DESCRIPTION OF THE STUDY
The significance of accounting earnings for equity and firm
valuation has been a topic of considerable research since the 1960s. Accounting
earnings could simply be defined as the excess of income over expenditure, the
earnings which is usually reflected in the financial statement of a company is
usually obtained in line with the accrual concept which recognizes all income
and expenses earned or incurred in a particular period irrespective of whether
cash has actually been received or paid. Also, this earnings figure in the
financial statement is made up of various components such as the earnings
before interest and tax, earnings after tax, earnings after tax and
extra-ordinary items etc.
In this context, accounting earnings would be considered as
a source of information to be used by investors and analysts to enable them
have an idea about the real performance of companies and also aid them in firm
valuation. The value of a firm could be seen as a function of its future
performance and this future performance depends on realized accounting earnings
which are normally disclosed in the firm’s financial statements.
Since earnings are said to be a determinant of the value to
be placed on a firm; the question would arise as to how value relevant is
earnings? Earnings would be considered to be value relevant if it is able to
capture and summarize the firm’s value. The value relevance would be measured
as a statistical association between the financial statement earnings and the
market value of the firm and earnings would be said to have quality if it is
able to predict its future value.
BACKGROUND OF THE STUDY
Researches in this field of study began from the seminal
work of Ball and Brown (1968) and Beaver that showed empirically the utility of
accounting earnings is supposed to be relevant to appreciate the real
performance of the company.
Previous studies have used different accounting variables as
proxies of firms’ performance but ended up in disappointing conclusions; indeed
the explanatory power of these regression models were weak, Lev (1989)
attributed this result to the bad quality of accounting information.
Two studies have been developed which allows for the testing
of the value relevance and the information content they are the event studies
and the association studies. The event studies involves the examining of prices
after the announcement of accounting information and measuring the abnormal
returns which reflects a reaction of investors further to this event and the
adjustment of share pries thus showing the information content.
The association studies consist of estimating regression
models of market performance of the company on its financial information.
1.3 SCOPE OF
The study would cover the content analysis of the financial
statements of companies in the banking and insurance sectors quoted on the
Nigerian Stock Exchange between 2004 – 2008. The Nigerian Stock Exchange over
the period of 2004 – 2008 has been selected because of the rapid growth which
has been recorded during this short period and also the possibility of direct
data collection. The findings in this paper would not be generalized to all
emerging markets but, rather it can be used as a starting point for future
studies and debate.
SIGNIFICANCE OF THE STUDY
It would aid investors by reducing uncertainties and
information asymmetry and also boost their confidence in the use of financial
The value relevance of earnings would assist financial
analysts in determining if earnings poses the desired quality to be relied upon
for firm valuation.