Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):62-74

Journal of Emerging
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2017 Sciences (JETEMS) 8(1):62-74 (ISSN: 2141-7016)
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Trend Analysis of Earnings Quality among Listed Companies in

Nigeria
Mary Kehinde Salawu
Department of Management and Accounting
Obafemi Awolowo University, Ile-Ife, Nigeria
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Abstract
The study examined the trend of earnings quality of listed companies in Nigeria. Secondary data were employed for
the study. Purposive sampling technique was used to select 65 financial and non-financial firms quoted on the
Nigerian Stock Exchange (NSE). These comprised 15 financial firms and 50 non-financial firms selected on the
basis of continuity in transaction and availability of complete data during the study period. Data were sourced from
the audited Annual Reports and Accounts of the sampled firms and from the NSE factbooks. Data were analysed
using content analysis, mean, percentages, graphs and tables. The trend analysis results showed that previous
earnings quality of companies listed in Nigeria have potential positive impact on their current and subsequent
earnings quality. The quality of earnings improved between 2006 and 2007 but declined in 2008. However, there
was consistent improvement in the earnings quality in year 2009, 2010 and 2012 with a decline in 2013. The result
further revealed that IT Services sector had the best average earnings quality performance, followed by packaging
and containers, construction and chemical while agric/agro-allied and food beverages had the least average earnings
quality. The study concluded that stock market participants including the shareholders, potential investors, financial
analysts and other users of audited financial statements would enhance the quality of their economic evaluation and
decisions by painstakingly analysing the comparative earning quality trends of various companies.
_________________________________________________________________________________________
Keywords: earnings quality, accrual ratio, earnings trend, listed company, Nigeria.

INTRODUCTION
Earnings are a central part of financial statements that offer a robust and parsimonious measure of earnings
help a large number of stakeholders or users of quality (Sloan, 1996; and Richardson, Sloan, Soliman&
accounting information to evaluate firm performance. Tuna 2001).
Shareholders use the reported financial information to
measure managers‟ performance, deciding Ohlson and Feltham (1995) defined earnings quality as
compensation plans and assessing the future of the the investor‟s ability to predict future abnormal earnings
company. Reported financial information influences the depending on recent data. According to Sloan (1996)
investors‟ capital allocation decisions (Xu, Taylor & and Dechow and Dichev (2002) earnings of high quality
Dugan 2007). Earnings serve as a key determinant of are those that "are backed by past, present, or future
dividend policy, investment decision as well as a core cash flows". Penman and Zhang (2002) and Dechow
measure of a firm's performance, an effective criterion and Schrand (2004), defined it as earnings of high-
in stock pricing and eventually an instrument utilized to quality those that "are persistent and hence the best
make predictions (Mohammady 2012). predictor of future long-run sustainable earnings". That
is, a high earnings quality shows the usefulness of profit
Earnings quality is the honest expression of the reported information for decision making by the users and also it
profit. It is the ability of the present earnings to provide is more adjusted with economic profit (Ahmadpoor and
a real picture about the company and its ability to Ahamdi, 2008).
survive in the future. Chasteen, Flaherty and O'Connor
(1992) opined that the quality of earnings refers to how Today, the incidence of earnings manipulation activities
closely income is correlated with cash flows, that is, the by management is perceived to have consequently
higher the correlation, the higher the earnings quality. shaken the trust and confidence of investors in the
Prior research related earnings quality to the level of financial reporting system and earnings quality emerges
earnings management because of the difficulties in as an important factor in determining the validity and
measuring earnings quality and established that firms reliability of reported figures. The reliance of external
use accounting accruals to manage earnings (Healy users on reported earnings as a fundamental variable for
1985; Jones 1991; DeFond and Park 1997) and accruals
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):62-74 (ISSN: 2141-7016)

