2 3
current accounting period with previous accounting periods?
C5 To what extent is the information in the annual report comparable to 3.35 0.483 3 4
information provided by other organizations?
C5 To what extent does the company presents financial index numbers and 3.725 0.640 2 4
ratios in the annual report?
Timeliness
T1 How many days did it take for the auditor to sign the auditors’ report 4.775 0.423 4 5
after book year end?
Descriptive Analysis of the Fundamental Qualitative Characteristic of Accounting Information (POST
ADOPTION 2011-2014)
Relevance
R4 The annual report provides feedback information on how various market 3.5 0.506 3 4
events and significant transactions affected the company?
Faithful representation
Fr1 To what extent are valid arguments provided to support the decision for 3 0 3 3
certain assumptions and estimates in the annual
Fr2 To what extent does the company base its choice for certain accounting 3.75 0.439 3 4
principles on valid argument
Fr3 To what extent does the company, in the discussion of the annual results, 3.75 0.439 3 4
highlight the positive events as well as the negative events?
Understandability
U1 To what extent is the annual report presented in a well organized 3.5 0.506 3 4
U2 To what extent are the notes to the balance sheet and the income 3.75 0.439 3 4
statement sufficiently clear?
U3 To what extent does the presence of graphs and tables clarifies the 3.5 0.506 3 4
presented information?
U4 To what extent is the use of language and technical jargon in the annual 2.75 0.439 2 3
report easy to follow?
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European Journal of Business and Management www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.8, No.24, 2016
Comparability
C5 To what extent is the information in the annual report comparable to 1.75 0.439 3 4
information provided by other organizations?
C5 To what extent does the company presents financial index numbers and 3.5 0.506 3 4
ratios in the annual report?
Timeliness
T1 How many days did it take for the auditor to sign the auditors’ report 4.875 0.335 4 5
after book year end?
124