VALUE RELEVANCE OF ACCOUNTING INFORMATION OF LISTED INDUSTRIAL GOODS FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Accounting is regarded as the language of business used by corporate firms in communicating their financial positions to their users through the publication of annual financial statements containing the required financial accounting information. Financial accounting information is the product of corporate accounting and external reporting systems that measures and publicly discloses audited, quantitative data concerning the financial position and performance of publicly held firms. These financial statements, according to the Generally Accepted Accounting Principles (GAAP), have certain qualitative characteristics that should be met in order for it to succeed in its purpose. The statement should disclose reliable, relevant, comparable, timely and understandable information (ICAN, 2014). For any accounting information to meet up with the above qualitative characteristics, it must be prepared and made public for the consumption of its target users.

These users need different information at different times and as such, it is mandatory for preparers of these financial statements to prepare and present reliable information to assist them in their decision making (ICAN, 2014). Reliability has to do with the quality of information which assures that information is reasonably free from error and bias and faithfully represents what it is intended to represent. The International Accounting Standard Board (IASB) Framework (2011) shows that accounting information is only relevant when users are able to evaluate past, present or future events in taking economic decisions. These users could be owners, managers, or employees Value relevance refers to the ability of accounting information to be reflected in stock values (Francis & Schipper, 1999). Value relevance has to do with the summarization of accounting information which affects stock values in such a way that the investors can come up with an informed decision, that has to do with an organization. Valuation study is mainly aimed at relating accounting numbers to a measure of firm value with a view to assessing the characteristics of accounting numbers and their relation to value of the firm (Barth, 2000). If accounting information is prepared in such a way that it plays the roles expected of it, it will lead the investors to come up with the right investment decision that at the end will give them higher returns on investment and minimize risks of the investment. 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 by a positive correlation between market values and book values (Takacs, 2012).