making decisions, made earnings quality a matter of components to the income series, which reduce earnings
great concern. quality as captured by persistence, in order to decrease
time-series variability and increase predictability. Leuz,
Having considered the centrality of earnings quality in Nanda, and Wysocki (2003) shared the same view by
literature, it was apparent that further efforts should be their assertion that artificially smoothed earnings are not
made to explore the yearly reports of company‟ representatively realistic to the reporting entity's
chairman vis a vis the pattern of earnings quality of business model and its economic environment.
listed companies over time. This aspect appeared to
have been neglected by researchers so far in the Watts (2003a, 2003b) argued that those earnings that are
available literature. The need to investigate the trend of derived under conservative accounting rules or the
earnings reported among the listed companies in Nigeria conservative application of relevant rules" are of high
therefore becomes critical. In addition,past studies in quality. Schipper and Vincent (2003) considered
Nigeria focused on non-financial firms (Shehu 2011; earnings to be the main profitability indicator as well as
Shehu and Abubakar 2012; Adeniyi and Mieseigha the main source of financial information in capital
2013; Okolie, Izedonmi and Enofe 2013; Okolie 2014; markets. They focused on decision usefulness and
Omoye and Eriki 2014; Musa and Shehu (2014) while economic income to express a definition of earnings
this study focused on both financial and non-financial quality as proximity degree of accounting earnings to
listed companies. The rest of the paper is divided into Hicksian earnings. Hicksian earning is an amount that is
four sections. Section two focused on literature review consumed during a period so that the welfare at the end
while methodology is discussed in section three. Results period in comparison to the beginning of period is not
and discussions are contained in section four while changed. They argued that earnings of high quality are
section five focused on the conclusion of the paper. those that "predict future earnings better".

