IMPACT OF PUBLISHED FINANCIAL STATEMENT ON SHAREHOLDER’S INVESTMENT DECISION

IMPACT OF PUBLISHED FINANCIAL STATEMENT ON SHAREHOLDER’S INVESTMENT DECISION

(A CASE STUDY OF WEST AFRICAN CERAMIC COMPANY AJAOKUTA)

ABSTRACT

This research project was designed to examine “the impact of Published Financial Statement on Shareholders Investment Decision” (A Case Study of West African Ceramic Company Ajaokuta). The primary and secondary sources of data were adopted. Questionnaires were distributed by hand and ninety nine were returned. Upon presentation and analysis of data, hypotheses were tested empirically using analysis of variance (ANOVA). The research revealed the following: Investors do not analyze financial statement before making an investment decision. Published financial statement of a company does not show true and fair view. Majority of the respondents agreed that information contained in the company’s annual report could be reliable for effective investment decision. The researcher recommends that all public limited enterprise should continue to publish their financial statement every year; hence it helps shareholders in making investment decision.

CHAPTER ONE: INTRODUCTION

1. Background to the study      

Corporate organizations owe a duty to fully disclose matters concerning their operations so as to aid investors in making investment decisions. Both large and small organizations in addition to satisfying the legislating requirement tend to retain existing investors and to attract potential ones through the publication of their financial statements where the capital stock of a corporation is widely held and its affairs are of interest to general public relations.

The purpose of financial statement is to provide reliable information about the financial position, performance, and relevant changes in financial position of a company or business. Listed companies use financial statements as one of the major medium of communication with their equity shareholders and public at large (Cheng and Yang, 2003; Sloan, 1996; Hribar and Collins, 2002).Financial statements according to Illoumezie (2006:33) are like compasses “which navigators use to locate their bearing and find direction”. People use them to gauge their financial positions at various points in their lives in order to judge their progress towards their financial goals.

Financial statements according to Meigs and Meigs (1981:28) refers to reports which summarize the financial position and operating results of a business (balance sheet and income statements). It referred to as general purpose that satisfy the need of many groups generally called stakeholders. These groups are particularly concerned with the risk inherent in and returns provided by their investments, and who require accounting information to enable them assess the ability whether they should buy, hold and sell their investments.

According to Anayaogu (2002:14) financial accounting provides information to eternal decision makes such as shareholders, government, creditors, employees etc, these are people with whom or from whom money is ultimately paid or received. Anayaogu (2002:20) also states that records of financial accounting includes various ledges accounts, profits and loss accounts, balance sheet and other financial records. These records are intended to show the strength, progress, portability, management effectiveness and stewardship.

Financial statement are the means of communicating to interested partners information or the resource, obligation and performance of the reporting enterprise in a simple, clear and understandable form to all its user with such attributer of relevance to decision reliability, consistency and comparability materiality efficiency and understandability.

The annual report and accounts are said to be published owing to the fact. It is being printed and dispatched to each shareholder and any other unfrosted where person on request. The annual reports and accounts are the primary means of communicating vital economic information in the cooperation’s resources and obligation to absentee owners and could be investor by the management. The published financial statement serve as a means of conveying business information to the equity investor groups (shareholders), the loans creditors group, the employee groups, the business contract group, the government and its agencies as well as the general public. It gives a concise and genuine picture of an enterprise profitability trend and its financial position. The information contained in the published financial statement act as a basis for which shareholder maker investment decisions. However, the account days of pre-colonial administration, the preparation and publication of financial reports used by owner managers for internal control and cost determination. At the onset of industrial revolution, trade begins to increase and expand. This necessitated employing managers to manage the business on behalf of the shareholders. Managers positions now necessitated companies to prepare and publish a financial report that would reveal to the owners (shareholders) the operational state and financial position of the company and how the capital contributed by the shareholder had been utilized in the realization of the set out objectives of the company.

The company Act 1963 outline that every registered business organization should maintain and submit audited financial statements every year during the Annual General Meeting (AGM) where it is laid to the members. This is in consonance with the provision of schedule two of the Companies and Allied Matter Decree of 1990 which states internally that the form and contents of published financial statements and with the accounting standard issued from time to time by the Nigeria Accounting Standard Board (NASB).

