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Impact of Earnings Persistence on the Market Value of Listed Companies in Nigeria

Abstract

Earnings persistence is an important indicator of the sustainability and predictability of a company's reported earnings over time. It reflects the extent to which current earnings are likely to continue into future periods and provides useful information about the quality, stability, and reliability of reported financial performance. Market value represents the value assigned to a company by investors based on its current financial position, expected future earnings, growth opportunities, risk profile, dividend prospects, and other relevant information available in the capital market. Companies with highly persistent earnings may be perceived as having more stable and predictable business operations, potentially increasing investor confidence and market valuation. Conversely, low earnings persistence may indicate volatile earnings, temporary income components, weak operating performance, or uncertainty regarding future profitability, which may negatively influence investors' valuation decisions. In Nigeria, listed companies operate in an economic environment characterized by inflation, exchange rate volatility, changing interest rates, rising operating costs, economic uncertainty, and fluctuations in consumer demand. These conditions can influence the stability of corporate earnings and investors' assessment of future financial performance. The relevance of earnings persistence is therefore important to investors, financial analysts, corporate managers, auditors, and regulators in evaluating the sustainability of reported earnings and corporate value. Regulatory institutions such as the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), and the Nigerian Exchange Group (NGX) promote transparent financial reporting and disclosure practices that enable investors and other stakeholders to assess the quality and sustainability of corporate earnings. Despite these regulatory efforts, differences exist in the persistence of earnings and market valuations among listed companies, raising questions about the extent to which earnings persistence influences market value. Although previous studies have examined earnings quality, earnings management, and firm value, empirical evidence regarding the impact of earnings persistence on the market value of listed companies in Nigeria remains limited and inconclusive. Against this background, this study investigates the impact of earnings persistence on the market value of listed companies in Nigeria. The study is anchored on the Ohlson Valuation Model, Signaling Theory, and Efficient Market Hypothesis (EMH). The Ohlson Valuation Model provides a theoretical basis for linking accounting information, including earnings, to the market value of equity and emphasizes the relevance of earnings and book value in corporate valuation. Signaling Theory suggests that persistent and stable earnings may provide positive information to investors regarding the quality of management, operational stability, and future earnings capacity of a company. The Efficient Market Hypothesis proposes that investors incorporate relevant publicly available financial information into share prices as they assess the future prospects of listed companies. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between earnings persistence and the market value of listed companies in Nigeria. The study adopts a quantitative research design using a structured questionnaire administered to chief executive officers, chief financial officers, finance managers, accountants, financial controllers, investment analysts, portfolio managers, fund managers, stockbrokers, institutional investors, internal auditors, external auditors, and other professionals involved in financial reporting, investment analysis, and corporate valuation within selected listed companies in Nigeria. A stratified random sampling technique will be employed to ensure adequate representation of companies operating in the financial services, manufacturing, consumer goods, industrial goods, oil and gas, telecommunications, agriculture, healthcare, and other sectors listed on the Nigerian Exchange Group (NGX). Earnings persistence will be measured using the stability and continuity of reported earnings, persistence of operating income, consistency of earnings growth, recurrence of earnings components, and predictability of future earnings, while market value will be measured using market capitalization, market price per share, Tobin's Q, price-to-book ratio, and overall market valuation. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding earnings persistence and market value. Structural Equation Modeling (SEM) will be employed to examine the impact of earnings persistence on market value. 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, 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 earnings persistence will have a significant positive impact on the market value of listed companies in Nigeria. Companies with highly persistent earnings are expected to attract greater investor confidence because stable and recurring earnings provide stronger indications of future profitability and cash-flow-generating capacity. Investors may regard persistent earnings as more informative and reliable than temporary or non-recurring earnings, thereby assigning greater value to companies with sustainable earnings streams. High earnings persistence may also reduce uncertainty regarding future financial performance and improve investors' ability to estimate expected returns, potentially resulting in higher share prices and market valuations. Conversely, low earnings persistence may indicate unstable earnings, greater dependence on non-recurring income, volatile operating performance, or uncertainty regarding future profitability, potentially reducing investor confidence and market value. However, earnings persistence may be affected by industry characteristics, economic conditions, business cycles, accounting policies, and changes in corporate strategy. Consequently, investors may evaluate earnings persistence alongside earnings quality, cash flows, profitability, growth prospects, and other financial information when determining market value. Overall, sustainable and predictable earnings are expected to contribute significantly to the market value of listed companies in Nigeria. This study is expected to make significant theoretical and empirical contributions to the literature on financial accounting, earnings quality, corporate valuation, and capital market research by providing comprehensive evidence on the relationship between earnings persistence and the market value of listed companies in Nigeria. Unlike previous studies that broadly examined earnings quality, earnings management, or accounting information, this research specifically evaluates earnings persistence as a determinant of market value using primary data and Structural Equation Modeling (SEM). The findings will provide valuable insights for listed companies, accountants, auditors, financial analysts, investment managers, portfolio managers, investors, stockbrokers, the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), the Nigerian Exchange Group (NGX), professional accounting bodies, policymakers, regulators, and academic researchers regarding the relevance of sustainable earnings in corporate valuation. The study will also provide evidence-based recommendations for improving earnings quality, strengthening financial reporting practices, reducing reliance on temporary income components, enhancing disclosure of recurring and non-recurring earnings, improving investor communication, and promoting reliable financial information to support efficient market valuation of listed companies in Nigeria.

Keywords: Earnings persistence, market value, listed companies, earnings quality, accounting information, financial reporting, investor confidence, corporate valuation, share price, Structural Equation Modeling (SEM), Nigeria.