LITERATURE REVIEW Schipper and Vincent (2003) offered alternative

According to DeAngelo (1986), earnings of high quality perspective on measuring earnings quality based on
are those that "present smaller changes in total accruals understanding of accounting choices, incentives,
that are not linked to fundamentals". There are several expertise and limitation posed to auditors and
possible earnings quality constructs, based on a range of accountants with two approaches. The first is that
definitions of which some are related to the time-series earnings quality is inversely related to the amount of
properties of earnings which include persistence, judgment and forecasting that the preparers of financial
predictive ability and variability (Kormendi&Lipe reports require and secondly, quality is inversely related
1987). to the extent that accountants' estimations and forecasts
have results other than those standards target. `
Financial analysts view earnings of high quality when it
is expected to repeat constantly and with a high level of Dechow and Schrand (2004) argued that a good
predictability. (Bernstein 1988; Bricker, Previts, understanding of earnings quality plays an important
Robinson and Young 1995). Lev (1989) defined role in the process of financial analysis and that
earnings quality in the context of equity valuation earnings of high quality help financial analysts in
decisions and he popularized the adjective “quality” as a analyzing three basic sides of information, that is, the
descriptive characteristic of earnings for academic present functional performance of the company; future
researchers and stated that one explanation for low functional performance; and value of the company.
earnings/returns models is that: “No serious attempt is They stated that smooth earnings and earnings that do
being made to question the qualityof the reported not have special or non-recurring items are earnings of
earnings numbers prior to correlating them with high quality. Abdelghany (2005) noted that different
returns.” Accounting researchers continue to use the styles for measuring earnings quality lead to different
descriptor quality in reference to the decision-usefulness evaluations, where the same company might be given a
of earnings in equity market valuation. higher or lower quality level according to the earnings
quality form adopted. Altamuro and Beatty (2006) used
However, Schipper and Vincent (2003) asserted that the earnings continuity (the relationship between the present
predictive ability is not linked to "the representative earnings with the future ones) as a standard of its
accuracy of reported earnings to an economic construct" quality.
due to the fact that the ability of earnings to predict
itself might increase management involvement to Financial Accounting Standards Board (FASB)'s
smooth the reported series relative to the unreported Conceptual Framework emphasised various qualitative
unmanaged series. Managers may introduce short-term characteristics in relation to earnings quality construct:
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relevance (timely accounting recognition of economic Table 1: Population and Sample Size
phenomena); reliability (reducing measurement errors) SECTOR Population Sample Size
and comparability (assessing financial reporting quality Agric/Agro-Allied 5 5
Conglomerates 8 7
among firms). This definition poses operational and Breweries 7 3
empirical challenge for researchers since the stated Food/Beverages 14 5
characteristics are neither mutually exclusive nor Industrial Products 5 2
necessarily compatible and cannot be separately Health Care 10 5
measured (Barker and Iman 2008). Printing & Paper Product 6 2
Building Materials 13 5
IT Services 7 2
According to Dechow, Ge and Schrand (2010), higher Financial Institution 55 15
quality earnings more faithfully represent the features of Energy Equipment,
the firm‟s fundamental earnings process that are Petroleum & Petrol Products 14 6
relevant to a specific decision made by a specific Household Durables 4 4
Packaging & Containers 6 1
decision-maker. They identify the proxy for earnings
Chemicals 1 1
quality under the following categories: (i) statistical Tools & Machines 3 1
properties of earnings which are composed of Construction 10 1
persistence and accruals, earnings smoothness, Services 12 NIL
asymmetric timeliness and timely loss recognition as Alternative Securities 8 NIL
well as the benchmarking, in which the distance of Natural Resources 3 NIL
Electrical Services 3 NIL
earnings from a benchmark is viewed as a measure of its TOTAL 194 65
quality (e.g., small profits) ; (ii) investor responsiveness Source: Nigerian Stock Exchange 2013
to earnings includes papers that use an earnings Measurement of Earnings Quality
response coefficient (ERC) as a measure of earnings
informativeness or earnings quality ; and (iii) external There is no standard ratio to define what is
indicators of financial reporting quality which also considered good, strong, or poor quality
includes: Accounting and Auditing Enforcement earnings. Ratio is best used therefore as a
Releases (AAERs) restatements, and internal control relative measurement between companies. Using
procedure deficiencies reported under SOX. the statement of financial position approach, earnings
quality was measured as the change in net operating
METHODOLOGY assets over a period. Francis and Wang (2008) used
The list of quoted companies on the first and second signed discretionary accruals as the (inverse) measure of
tiers of Nigerian Stock Exchange (NSE) in the Factbook earnings quality. Suleiman (2014) employed negative
2013 contained 194 firms Secondary data was sourced accrual measure in estimating accounting conservatism.
for this study from the audited Annual Reports and
Accounts of the 65 sampled firms and from the Nigerian The accrual method has been used extensively in
Stock Exchange factbooks. The firms comprised 15 earnings quality research as it not only captures the
financial and 50 non-financial firms purposively effect of accruals management but also the effect of
selected on the basis of continuity in transaction and some of the earnings quality techniques, such as
availability of complete data during the study period. changes in accounting estimates and manipulating
The financial companies comprise of money deposit recognition timing. Earnings have a cash flow
banks and insurance companies. Table 1 contained the component and an accrual component. Reported
details of the sample size for the study Data were earnings can be disaggregated into cash flow and
analysed using content analysis, mean, percentages, accruals using the statement of financial position
graphs and tables. approach or the cash flow statement approach.
Earnings quality has been used in numerous empirical Using the statement of financial position approach,
studies to show trends over time in line with the earnings quality was measured as the change in net
objective of standard setters to evaluate changes in operating assets over a period (CFA, 2014). A net
financial accounting standards with a view to improving operating asset (NOA) is the difference in operating
as well as making comparison. Other usefulness of assets and operating liabilities. The formula is given as:
earnings quality trend include among others, EQ = NOAt – NOAt-1 .1
determining the effect of earnings quality on the cost of Where:
capital, keeping pace with the recent changes in auditing NOA = Operating Assets (OA) – Operating liabilities (OL)
as well as corporate governance in general. OA = Total assets minus cash equivalents and marketable
securities
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OL = Total liabilities minus total debt (both short-term and Where:

