1.1 Introduction
Financial institutions owe duty to fully disclose matters concerning strengths, weaknesses and prospects of their operations so as to aid in making investment decisions because information obtained from its financial reports use to predict future investment. Without the financial reporting quality, there will be a problem of how to invest and evaluation of performance of bank in general. Therefore, financial reporting quality relates to the accuracy with which reported financials of a bank reflects its operating performance and how useful they are in forecasting future cash flows (Nyor, 2013).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.
1.2 Background of Study
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.
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.
Financial reporting quality entails the standardization of preparation and presentation of both financial and non-financial information by the financial institution for effective planning and reliable decisions. However, the objective of financial reporting is to provide information that may be useful enough for evaluating management effectiveness in utilizing resources under its control to satisfy its users’ needs. Financial reports are used by investors and creditors in deciding where to in- vest their limited resources in a particular organisation or not (Akintoye 2002) cited (Muhammed, Abubakar & Danrim, 2016). Financial reports is a formal and comprehensive statement describing financial activities of a business organization such as the financial institutions. For such a business entity, is a statement that reports all relevant financial information presented in a structured manner and in a form easy to understand for managerial use for taking prompt and informed decision making related to investment (IASB, 2007a) and also to decision making pertaining to cost planning, investment planning, expected returns and performance evaluation. The financial reports comprises of statement of financial position, statement of comprehensive income, statement of equity changes and cash flow statements (reports on a company’s cash flow activities, particularly its operating, investing and financing activities). In order for the financial reporting to be useful for decision maker, it must possess all aspects of qualitative characteristics such as understandable, comparability, consistence, relevant, reliable, objectivity, correctness and in time for the needs of the users.
The investment decisions of a firm are generally known as the capital budgeting decision. This may be defined as the firm’s decision to invest its current funds most efficiently in the long-term assets in anticipated of an expected flow of benefits over a series of years. The two importance aspects of investment decisions are; evaluation of the prospective profitability of new investments and the measurement of a cut-off rate against that the prospective return of new investment could be compared (Anaja & Emmanuel 2015).
Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Financial Reporting Quality and Its Effect on Investment Decision.
1.3 Statement of Problems
Investigation reveals the problems of the Financial Reporting Quality and Its Effect on Investment Decision research work which entails that:
- Some shareholders cannot interpret financial information correctly and cannot be able to make good use of the financial information disclosed to get the best out of their investment.
- Company’s concepts, conventions and principles are not capable of meeting the user needs.
- Published financial statements do not induce more people to make investment in some companies.
- Some shareholders are not oriented before making investment decision.
- Sometimes the dividends are not satisfactory considering the risk involved in investment.
- Some company’s find it difficult to make their financial statement available to the shareholder at any point in time.
1.4 Aim and Objectives of Study
The aim of the study is to scrutinize the Financial Reporting Quality and Its Effect on Investment Decision. In achieving this aim, the following specific objectives were laid out as follows:
- To know whether the information in the financial reports of companies and other financial information areas are understood and used for investment decision making.
- To ascertain the extent the company’s concept, convention and principles are capable of meeting users/ investors needs.
- It is deemed to state categorically and in clear terms that the influence of corporate reporting to investment differences in accounting methods and how financial statement deficiency affects the investors (shareholders).
- To ascertain the extent published financial statement induced more people to invest in companies.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- Do investors understand financial statement very well?
- Do the companies publish the market value of shares and dividend of the company to the shareholders?
- Do the shareholders carryout analysis to the appropriate personnel?
- What do they (investors) see as the importance of published financial statement of companies?
- To what extent do companies concepts, conventions and principles capable of meeting users need?
- To what extent does the financial statement of a company encourage investors to invest?
- What is the best source of information to the shareholder on investment decision?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Most investor does not analyze financial report before making an investment decision.
- H1: Most investor does analyze financial report before making an investment decision.
Hypothesis Two
- H0: Financial statement does not show true and fair view of the statement in your company.
- H1: Financial statement show true and fair view of the statement in your company.
Hypothesis Three
- H0: Financial reporting quality has no significant effect on investment decisions
- H1: Financial reporting quality has a significant effect on investment decisions
1.7 Significance of Study
This study would be of benefit by improving the performance of deposit money banks because it intends to help the banks in investment decisions. The study would help in widening knowledge of financial reporting quality in investment decisions; it will also make the banks to appreciate the importance of financial reporting quality in the provision of information necessary for investment decisions. Additionally, this study helps banks prepare financial statement under similar accounting principles. It also creates awareness with respect to the great impact account reporting quality has on investment decisions. It shows how finance has been raised and how it has been deployed, how relationships between wealth generated and wealth invested can be important and helpful indicators of business effectiveness. Finally, it will serve as a reference document for future researchers who may be interested to embark on study of this nature.
1.8 Scope of the Study
The study focuses on the Financial Reporting Quality and Its Effect on Investment Decision in Nigeria.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Definition of Terms
- 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.
- 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.
- 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.
- Financial Information: This is any information dealing with the operation of company and how the fund acquired.
- Efficiency: This refers to achievement of organization goals within minimum waste of resources that is best possible use of resources.
- Financial Statement: This is a periodic financial reports account and other related documents that highlight the financial position of an enterprise as well as the financial profitability.
- 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.
- Ordinary Shares: These are the common stock of a company which is to be issued out for sale to individual public.