Meigs & Meigs (1981:14) states that the preparation of financial statement is not the first step in accounting process. At the close of financial period, the stakeholder such as investors of a company naturally desires to ascertain the following:

• The result of the company’s operations for the period.
• The resources and hostilities of the company over the period in question.
• Wealth created by the company and how it has been distributed.
• Financial resources acquired and how they have been expanded.

Thus, published financial statement prepared under companies and allied matter decree (CAMA) 1990 supplies information about the above. As a matter of fact, shareholders of any corporation would require annual corporate report published about the entity and which must be relevant, sufficient and reliable.

1. Statement of the Problem     

Virtually, every economic entity maintains its records on a historical cost basis. The historical cost figures alone are inadequate. This is because net profit is over stated, the balance sheet does not reflect the current worth of the enterprises and inflationary situation, and the charging of the historical cost of operations to profit and loss account may endanger the maintenance of the operating capital of the entity. It is obvious that the current situation of published financial statement has some limitations. This is because the result of operation (net profit) is a function of accounting standards, policies and conventions adopted by a company and used in the preparation of the financial statements. Hence this study examine the impact of published financial statement on shareholders’ investment decision making with a particular interest in West African Ceramic Company Ajaokuta.

1. Research Questions

The research questions help keep the research in focus in order to achieve the desired aims of this research. Therefore the following research questions about the impact of published financial statement on shareholders’ investment decision making are being asked so as to find answer to them.

1. Do investors understand financial statement very well?
2. What do shareholders see as the importance of published financial statement of companies?
3. To what extent do the financial statements of a company encourage investors to invest?

1. Objectives of the study

The main objective is to ascertain the impact of published financial statement on shareholders’ investment decision making in West African Ceramic Company Ajaokuta. The specific objectives are stated as follows;

1. To know whether the information in the financial reports of companies are understood and used for investment decision making.
2. To ascertain the extent the company’s published financial statement are capable of meeting shareholders and investors need.
3. To determine how financial statement deficiency affects the shareholders investment decision.
   1. Statement of Hypotheses       

The research would test the following research hypothesis to ascertain whether their correct or not.

H0₁:   Most investor does not analyze financial report before making an investment decision.

HA₁: Most investor does analyze financial report before making an investment decision.

Ho₂:   Financial statement does not show true and fair view of the statement of a company.

HA₂: Financial statement show true and fair view of the statement of a company.

1. Significance of the study

This research work is expected to be of great importance to investors and shareholders in particular. It will serve as a guide to individuals who are interested to acquire shares in any firm, company or business organization. It is expected to serve also as an indispensable tool for current and potential investors of business organization as well as companies in their investment decision making by way of providing sound investment strategies for shareholders and other users of published financial statement.

1. Scope of the Study

This research work is limited to the impact of published financial statement on shareholders’ investment decision making with particular interest in West African Ceramic Company Ajaokuta. The researcher find out all  the relevant accounting information that was needed by investors / shareholders of West African Ceramic Company Ajaokuta and the investment states of West African Ceramic Company Ajaokuta using its published annual report and financial statements.

1. Limitations of the study

This research work is limited to the Impact of Published Financial Statement on Shareholders Investment Decision Making with Particular Reference to West African Ceramic Company Ajaokuta. 

In carrying out a research work of this nature, a lot of problems are encountered and the degree varies from one research to another. The obstacles faced in this research work include distance, security challenges, lack of research materials etc.

1. Definition of Terms
2. Dividend: Is the distribution of part of the earnings of a company to its shareholders. The dividend is normally expressed as an amount per share on the par value of the share.
3. Dilution of Earnings: This is when additional shares of stock are sold without an immediate increase in income. This result is a decline in earnings per share until earning can be generated from funds raised.
4. Earning Per Share: Is the amount of profit after tax and preference dividend (but before taking accounting of extra-ordinary income and expenses attributable to each ordinary share in issue and ranking for dividend during the period.
5. Financial Information: This is any information dealing with the operation of company and how the fund acquired.
6. Efficiency: This refers to achievement of organization goals within minimum waste of resources that is best possible use of resources.
7. Financial Statement: This is a periodic financial reports accounts and other related documents that highlights the financial position of an enterprise as well as the financial profitability.
8. Investment: This is the commitment and utilization of funds and other scare resources in a project with the expectation, that the utilization will generate return.
9. Ordinary Shares: These are the common stock of a company which is to be issued out for sale to individual public.

Profitability: Profitability refers to the relationship between profit and the resources employed in earning it. Its resultant effect is usually expressed as a percentage.