long-term) NI = Income after tax
NOAt= Operating Assets (OA) minus Operating liabilities CFO = cash flow from operating activities
(OL) for firm i in year t. CFI = cash flow from investing activities
NOAt-1= Operating Assets (OA) minus Operating liabilities
(OL) for firm i in year t-1.
NOAit= Operating Assets (OA) minus Operating
liabilities (OL) for firm i in year t.
Literature has established the necessity of scaling the NOAit-1= Operating Assets (OA) minus Operating
accrual measure of earnings quality for differences in liabilities (OL) for firm i in year t-1.
size. Scaling the measure also allows for comparisons
with other firms. Scaling is done by dividing the accrual According to Dechow, Ge and Schrand (2010), the
measure of earnings quality by the average NOA for the higher the accrual measure of earnings quality for each
period. The result is known as the accrual ratio: sampled firm, the lower the quality. The interpretation
of both accruals ratios (eq. 3.2 and 3.3) is the same; the
EQ = NOAit – NOAit-1 2 lower the ratio, the higher the earnings quality. A high
(NOAit + NOAit-1)/2 ratio is an indication that the company‟s accrual basis
earnings has a high aggregate accruals component
Using cash flow statement approach, aggregate accruals which represents less persistent/ lower quality earnings.
(earnings quality) can be derived by subtracting cash This measure of earnings quality captures the extent to
flow from operating activities (CFO) and cash flow which accruals map into cash flow realization in the
from investing activities (CFI) from reported earnings past, present, and in the future cash flows. Thus, the
as follows: scaled accrual ratio results, that is, the earnings quality
EQ = NI – CFO – CFI for each of the companies under study were presented in
The cash flow measure must be scaled for comparison Table 2. The lower the accrual ratio, the higher the
purposes. Thus, the accruals ratio (earnings quality) earnings quality.
based on the cash flow statement follows:
EQit = NIit – CFOit – CFIit .F3
(NOAit + NOAit-1)/2

RESULTS AND DISCUSSIONS

Table 2: Trend analysis of earnings quality among the listed companies in Nigeria
SECTORAL ANALYSIS OF EARNINGS QUALITY OF NIGERIAN LISTED COMPANIES DURING
2006-2013 (EQ1)
SECTOR 2006 2007 2008 2009 2010 2011 2012 2013 MEAN
Agric/Agro-Allied 0.362548 0.091367 1.230006 2.365128 -1.67828 0.646305 1.741094 0.156343 0.614313507
CONGLOMERATES 0.640246 1.349058 0.96929 0.029249 0.024876 0.447606 2.011565 -1.58663 0.485657212
BREWERIES -2.37065 -1.02079 1.892294 0.987248 0.871539 -0.09544 0.518801 0.122038 0.113129895
FOOD/BEVERAGES -0.72864 2.08335 0.941096 0.53893 -0.1882 1.131931 -2.44065 6.881891 1.027463688
INDUSTRIAL
PRODUCTS -0.07014 2.074872 0.284758 0.367499 1.540428 -1.39871 0.230611 -0.09665 0.366581824
HEALTH CARE 0.481598 -0.37653 0.870326 -0.49339 0.191414 0.919181 -0.04679 -0.01012 0.19196147
PRINTING &/PAPER
PROD -0.08341 0.164664 0.861939 0.156375 -0.68865 -1.17222 -0.95515 2.031049 0.039325458
BUILDING
MATERIALS -0.81424 -6.1495 0.344798 0.670048 0.475321 1.436264 0.042357 0.563588 -0.428920107
IT SERVICES 0.114425 0.84715 -0.50024 -0.26301 0.155735 -0.08996 -0.18698 -0.06934 0.000971916
FINANCIAL SECTOR 0.732996 1.249087 0.155877 -6.91008 -2.18216 -2.59948 0.525555 1.908241 -0.88999568

