Earnings Predictability of Quoted Firms in Nigeria
Keywords:
Earnings, Predictability, Volatility, Investment, Decision.
Abstract
The inability of investors to predict future earnings of firms exposes them to further risk such that potential investors may be scared away while existing ones may be prompted to withdraw their investment. Thus, it becomes imperative to evaluate the earnings predictability of Nigerian quoted firms with a view to establish the ability or inability of earnings to predict itself. Also, the study examined the impact of volatility on earnings predictability of Nigerian quoted firms. The total number of seventy three (73) quoted Nigerian firms constitutes the population of this study and the entire 73 firms were studied. The causal relationship research design was adopted. The secondary data used were collected from the financial statements of the quoted firms for the period 1996 to 2015. The system generalized method of moment (GMM) was used to estimate the dynamic panel regression models of the study. The study found that earnings of firms are predictable. The study also found that volatility has adverse effect on earnings predictability. It was therefore recommended more interest/investment in Nigerian firms since earnings information is available and is predictable while managements of firms should reduce instability in reported earnings.
References
Afego, P. (2012). Weak form efficiency of the Nigerian Stock Market: An empirical analysis (1984-2009). International Journal of Economics and Financial Issues, 2(3), 340-347.
Albrecht, W. S., Lookabill, L. L., & McKeown, J. C. (1977). The time series properties of annual earnings. Journal of Accounting Research, 15(2), 226-244.
Allayannis, G., Rountree, B. &Weston, J. P. (2005). Earnings volatility, cash flow volatility and firm value. Retrieved 6th July, 2017 from https://faculty.fuqua.duke.edu/seminarscalendar/Rountree.doc
Arellano, M. & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58, 277-297.
Arewa, A. & Nwakanma, P. C. (2014). Re-validating weak-form hypothesis Nigerian capital market: A comparative test analysis. International Business Research, 7(4), 73-83
Artikis, P. G., & Papanastasopoulos, G. A. (2016). Implications of the cash component of earnings for earnings persistence and stock returns. The British Accounting Review, 48(2), 117-133.
Ball, R. & Watts, R. (1972). Some time series properties of accounting income. The Journal of Finance, 27, 663-681.
Bandyopadhyay, S. P., Chen, C., Huang, A. G., & Jha, R. (2010). Accounting Conservatism and the Temporal Trends in Current Earnings’ Ability to Predict Future Cash Flows versus Future Earnings: Evidence on the Trade‐off between Relevance and Reliability. Contemporary Accounting Research, 27(2), 413-460.
Black, K. (2010). Business statistics: For contemporary decision making (6th ed.), Hoboken: John Wiley &Sons
Boubakri, F. (2012). The relationship between accruals anomaly in the Canadian context. International Journal of economics and Finance, 4(6), 51-62.
Bruner, R. F., Conroy, R.M., Estrada, J., Kritzman, M., & Li, W. (2010). Introduction to ‘valuation in emerging market’. Emerging Market Review, 3(310-324)
Chant, P. D. (1980). On the predictability of corporate earnings per share behavior. Journal of Finance, 35(1), 13-21.
Collins, D.W. & Kothari, S.P. (1989). An analysis of inter-temporal and cross-sectional determinants of earnings response coefficients. Journal of Accounting and Economics, 11(143-181).
Das, S., Levine, C. B., & Sivaramakrishnan, K. (1998). Earnings predictability and bias in analysts’ earnings forecasts. The Accounting Review, 73(2), 277-294.
Dechow, P., Ge, W., Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50, 344-401.
Dichev, I. D., & Tang, V. W. (2008). Matching and the changing properties of accounting earnings over the last 40 years. The Accounting Review, 83(6), 1425-1460.
Dichev, I. D., & Tang, V. W. (2009). Earnings volatility and earnings predictability. Journal of Accounting and Economics, 47(1/2), 160-181.
Doneva, V. & Strom, J. (2013). Credit rating and investment decision in emerging market. Unpublished Master Dissertation, School of Economics and Management, Lund University
Dumontier, P., & Raffournier, B. (2002). Accounting and capital markets: A survey of the European evidence. European Accounting Review, 11(1), 119-151.
Dupernex, S. (2007). Why might share prices follow a random walk? Student Economic Review, 21, 167-179.
