1.1 Background to the Study
Financial reporting is undergoing a global transformation toward a single set of accounting standards – the International Financial Reporting Standards (IFRS) – as promulgated by the International Accounting Standards Board (IASB). IFRS incorporates more information into the financial statements by essentially promoting the fair value approach to presentation with shareholder-orientation (Hung & Subramanyam, 2007).
The IASB has designed these standards with the objective of reducing information asymmetries amongst users of the financial statements across countries (Barth, Landsman & Lang, 2008) and principally, investors (Haller, Ernstberger & Froschhammer, 2009). Hence, the adoption of IFRS is based on the fact that accounting quality should be improved in terms of financial reporting (Munteanu, Brad, Ciobanu & Dobre, 2014; Pascan, 2015). Sequel to the above premise, several countries subscribed to IFRS (Greuning, 2010).
In Nigeria, the local accounting standards were issued by the Nigerian Accounting Standard Board (NASB) up till 2011 (Umoren & Enang, 2015). On 28 July 2010, the Nigerian Federal Executive Council approved the effective date for replacing the Nigeria local Generally Accepted Accounting Principles (GAAP) with IFRS (Onalo, Lizam & Kaseri, 2015) by following a phased transition programme starting from January 1, 2012. The first phase of the programme covered publicly listed and significant public interest entities which were mandated to apply IFRS in their financial statements by January 1, 2012. Other public interest entities were covered in the second phase and were to adopt IFRS by January 1, 2013 while phase three covered Small and Medium-Scale Enterprises (SMEs) which were given up to January 1, 2014 to adopt IFRS (Umoren & Enang, 2015).
Interestingly, the banking sector in Nigeria which falls under the first phase is one of the pillars of economic development (Umoren & Enang, 2015). The sector’s intermediation function ensures that essential funds are channeled from the savings surplus to the savings deficit unit of the economy which needs funds for investment, thus promoting economic growth and development. Essentially, a strong banking sector as perceived by investors will not only enhance depositors’ confidence but will also lead to improved performance of the economy. However, in order to achieve these desired intents in the banking sector, quality accounting information is essential.
Extant literature on IFRS adoption has demonstrated a mixed result. For instance, Bartov, Goldberg and Kim (2005) found that the value relevance of earnings increased when firms switch from GAAP to IFRS. These findings differ from those of Hung and Subramanyam (2007) and Stergios, Athanasios and Nikolaos (2007) who found that the combined value relevance of book value and earnings decreases after adopting IFRS. Using the Ohlson (1995) model, Kargin (2013) found that the overall book value relevance of accounting information improved in the post-IFRS period (2005-2011) while no improvements was observed in the value relevance of earnings. Maggina and Tsaklanganos (2011) however, found no effect on value relevance after the adoption of IFRS. These inconsistencies in empirical literature provide a research gap for an empirical research from our jurisdiction.
This research is influenced by the agency theory because investors (shareholders), who are usually different from the management, rely on the information supplied by management in the financial statements in assessing the value of a firm before deciding either to invest or disinvest. The ability of IFRS adoption to effectively and satisfactorily guide investors in their investment decisions depends on the value relevance of the information in the financial statements. It is against this backdrop that this study intends to empirically investigate the impact of IFRS adoption on the value of deposit money banks in Nigeria.
1.2 Statement of the Problem
Accounting literature gives evidence that accounting quality has serious consequences on the economic, cost of capital and value of the firm (Sun, 2006; Bushman & Piotroski, 2006; Leuz & Verrecchia, 2000). Following the adoption of IFRS by over 100 countries across the world (Greuning, 2010), there has been an increasing debate around policy and academic circles on the potential effect of such move. In many countries where IFRS has been adopted, empirical evidence on the benefits has been largely mixed. However, some studies such as (Ofoegbu & Okaro, 2014) have discusses the procedure of IFRS adoption in Nigeria but paucity of empirical research from our jurisdiction has limited our contribution to the debate. This, therefore, creates an important research gap on the impact of IFRS adoption since January 1, 2012. In an attempt to provide insight into the effects of the change from the local GAAP, this study sought to fill this research gap by empirically investigating the impact of IFRS adoption on the value of deposit money banks in Nigeria.
1.3 Research Objectives
The overall objective of this study was to empirically investigate the impact of the adoption of IFRS on the value of deposit money banks in Nigeria since its introduction in 2012. To achieve this objective, the study specifically sought to accomplish the following:
(1.) To determine the impact of book value of equity per share on the market value per share of deposit money banks in Nigeria.
(2.) To ascertain the impact of accounting earnings per share on the market value per share of deposit money banks in Nigeria.
1.4 Research Questions
This study sought to provide answers to the following research questions drawn in line with the objectives of the study:
(1.) What is the impact of book value of equity per share on the market value per share of deposit money banks in Nigeria?
(2.) How does accounting earnings per share impact on the market value per share of deposit money banks in Nigeria?