ENERGY EQUIP,PET&
PETROL PRODUCTS 6.57469 1.814693 -2.03769 -4.34985 2.403145 4.30642 -9.13259 3.292759 0.358947402
HOUSEHOLD
DURABLES 0.201345 0.865612 -0.40383 0.589109 0.116418 0.186849 0.711331 0.069942 0.292097413
PACKAGING & CONT. 0.095584 -0.03133 0.126457 0.015874 0.006015 -0.06475 -0.03381 -0.01432 0.012465196
CHEMICALS 0.054504 0.045534 -0.02437 0.075915 0.000404 -0.00205 0.114952 0.014597 0.034935031
TOOLS & MACHINES 0.11238 0.111416 -0.14704 -0.09152 0.173932 -0.08968 -0.0456 0.446685 0.058821679
CONSTRUCTION 0.029168 -0.0339 -0.04544 0.101562 0.066062 -0.02667 -0.02968 0.058005 0.014889653
AVERAGE MEAN 0.333275 0.192797 0.28239 -0.38818 0.0805 0.220974 -0.43594 0.860504 0.143290347

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Figure 1: Trend of Earnings Quality (EQ) of Nigerian Listed Companies during 2006-2013
Source: Author’s Computation, 2016
and food beverages had the least average earnings
The results of the trend analysis of earnings quality in quality. It is worthy of note here, that although, the
table 2 with graphical representation in figure 1 showed financial sector had the lowest accrual ratio, the sector
that building materials sector had the best average was majorly comprised of banks in which the accrual
earnings quality performance. The next to it was IT characteristics are different from the non-financial firms
Services sector, followed by packaging and containers, which on the hand were composed of manufacturing
construction, chemical, Printing &/Paper Production, companies with common accrual features. The basis for
tools and machines, Breweries while agric/agro-allied comparison of firms in the financial sector would be
best among firms within the sector.

Table 3: Sectorial Analysis of Earnings Quality of Nigerian Listed Companies (2006-2013)