Ebirien, G. I. & Nwanyanwu, L. (2017). Earnings quality of firms in the Nigerian financial services sector. European Journal of Accounting, Auditing and Finance Research, 5(4), 54-64.
Espinosa, P. (2016). On value in the emerging markets. SEAFARER Capital Partners, LLC, SEA000471
Ewert, R., Wagenhofer, A. (2010). Earnings quality metrics and what they measure.
Fama, E. F. & French, K. R. (2000). Forecasting profitability and earnings. Journal of Business, 73(2), 161-175.
Feltham, G. & Ohlson, J. A. (1995). Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research, 11(2), 689-731.
Folsom, D., Hribar, P., Mergenthaler, R. D., & Peterson, K. (2016). Principles-based standards and earnings attributes. Management Science, 63(8),http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2016.2465
Francis, J., Lafond, R., Olsson, P., & Schipper, K. (2004). Costs of equity and earnings attributes. The Accounting Review,79(4), 967-1010.
Fink, J. (2014). Valuing stocks using a snapshot multiple requires earnings predictability. Retrieved on 6th June, 2017 from https://www.investingdaily.com/20643/valuing-stockusing-a-snapshot-multiple-requires-earnings-predictability-2
Graham, B., & Dodd, D. L. (2009). Security analysis: Principles and techniques (6th ed.), New York: McGrawHill.
Hamzavi, M. A. & Aflatooni, A. (2011). Earnings smoothing and earnings predictability. Business Intelligence Journal, 4(1), 187-201.
Hasan, I, Park, J. C., & Wu, Q. (2012). The impact of earnings predictability on bank loan contracting. Journal of Business Finance and Accounting, 39(7-8), 1068-1101.
Holt, P. (2013). Earnings quality as measured by predictability of reported earnings. Advances in Business Research, 4(1), 49-53.
International Accounting Standard Board (IASB, 2010). Conceptual framework for financial reporting. Retrieved from http://www.ifrs.org/News/Press-Releases/Documents/ConceptualFW2010vb.pdf.
Li, F., Abeysekera, I., & Ma, S. (2014). The effect of financial status on earnings quality of Chinese-listed firms. Journal of Asia-Pacific Business, 15(1), 4-26.
Lipe, R. (1990). The relation between stock return and accounting earnings given alternative information. Accounting Review, 65(1), 49-71.
Luttman, S. M. & Silhan, P. A. (2011). An empirical analysis of the value line earnings predictability index. Journal of Applied Business Research, 9(4), 104-109.
Luttman, S. M. & Silhan, P. A. (2017). Determinants of earnings variability. Journal of Applied Business Research, 11(1), 117-124.
Nigerian Stock Exchange Rule Book (2015)
Nilsson, H. (2003). Essays on the value relevance of financial statement information. Retrieved from http://www.diva-portal.org/smash/get/diva2:142541/FULLTEXT01.pdf
Ogege, S., & Mojekwu, J. N. (2013). Econometric investigation of the random walk hypothesis in the Nigerian stock market. Journal of emerging issues in economics, 1(5), 381-400.
Ohlson, J. (1995). Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research, 11(2), 661-687.
Oludoyi, S. B. (1999). Understanding risk in a regulated market: evidence from the Nigerian stock markets. African Journal of Economic Policy, 6(2), 59-76.
Park, S. & Shin, H.(2015). Earnings persistence over the macroeconomic cycle: Evidence from Korea. The Journal of Applied Business Research, 31(6), 2147-2166.
Petrovic, N., Manson, S., & Coakley, J. (2009). Does volatility improve UK earnings forecasts? Journal of Business Finance and Accounting, 36(9-10), 1148-1179.
Richardson, S. A., Sloan, R. G., Soliman, M. T., & Tuna, I. (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics, 39, 437-485.
Roggi, O., Giannozzi, A., & Baglioni, T. (2016). Firm valuation in emerging markets and the exposure to country risk. Global Journal of Management and Business Risk, 16(1), 1-20.
Uwuigbe, U. Uyoyoghene, A. L., Jafaru, J., Uwuigbe,, O.R. & Jimoh, R. (2017). IFRS adoption and earnings predictability: Evidence from listed banks in Nigeria. Bank and Bank Systems, 12(1), 166-174.
