ABSTRACT
The purpose of financial reports is to provide information that is useful for making informed economic decisions. Financial statements that reflect earnings of high quality are of more value relevance to users. The importance of earnings to investors goes beyond the magnitude to include the quality of earnings so that in establishing the relationship between earnings and share price, the decision is enriched by an appreciation of the quality of those earnings in terms of its bankability, stability, recurrence and sustainability. This study examines earnings quality and share price of firms.
The population of the study comprises all the 115 quoted non financial firms on the Nigerian Exchange Ltd (NGX) as at 31st December 2020. Filters were employed to arrive at a sample size of 76 firms. Random sampling technique was used in selecting the 76 firms that formed the sample size. Panel data were extracted from the annual financial statements of the firms for the period 2010 – 2020 to examine the effect of earnings quality proxied by earnings surprise, earnings predictability, earnings persistence, earnings smoothness and accrual quality on share price of firms. Ordinary Least Square Multiple Regression was used to analyse the data.
The results reveal that out of the five (5) earnings quality measures used in the study, earnings persistence, earnings predictability and earnings smoothness has negative significant impacts on share price. Earnings surprise however, has a negative insignificant impact on share price. On the other hand, accruals quality has a positive significant impact on share price. The study further reveal that with the interaction of earnings quality measures with the bottom line metrics of book value per share (BVPS) and earnings per share (EPS) in determining share price, earnings smoothness, earnings predictability and accruals quality were significantly related with share price of firms while earnings surprise and earnings persistence were insignificantly related with share price of firms. Based on the results, the study recommends that the earnings of non financial firms should be subjected to periodic and random stress quality tests by the Securities and Exchange Commission (SEC). Also, there is need for stock market regulators to improve the level of market efficiency of the stock markets. This will improve the rate at which earnings news will be impounded into share prices. The study therefore concludes that earnings quality is a determinant of share price of firms in Nigeria.