YEAR AGR % Change CON % Change BRE % Change FOO % Change
2006 0.362548 0.640246 -2.37065 -0.72864
2007 0.091367 -27.1181 1.349058 70.88115 -1.02079 134.986 2.08335 281.1989
2008 1.230006 113.8639 0.96929 -37.9768 1.892294 291.3086 0.941096 -114.225
2009 2.365128 113.5122 0.029249 -94.0041 0.987248 -90.5046 0.53893 -40.2166
2010 -1.67828 -404.341 0.024876 -0.43732 0.871539 -11.5709 -0.1882 -72.7131
2011 0.646305 232.4588 0.447606 42.27303 -0.09544 -96.6975 1.131931 132.0132
2012 1.741094 109.479 2.011565 156.3958 0.518801 61.42366 -2.44065 -357.258
2013 0.156343 -158.475 -1.58663 -359.82 0.122038 -39.6763 6.881891 932.2539
INP % Change HEA % Change PRI % Change BIU % Change
2006 -0.07014 0.481598 -0.08341 -0.81424
2007 2.074872 214.5017 -0.37653 -85.8129 0.164664 24.80717 -6.1495 -533.527
2008 0.284758 -179.011 0.870326 124.6857 0.861939 69.72745 0.344798 649.43
2009 0.367499 8.274032 -0.49339 -136.372 0.156375 -70.5564 0.670048 32.52498
2010 1.540428 117.2929 0.191414 68.48026 -0.68865 -84.5023 0.475321 -19.4727
2011 -1.39871 -293.914 0.919181 72.77667 -1.17222 -48.3569 1.436264 96.09427
2012 0.230611 162.9326 -0.04679 -96.5968 -0.95515 21.70669 0.042357 -139.391
2013 -0.09665 -32.7265 -0.01012 3.666612 2.031049 298.6199 0.563588 52.1231
ITS % Change BAN % Change ENE % Change HOU % Change
2006 0.114425 0.73299 6.5746 0.20134
2007 0.84715 73.2725 1.2490 51.6091 1.8146 -476 0.8656 66.4266
2008 -0.50024 -134.739 0.1558 -109.321 -2.03769 -385.238 -0.4038 -126.944
2009 -0.26301 23.72252 -6.91008 -706.595 -4.34985 -231.217 0.589109 99.2936
2010 0.155735 41.87471 -2.18216 472.7916 2.403145 675.2999 0.116418 -47.2691
2011 -0.08996 -24.5699 -2.59948 -41.7322 4.30642 190.3275 0.186849 7.043116
2012 -0.18698 -9.70167 0.525555 312.5038 -9.13259 -1343.9 0.711331 52.44818
2013 -0.06934 11.76416 1.908241 138.2685 3.292759 1242.535 0.069942 -64.1389
PAC % Change CHE % Change TOO % Change CST % Change
2006 0.095584 0.054504 0.11238 0.029168
2007 -0.03133 -12.691 0.045534 -0.89705 0.111416 -0.09643 -0.0339 -6.30644
2008 0.126457 15.77835 -0.02437 -6.99072 -0.14704 -25.8455 -0.04544 -1.15396
2009 0.015874 -11.0583 0.075915 10.02879 -0.09152 5.552073 0.101562 14.69977
2010 0.006015 -0.98595 0.000404 -7.55102 0.173932 26.54512 0.066062 -3.55003
2011 -0.06475 -7.07691 -0.00205 -0.24567 -0.08968 -26.361 -0.02667 -9.27324
2012 -0.03381 3.094843 0.114952 11.70048 -0.0456 4.407488 -0.02968 -0.30057
2013 -0.01432 1.948423 0.014597 -10.0356 0.446685 49.22883 0.058005 8.768168
Source: Author’s Computation, 2016
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Table 3 presented the percentage changes in accrual of the trend were provided by Table 2 as well as the
ratio of the companies in the study over the period of percentage change of the accrual ratio provided in Table
eight years under study, i. e 2006 to 2013. The analysis 3. The figure revealed a decline in earnings quality in
was based on the sectors included in the sample. years 2007, 2011 and 2012 only. For the companies in
Agriculture / Agro allied sector returned percentage this sector, earnings quality was on the increase in years
decrease of about 27% in its accrual ratio for the five 2008, 2009, 2010 and 2013. The implications of this
companies taken together between years 2006 and 2007. pattern would include the fact that the companies under
There was a percentage increase of about 114% between conglomerate are healthy in their business and market
2007 and 2008 as well as 114% percentage increase operation and most likely the effectiveness of the audit
between 2008 and 2009. Whereas, the subsequent committee activities as required by regulations. The
period witnessed a very sharp decline of about 404% in periods of higher earnings quality for some of the
its accrual ratio, while the trend was averagely reversed companies might be due to low cost of capital as found
during the period of 2010 and 2011 by about 232% by Francis,Lafond, Olsson and Schipper(2004).
change increase. Between 2011 and 2012, the
percentage change in the ratio returned about 109% EQ
increase while it resulted in about 158% between 2012
and 2013.

The trend for agriculture as analysed became clearer as

plotted on line graph in figure 2. Earnings quality for
agriculture / agro allied companies therefore, showed
irregular pattern within the eight years under study.
Earnings quality improved appreciably in years 2007,
2010 and 2013 specifically. For some of the sampled
companies, the accounting earnings for the period under
investigation were volatile in nature and the
management estimates of accruals might have been
affected by economic and market uncertainties.

EQ
Figure 3: Trend Analysis of Earnings Quality (EQ) in
Conglomerate Sector between 2006 and 2013
Source: Author’s Computation, 2016.