Watts, R. L. & Leftwich, R. W. (1977). The time series of annual accounting earnings. Journal of Accounting Research, 15(2), 253-271.
Yosra, B. M. & Fawzi, J. (2015). Earnings volatility and earnings predictability. Journal of Business Studies Quarterly, 6(3), 37-53.
Albrecht, W. S., Lookabill, L. L., & McKeown, J. C. (1977). The time series properties of annual earnings. Journal of Accounting Research, 15(2), 226-244.
Allayannis, G., Rountree, B. &Weston, J. P. (2005). Earnings volatility, cash flow volatility and firm value. Retrieved 6th July, 2017 from https://faculty.fuqua.duke.edu/seminarscalendar/Rountree.doc
Arellano, M. & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58, 277-297.
Arewa, A. & Nwakanma, P. C. (2014). Re-validating weak-form hypothesis Nigerian capital market: A comparative test analysis. International Business Research, 7(4), 73-83
Artikis, P. G., & Papanastasopoulos, G. A. (2016). Implications of the cash component of earnings for earnings persistence and stock returns. The British Accounting Review, 48(2), 117-133.
Ball, R. & Watts, R. (1972). Some time series properties of accounting income. The Journal of Finance, 27, 663-681.
Bandyopadhyay, S. P., Chen, C., Huang, A. G., & Jha, R. (2010). Accounting Conservatism and the Temporal Trends in Current Earnings’ Ability to Predict Future Cash Flows versus Future Earnings: Evidence on the Trade‐off between Relevance and Reliability. Contemporary Accounting Research, 27(2), 413-460.
Black, K. (2010). Business statistics: For contemporary decision making (6th ed.), Hoboken: John Wiley &Sons
Boubakri, F. (2012). The relationship between accruals anomaly in the Canadian context. International Journal of economics and Finance, 4(6), 51-62.
Bruner, R. F., Conroy, R.M., Estrada, J., Kritzman, M., & Li, W. (2010). Introduction to ‘valuation in emerging market’. Emerging Market Review, 3(310-324)
Chant, P. D. (1980). On the predictability of corporate earnings per share behavior. Journal of Finance, 35(1), 13-21.
Collins, D.W. & Kothari, S.P. (1989). An analysis of inter-temporal and cross-sectional determinants of earnings response coefficients. Journal of Accounting and Economics, 11(143-181).
Das, S., Levine, C. B., & Sivaramakrishnan, K. (1998). Earnings predictability and bias in analysts’ earnings forecasts. The Accounting Review, 73(2), 277-294.
Dechow, P., Ge, W., Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50, 344-401.
Dichev, I. D., & Tang, V. W. (2008). Matching and the changing properties of accounting earnings over the last 40 years. The Accounting Review, 83(6), 1425-1460.
Dichev, I. D., & Tang, V. W. (2009). Earnings volatility and earnings predictability. Journal of Accounting and Economics, 47(1/2), 160-181.
Doneva, V. & Strom, J. (2013). Credit rating and investment decision in emerging market. Unpublished Master Dissertation, School of Economics and Management, Lund University
Dumontier, P., & Raffournier, B. (2002). Accounting and capital markets: A survey of the European evidence. European Accounting Review, 11(1), 119-151.
Dupernex, S. (2007). Why might share prices follow a random walk? Student Economic Review, 21, 167-179.
Ebirien, G. I. & Nwanyanwu, L. (2017). Earnings quality of firms in the Nigerian financial services sector. European Journal of Accounting, Auditing and Finance Research, 5(4), 54-64.
Espinosa, P. (2016). On value in the emerging markets. SEAFARER Capital Partners, LLC, SEA000471
Ewert, R., Wagenhofer, A. (2010). Earnings quality metrics and what they measure.
Fama, E. F. & French, K. R. (2000). Forecasting profitability and earnings. Journal of Business, 73(2), 161-175.
Feltham, G. & Ohlson, J. A. (1995). Valuation and clean surplus accounting for operating and financial activities. Contemporary Accounting Research, 11(2), 689-731.
Folsom, D., Hribar, P., Mergenthaler, R. D., & Peterson, K. (2016). Principles-based standards and earnings attributes. Management Science, 63(8),http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2016.2465
Francis, J., Lafond, R., Olsson, P., & Schipper, K. (2004). Costs of equity and earnings attributes. The Accounting Review,79(4), 967-1010.
