Accounting & Marketing

Theory of Conservatism and Value Relevance of Accounting Information

Abstract

Felix UO and Rebecca UI

This paper is centered on theory of conservatism and value relevance of accounting information in the Nigeria stock ex-change (NSE) and other related literatures. It reviews the relevance of conservatism and value relevance of accounting information and their comparisons. While there have been a number of studies on this topic in the developed countries not much has been explored in Nigeria. Value relevance has been criticized by extant literature and also that conservatism in accounting as one reason for the observed decrease in value relevance. One of such recommendation was that the financial reporting council and other allied bodies should ensure clarity and provide rules with probably less discretionary tendencies for management to manipulate. The overall aim is to improve credibility of financial information. In order to ascertain the impact of conservatism on value relevance of accounting information, secondary source of data collection, statistical instruments like regression and correlation were used in the analysis of data collected. It was discovered among others that there is the existence of a significant inverse relationship between Market-based conservatism (BMCONA) and Earnings per share (EPS) used as a proxy for stock returns for the pooled OLS, fixed and random effects model. The results suggest that higher conservative practices by companies will affect the informativeness of financial estimates and declines in stock returns may be seen as an outcome of the markets assessment of disclosure credibility. In concluding this study, some recommendations were made. One of such recommendation was that the financial reporting council and other allied bodies should ensure clarity and provide rules with probably less discretionary tendencies for management to manipulate. The overall aim is to improve credibility of financial information.