THE IMPACT OF FINANCIAL STATEMENTS ON INVESTMENT DECISION MAKING (A STUDY OF FIRST BANK OF NIGERIA LIMITED)
1.1 BACKGROUND OF THE STUDY
A financial statement is an official record of the financial actions of a business. The purpose of financial statement is to provide reliable information about the financial position, performance, and relevant changes in financial position of acompany or business. Listed companies use financial statements as one of the major medium of communication with their equity shareholders and public at large (Cheng and Yang, 2003; Sloan, 1996; Hribar and Collins, 2002).
When these financial statements are released, they can have large impacts on the business and on the investors of the company. Therefore, it is critical for the companies to ensure that the information the statements present is correct.
Financial statements can have a drastic effect on the stock price of a company. Many investors look at the financial statements when making investment decisions. If information is presented in a financial statement that is better or worse than expected, it can send the stock price up or down. Investors often use financial ratios based on information from the financial statements to make assumptions. Because of this, the financial statements can have a serious effect on the investors of a business.
Financial statements can also have an impact on how easy it is for a business to get financing. If a company is trying to take out a business loan, the lender will typically want to look at the financial statements of that company. If the information on the financial statements is not flattering, it may negatively impact the ability of the company to borrow money. Lenders usually want to invest in companies that have good financial numbers.
Financial statements also have impact on new investors. When a company issues new shares of stock, it will most likely distribute financial statements to potential investors. The potential investors will examine the financial statements to determine if they want to put money into the company. Low earnings numbers could negatively impact the number of investors willing to put money into the company.
In some cases, financial statements can even affect other businesses. For example, a leading company in a particular industry releasing financial statements can influence that industry as a whole. Bad numbers by a leading company can sometimes lead to a negative outlook on other companies. This may drive down the stock prices on other companies in the same industry or sector of the market.
1.2 STATEMENT OF THE PROBLEM
Virtually, every economic entity maintains its records on a historical cost basis. The historical cost figures alone are inadequate. This is because net profit is over stated, the balance sheet does not reflect the current worth of the enterprises and inflationary situation, and the charging of the historical cost of operations to profit and loss account may endanger the maintenance of the operating capital of the entity. It is obvious that the current situation of published financial statement has some limitations. This is because the result of operation (net profit) is a function of accounting standards, policies and conventions adopted by a company and used in the preparation of the financial statements.
The financial statement should provide accurate financial information; which shareholders can effectively manipulate to get the best out of their investment. It is pertinent to say that analysis and interpretation of any financial statement will descend on the adequacy and accuracy of the said statement and how the financial information is being disclosed so as to enable to shareholder make major investment decision such as “if to hold their shares or sell them and invest in bond other than equity”.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the impact of financial statements on investment decision making. Specific objectives include:
1. To determine whether the information in the financial reports of companies and other financial information areas are understood and used for investment decision making.
2. To evaluate the performance of a company for investment decision making.
3. To determine whether financial statements enhance profitability in an organization.
4. To ascertain the extent published financial statement induced more people to invest in companies.
1.4 RESEARCH QUESTIONS
1. Does information in the financial reports of companies and other financial information areas are understood by the investor for investment decision making?
2. Are financial statements useful for forecasting company’s performance?
3. Does financial statements enhance profitability in an organization?
4. Do the companies publish the market value of shares and dividend of the company to the shareholders?
1.5 SIGNIFICANCE OF THE STUDY
This research work is expected to be of great importance to investors and shareholders in particular. It will serve as a guide to individuals who are interested to acquire shares in any firm, company or business organization. It is expected to serve also as an indispensable tool for current and potential investors of business organization as well as companies in their investment decision making by way of providing sound investment strategies for shareholders and other users of published financial statement.
1.6 SCOPE OF THE STUDY
This study is concerned with the impact of financial statements on investment decision making with a particular reference to First Bank of Nigeria Limited.
1.7 LIMITATION OF THE STUDY
There is no research/ study that is hitch free, during the course of this study, some of the constraint failed and those envisage making this task all the more daunting are;
1) Financial constraints
2) Lack of co-operation among staffs
3) Limited time
1.8 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 highlights 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.
PROFITABILITY: Profitability refers to the relationship between profit and the resources employed in earning it. Its resultant effect is usually expressed as a percentage.