Fink, J. (2014). Valuing stocks using a snapshot multiple requires earnings predictability. Retrieved on 6th June, 2017 from https://www.investingdaily.com/20643/valuing-stockusing-a-snapshot-multiple-requires-earnings-predictability-2
Graham, B., & Dodd, D. L. (2009). Security analysis: Principles and techniques (6th ed.), New York: McGrawHill.
Hamzavi, M. A. & Aflatooni, A. (2011). Earnings smoothing and earnings predictability. Business Intelligence Journal, 4(1), 187-201.
Hasan, I, Park, J. C., & Wu, Q. (2012). The impact of earnings predictability on bank loan contracting. Journal of Business Finance and Accounting, 39(7-8), 1068-1101.
Holt, P. (2013). Earnings quality as measured by predictability of reported earnings. Advances in Business Research, 4(1), 49-53.
International Accounting Standard Board (IASB, 2010). Conceptual framework for financial reporting. Retrieved from http://www.ifrs.org/News/Press-Releases/Documents/ConceptualFW2010vb.pdf.
Li, F., Abeysekera, I., & Ma, S. (2014). The effect of financial status on earnings quality of Chinese-listed firms. Journal of Asia-Pacific Business, 15(1), 4-26.
Lipe, R. (1990). The relation between stock return and accounting earnings given alternative information. Accounting Review, 65(1), 49-71.
Luttman, S. M. & Silhan, P. A. (2011). An empirical analysis of the value line earnings predictability index. Journal of Applied Business Research, 9(4), 104-109.
Luttman, S. M. & Silhan, P. A. (2017). Determinants of earnings variability. Journal of Applied Business Research, 11(1), 117-124.
Nigerian Stock Exchange Rule Book (2015)
Nilsson, H. (2003). Essays on the value relevance of financial statement information. Retrieved from http://www.diva-portal.org/smash/get/diva2:142541/FULLTEXT01.pdf
Ogege, S., & Mojekwu, J. N. (2013). Econometric investigation of the random walk hypothesis in the Nigerian stock market. Journal of emerging issues in economics, 1(5), 381-400.
Ohlson, J. (1995). Earnings, book values, and dividends in equity valuation. Contemporary Accounting Research, 11(2), 661-687.
Oludoyi, S. B. (1999). Understanding risk in a regulated market: evidence from the Nigerian stock markets. African Journal of Economic Policy, 6(2), 59-76.
Park, S. & Shin, H.(2015). Earnings persistence over the macroeconomic cycle: Evidence from Korea. The Journal of Applied Business Research, 31(6), 2147-2166.
Petrovic, N., Manson, S., & Coakley, J. (2009). Does volatility improve UK earnings forecasts? Journal of Business Finance and Accounting, 36(9-10), 1148-1179.
Richardson, S. A., Sloan, R. G., Soliman, M. T., & Tuna, I. (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics, 39, 437-485.
Roggi, O., Giannozzi, A., & Baglioni, T. (2016). Firm valuation in emerging markets and the exposure to country risk. Global Journal of Management and Business Risk, 16(1), 1-20.
Uwuigbe, U. Uyoyoghene, A. L., Jafaru, J., Uwuigbe,, O.R. & Jimoh, R. (2017). IFRS adoption and earnings predictability: Evidence from listed banks in Nigeria. Bank and Bank Systems, 12(1), 166-174.
Watts, R. L. & Leftwich, R. W. (1977). The time series of annual accounting earnings. Journal of Accounting Research, 15(2), 253-271.
Yosra, B. M. & Fawzi, J. (2015). Earnings volatility and earnings predictability. Journal of Business Studies Quarterly, 6(3), 37-53.
Published
2020-03-07
How to Cite
Olaniyi, T. A., Abogun, S., & Salam, M. O. (2020). Earnings Predictability of Quoted Firms in Nigeria. Bangladesh Journal of Multidisciplinary Scientific Research, 2(1), 23-32. https://doi.org/10.46281/bjmsr.v2i1.506
Issue
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2020 Taiwo Azeez Olaniyi ,Segun Abogun ,Mudathir Olanrewaju Salam
This work is licensed under a Creative Commons Attribution 4.0 International License.
