Firm’s value sustainability via accounting ratios: The case of Nigerian listed firms

Abstract

Orientation: The study highlights further use of accounting ratios by considering it as the main factor for value detecting, value enhancing and value sustainability tool. This is carried out by investigating the effect of accounting ratios on the performance of the listed firms in Nigeria. Research purpose: The study examining the relationship between accounting ratios and firm value sustainability. It further studied the effect of accounting ratios on firm’s value sustainability. Motivation for the study: The study provoked an insight that accounting ratios should not only be used to analyse and interpret company’s financial health but also be used as a tool that guides companies’ operation for value sustainability. Research approach/design and method: The study employed data retrieved from sampled listed firm’s annual reports and centered the study on agency and signaling theories. The data were evaluated using descriptive analysis, Pool ordinary least square (OLS), random effect and panel generalised method of moment (GMM). Thirty firms representing all sectors except the financial sector from 2008 to 2017 were sampled using a stratified sampling method. The dependent variable is Tobin’s q, whilst the explanatory variables are also proxy by accounting ratios. Main findings: The study revealed that accounting ratios do not only affect and influence firm value but also help to detect if value had been created or not, as well as if the value created has been sustained over years. It further revealed a significant and positive relationship between ratios used in the study (current ratio, ROA, asset turnover, debt-equity ratio and earnings per share) and firm’s value. Practical/managerial implications: The study therefore recommended that a comprehensive accounting ratio that comprises both conventional accounting ratios and sustainability accounting ratios should be published. This should be published alongside with the firm’s financial statement for ease of interpretation and determination of the yearly performance by any stakeholder who may want to interpret the report for an informed decision. Contribution/value-add: It then stated that a before tax sustainability rate law should be enacted for easy determination of sustainability ratio. The study contributed to decision makers, Accounting Profession, Corporate Organizations and Government.

Keywords

• firm value
• accounting ratios
• agency cost theory
• signalling theory
• value sustainability and sustainability ratios