THE ROLE OF FINANCIAL STATEMENT IN INVESTMENT DECISION MAKING

THE ROLE OF FINANCIAL STATEMENT IN INVESTMENT DECISION MAKING

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CHAPTER ONE

INTRODUCTION

1.1      Background of the study

Decision making process requires information – financial and non-financial information as well. The most important financial information needed in the process of business decision comes from accounting. Therefore, we can say that accounting is a service function to management. It basically, processes or gathers and studies “raw data” and converts them into suitable information in the process of decision making. The basic characteristics of the accounting are: Gathering, processing and presenting accounting (financial) information; information considering company’s business and those directed towards different interested users. Accounting process contains several phases. Basically, it is a process in which input data are converted into output information. Katarina Zager, LajosZager, 2006). Organizations both public and private need to disclose financial information relating to their operations in order to assist investors in making investment decisions. They do so as a matter to satisfy the legal requirement, retain existing investors and to attract potential ones through the publication of their financial statements where the capital stock of an organization is widely held and its affairs are of interest to general public relations (Amedu, 2008).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 discussions and illustrations of the study is centered on the financial statement presented to shareholders and also available for potential investors, bond holders and trade creditors as a tool of information for investment decision. Financial statement based on result for the pastactivities was analyzed and interpreted as a basis for predicting future rate of returns and assessment of risk (ICAN, 2013).

Financial statement provides important information for a wide variety of decision, investors draw information from the statement of the firm in whose security they contemplate investing. Decision makers who contemplate acquiring total or partial ownership of an enterprise expect to secure returns on their investment such as dividends and increase in the value of their investment [capital gain]. Both dividends and increase in the value of shares of company depends on the future profitability of the enterprise. So investors are interested in future profitability. Past income dividend data are used to forecast returns from dividend and increase in share prices.

The insurgence of corporate failures, like that of Enron Corporation and World.com in the year 2002 and other accounting scandals compounded by the global energy, food and financial crisis leading to credit sqeeze across the globe, has partly been attributed to impact of financial statement manipulations which portrayed some ailing company as if they were sound. In Nigeria also, corporate failures and distresses have been witnessed in the banking sector. Evidence was the huge collapse of the Cooperative and Commerce Bank (CCB), Orient Bank of Nigeria, African Continental Bank (ACB) all due to massive accounting related frauds. This problem resulted in the establishment of Asset Management Company of Nigeria (AMCON) to prevent corporate failures particularly in the Nigeria banking sector by acquiring and financially distress companiesThis trend has now more than ever ensures that financial statements are sternly scrutinised. Investors, Financial analysts and other users of accounting information tend to use their ‘third’ eye to scrutinise financial statements. This became necessary because audited financial statements, which used to provide assurance as to the healthy nature or otherwise of a firm has now, become an object of criticism due to manipulations done in these statements. According to Bishop and Wells (2002 ),one of the most difficulties facing the auditing profession is that there is no auditing process that can provide absolute assurance in detecting all fraudulent financial reporting. Calls have been made on the accounting/auditing profession to employ investigative principles in the preparation and audit of financial statements in order to restore confidence of the investing public on the financial statements. Silverstone and Sheetz (2007) opine that contrary to the external auditor who is basically concerned about compliance, the forensic accountant should employ investigative, law and business principles and accumen to carry out investigations on financial statement and prepare it for the court. Obviously it is the responsibility of the companies’ directors and management to prepare the final account of their companies. When a company prepares its own final account purely for internal use by the directors and management, it can draft them in any way which is most suitable. Although such accounts might have been prepared with strict adherence to accounting theory and principles but will not necessarily be the one to be published. These separate sets of statements are viewed by investors as creative accounting and has contributed to eroding public confidence on the published financial statements. Banks have accused of publishing paper profits (Soludo, 2009). There is therefore the general belief that published financial statements have failed in its responsibility of provide credible information for investors and other users of financial statements. This study therefore investigates the degree of reliance on the published financial statements by corporate investors in Nigeria with a view of finding the extent of the erosion of public confidence on the published financial statements. The study focuses on the banking sector because the banking sector in any country plays a pivotal role in setting the economy in motion and in its developmental processes. Banks promote growth and success of businesses in both developed and developing countries. According to Kamath (2007), the banking sector is an ideal area for this type of research because the banking sector is “intellectually” intensive and its operations more homogeneous than those in other economic sectors.

1.2      STATEMENT OF THE PROBLEM

It was observed, that the position of financial statements as an investment decision making tool in Nigeria, has some problems to both investors and managers of businesses who are not aware of the importance of interdependence relationship that exist between investors and business organizations. Such problems include: Firstly, whether all necessary disclosure have been made by the management of the enterprises, which can now convince a person that deductions made base on the financial statement is not misleading. Secondly, evaluation of performance of a company in investment decisions making and how to determine the profitability of a company. in view of the above stated problem, the researcher intend to investigate the role of financial statement in investment decision making by potential investors

1.3 OBJECTIVE OF THE STUDY

The main objective of this study is to investigate the role of financial statement in investment decision making; specific objective includes:

i)             To ascertain the role of financial statement in investment decision making

ii)           To investigate if there is any relationship between financial statement report and investment decision of potential investors

iii)          To evaluate the effect of window dress financial statement on investment decision making of the investors

iv)         To ascertain the impact of financial statement report on investors confidence

1.4      RESEARCH HYPOTHESES

To aid the completion of the study the following research hypotheses are formulated by the researcher:

H0:financial statement report does not play any significant role in investment decision making

H1:financial statement report does play a significant role in investment decision making

H02:there is no relationship between financial statement and investment decision by potential investors

H2:there is a relationship between financial statement and investment decision by potential investors.

1.5      SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great important to investors and potential investors, as the study seek to evaluate the role of financial statement in investment decision making.

The study will enhance benefit to different types of stakeholders by improving their organizational performance, such stakeholders are financial analysts, investors and other financial organization by widening their knowledge on the use of the financial statement in decision making process The study will make organization to appreciate the importance of sound financial statement in provision of information necessary for decision making. Finally this research will equally serve as reference to students in this noble institution and other school who may be interested to embark on further research study

1.6      SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the role of financial statement in investment decision making, in the cause of the study, there were some factors which limited the scope of the study

a)     AVAILABILITY OF RESEARCH MATERIAL: The research material      available to the researcher is insufficient, thereby limiting the study.

b)     TIME: The time frame allocated to the study does not enhance wider         coverage as the researcher has to combine other academic activities        and examinations with the study.

c)     FINANCE: The finance available for the research work does not     allow for wider coverage as resources are very limited as the        researcher has other academic bills to cover.

1.7 DEFINITION OF TERMS

Financial statement

Financial statements are a formal record of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form easy to understand.

Decision making

decision-making is regarded as the cognitive process resulting in the selection of a belief or a course of action among several alternative possibilities. Every decision-making process produces a final choice, which may or may not prompt action.

Investors

An investor is a person that allocates capital with the expectation of a future financial return. Types of investments.This definition makes no distinction between those in the primary and secondary markets.

1.8    ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study.





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