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Effect of Financial Reporting Restatements on Share Price of Listed Companies in Nigeria

Abstract

Financial reporting restatements have become an important issue in corporate financial reporting due to their potential implications for investor confidence, market efficiency, and corporate credibility. Financial reporting restatements refer to the revision and reissuance of previously published financial statements to correct material errors, accounting irregularities, fraud, misapplication of accounting standards, omissions, or other inaccuracies that may have affected the reliability of reported financial information. Restatements are intended to enhance the accuracy and transparency of financial reporting by ensuring compliance with applicable accounting standards and regulatory requirements. However, they may also signal weaknesses in internal controls, corporate governance, financial reporting processes, or management integrity, thereby influencing investors' perceptions and market valuation. In Nigeria, listed companies are required to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) under the oversight of the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), and the Nigerian Exchange Group (NGX). The increasing emphasis on financial reporting quality, corporate governance, and investor protection has heightened the importance of timely and accurate financial disclosures. Despite improvements in regulatory oversight, instances of financial statement restatements arising from accounting errors, earnings misstatements, regulatory non-compliance, and financial reporting deficiencies continue to occur, raising concerns regarding their effect on share prices and investor confidence. Although previous studies have examined earnings management and financial reporting quality, empirical evidence regarding the effect of financial reporting restatements on the share price of listed companies in Nigeria remains limited and inconclusive. Against this background, this study investigates the effect of financial reporting restatements on the share price of listed companies in Nigeria. The study is anchored on Signaling Theory, Efficient Market Hypothesis (EMH), and Agency Theory. Signaling Theory posits that financial reporting restatements transmit important information to investors regarding a company's financial reporting quality, governance practices, and future prospects, thereby influencing market reactions. The Efficient Market Hypothesis argues that publicly available information, including financial statement restatements, is rapidly incorporated into stock prices as investors adjust their expectations. Agency Theory explains that transparent financial reporting and timely correction of financial statement errors reduce information asymmetry between management and shareholders, thereby improving corporate accountability and investor confidence. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between financial reporting restatements and the share price of listed companies in Nigeria. The study adopts a quantitative research design using a structured questionnaire administered to finance managers, chief financial officers, accountants, financial controllers, internal auditors, external auditors, investment analysts, stockbrokers, portfolio managers, institutional investors, and other professionals involved in financial reporting and investment decision-making within selected listed companies and capital market institutions in Nigeria. A stratified random sampling technique will be employed to ensure adequate representation of respondents from the financial services, manufacturing, consumer goods, industrial goods, oil and gas, telecommunications, agriculture, healthcare, and other sectors listed on the Nigerian Exchange Group (NGX). Financial reporting restatements will be measured using frequency of restatements, materiality of restatements, disclosure transparency, timeliness of restatement announcements, compliance with International Financial Reporting Standards (IFRS), causes of restatements, and effectiveness of corrective actions, while share price will be measured using stock price performance, market value, investor confidence, market reaction, share price volatility, and perceived firm value. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding financial reporting restatements and share price. Structural Equation Modeling (SEM) will be employed to examine the effect of financial reporting restatements on share price. The measurement model will be evaluated using Cronbach's Alpha, Composite Reliability (CR), Average Variance Extracted (AVE), and Confirmatory Factor Analysis (CFA) to establish the reliability and validity of the research instrument. Additional diagnostic tests, including multicollinearity assessment, common method bias analysis, and model fit indices such as the Comparative Fit Index (CFI), Tucker-Lewis Index (TLI), Root Mean Square Error of Approximation (RMSEA), and Standardized Root Mean Square Residual (SRMR), will be conducted to ensure the adequacy, consistency, reliability, and robustness of the structural model. The study anticipates that financial reporting restatements will have a significant effect on the share price of listed companies in Nigeria. Financial reporting restatements are expected to influence investors' perceptions regarding corporate credibility, financial transparency, and management integrity, thereby affecting market valuation and stock price performance. Companies experiencing significant financial reporting restatements may witness temporary declines in share prices due to reduced investor confidence, increased uncertainty, and heightened perceptions of financial reporting risk. Conversely, transparent and timely disclosure of restatements, coupled with effective corrective actions and strong corporate governance practices, may restore investor confidence, strengthen market credibility, and support long-term share price recovery. Furthermore, effective financial reporting controls, robust internal audit systems, and compliance with IFRS are expected to reduce the likelihood of material restatements and enhance shareholder value. Consequently, sound financial reporting practices and effective management of financial reporting restatements are expected to contribute significantly to improving market confidence, corporate reputation, and sustainable capital market development in Nigeria. This study is expected to make significant theoretical and empirical contributions to the literature on financial accounting, capital markets, corporate governance, and financial reporting by providing comprehensive evidence on the relationship between financial reporting restatements and the share price of listed companies in Nigeria. Unlike previous studies that broadly examined earnings management or financial reporting quality, this research specifically evaluates financial reporting restatements as a determinant of share price using primary data and Structural Equation Modeling (SEM). The findings will provide valuable insights for the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), the Nigerian Exchange Group (NGX), listed companies, investors, stockbrokers, professional accounting bodies, corporate managers, policymakers, and academic researchers regarding the strategic importance of accurate financial reporting in promoting investor confidence and capital market stability. The study will also provide evidence-based recommendations for strengthening financial reporting controls, improving disclosure practices, enhancing corporate governance mechanisms, reinforcing compliance with International Financial Reporting Standards (IFRS), promoting timely financial statement corrections, and fostering a more transparent, efficient, and resilient Nigerian capital market.

Keywords: Financial reporting restatements, share price, listed companies, financial reporting quality, International Financial Reporting Standards (IFRS), investor confidence, corporate governance, Structural Equation Modeling (SEM), capital market, Nigeria.