ACCRUAL EARNINGS QUALITY AND COST OF CAPITAL OF LISTED NON-FINANCIAL FIRMS IN NIGERIA

Abstract

Reporting accurate financial information to decision-makers is vital to shareholders, who yield their reserves to firms in the form of capital, possess no means other than annual financial reports and statements of these firms to evaluate how their capital is dealt with and also ensure the proper performance of managers. It is therefore not clear if and how accruals quality affects cost of capital and how it is priced in Nigeria financial regulatory environment. Accordingly, there is lack of knowledge about the level of accrual quality among non-financial companies listed on Nigeria Stock Exchange, yet investors and other stakeholders rely of financial statements for vital decision making. The study has used quantitative research design to determine the impact of accrual quality on cost of capital of non-financial companies in Nigeria. It specifically tests the effects of total, innate and discretionary accrual qualities on cost of capital at the Nigeria Stock Exchange (NSE). The study purposively sampled of 61 non-financial companies derived from a population of 109 non-financial companies quoted at the NSE over the period January 2012 through December 2020. It relied on secondary quantitative accrual quality data from annual financial statements as well as monthly trading security prices from the NSE. The cost of capital effect is tested by a panel data linear regression of cost of capital on the accrual quality variables to establish the statistical significance of the total, innate and discretionary accrual qualities’ coefficients at 95% confidence interval. The study findings reject the three null hypotheses that accrual qualities have no effect on cost of capital and finds out that the total, innate and discretionary accrual qualities of non-financial companies in Nigeria have a negative effect on cost of capital. The finding further indicated that there exists accrual quality market pricing effect on total and innate accrual qualities but not for discretionary accrual quality. The study concluded that the most important determinant of accrual quality of non-financial firms listed at the NSE in Nigeria is the innate aspects of the regulatory environment. This points towards a tight regulatory regime among the listed non-financial firms in Nigeria and recommends accrual quality models be developed for predicting cost of capital as well as security pricing of the equities quoted at the NSE.