A framework for accounting information quality and shareholder value in listed consumer goods companies in Nigeria

Abstract

The role of accounting information quality, in explaining variations in the determinants of shareholder value—share prices and stock returns—has long been a subject of discussion in accounting research. Researchers developed the value relevance model as a measure of accounting information quality, and it has remained the dominant measure in the literature. However, it has not been sufficient in operationalising the fundamental qualities of accounting information – relevance and reliability – as prescribed by the Conceptual Framework for Financial Reporting. This study examines the extent to which accounting information quality, proxied by accounting-based measures of earnings quality, impacts shareholder value as measured by stock returns. It also tests whether there is a causal relationship between earnings quality and shareholder value. The study employs a correlational and causal research design, using quantitative methods and secondary data from consumer goods companies listed on the Nigerian Stock Exchange (NSE). Given cross-sectional dependence in the panel data, the Arellano-Bond dynamic panel-data estimator was adopted to test the hypothesis. The study found that only earnings persistence significantly impacts stock returns, negatively. Other earnings quality measures, including accrual quality, have a negative but statistically insignificant impact on stock returns. Earnings predictability and earnings smoothness, on the other hand, have positive but also statistically insignificant impacts on stock returns. The results of the pairwise Granger-causality tests revealed that none of the earnings quality measures used in this study Granger-cause stock returns. However, the study's findings showed reverse causality, with stock returns Granger-causing earnings persistence and the return on assets. Analysing the interrelationships among the earnings quality measures indicates a strong one-way causality from accrual quality to earnings predictability. In either direction, no significant causal relationships were found between earnings persistence and accrual quality, earnings persistence and earnings predictability, or between earnings persistence and earnings smoothness. Likewise, no Granger causality was observed between earnings smoothness and earnings predictability, suggesting that these aspects of earnings quality tend to operate independently in the sampled firms. The study therefore demonstrates that, to fully understand the impact of earnings quality on stock returns, it is crucial to broaden the scope of explanatory variables to examine how external factors interact with fundamental accounting information to determine changes in stock returns. The study contributes to knowledge by developing a framework for the observed relationship between earnings quality and stock returns, grounded in the efficient market hypothesis and its interaction with information asymmetry and agency theory. Finally, the study recommends that investors look beyond earnings quality and consider macroeconomic trends, behavioural biases, and firm-specific financial strength, and suggests the need for further research to investigate whether behavioural biases or market anomalies might explain the counterintuitive results