The accrual ratio pattern of the breweries sector was

presented in Table 2 with the percentage change in
accrual ratio in Table 3 as well as the graphical
representation of the trend in figure 4. From the
analysis, it could be seen that the ratio was on the
increase in years 2007 and in year 2008 implying that
the earnings quality for those period was low while in
2009, 2010 and 2011, there was a consistent increase in
the quality of the earnings of the breweries while again
in 2012, the quality fell as the accrual ratio computed
increased but in 2013, the fall in the value of the accrual
ratio indicated an improvement in the earnings quality
of the sector. This pattern of earnings could be adjudged
Year poor due to its inability for high earning quality
Figure 2: Trend Analysis of Earnings Quality (EQ) in sustainability.
Agriculture Sector between 2006 and 2013
Source: Author’s Computation, 2016. The accrual ratio computed as well as the pattern of the
earnings quality of the companies in the food and
Figure 3 showed the trend of earnings quality in beverages listed on the floor of Nigerian Stock
Conglomerate Sector of Nigerian economy. The details Exchange were as presented in Tables 2 and 3 as well as
figure 5. The trend showed that the earnings quality for
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the set of companies in the sample declined between The results of the accrual ratio as computed on the
2006 and 2007as shown by the percentage increase of companies in the industrial products sector in figure 6
about 281. However, the sector showed a consistent showed a fluctuation in the trend between 2006 and
improvement in its quality of earnings between 2007 2007, and 2007 and 2008. There was marginal increase
and 2008, 2008 and 2009, 2009 and 2010. The sector in accrual ratio of about 8% between 2008 and 2009.
showed a decline in the earnings quality in year 2012 The increase in the ratio was more between 2009 and
while in 2013, the decline was spurious. This raised a 2010 with about 117% than the preceding period. The
concern on the financial health of the sector in the most fluctuating showed a negative decline ratio of about
recent year of the period under study. This pattern of 294% between 2010 and 2011 while in 2012, an
trend of the earnings quality might be due to increase of about 163% between 2011 and 2012 with a
inconsistent use of accounting methods leading to further negative reduction in the ratio by a percentage
unsustainable reported quality of earnings as seen in the change of about 33% in 2013.
period under investigation.
EQ
EQ

Figure 4: Trend Analysis of Earnings Quality (EQ) in

Breweries Sector between 2006 and 2013 Figure 6: Trend Analysis of Earnings Quality (EQ) in
Source: Author’s Computation, 2016. Industrial Products Sector between 2006 and 2013
Source: Author’s Computation, 2016.
EQ
The results of the accrual ratio as computed on the
companies in the health care sector showed a fluctuation
in the trend. There was a negative decline of about 86%
between 2006 and 2007; a rise in the percentage
between 2007 and 2008 of about 125% while accrual
ratio negatively decreased by about 136% between 2008
and 2009. The fluctuating pattern also revealed an
increase of about 68% between 2009 and 2010 with a
further increase in the ratio of about 73% between 2010
and 2011 while in 2012, there was another negative
reduction in the ratio by a percentage change of about
96% and lastly in 2013, the upward rise in the value
ofthe accrual ratio. This consistent fluctuation showed
an immediate improvement in the earnings quality of
companies in this sector after an immediate decline in
Figure 5: Trend Analysis of Earnings Quality (EQ) in the quality of earnings. A major implication of this
Food and Beverages Sector between 2006 and 2013 pattern might be that the management was on consistent
Source: Author’s Computation, 2016.
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struggle to manage the financial health of this sector positive impact leverage, liquidity and firm growth
from crumbling in the face of market turbulence. The wield on earnings quality
pattern of the earnings was represented graphically by
figure 7. The significant variations in the earnings EQ
quality of health sector might be due to firm-specific
factors such as lines of business, unfavourable market
condition. This might also be due to accounting
manipulation.

EQ

Figure 8: Trend Analysis of Earnings Quality (EQ) in

Printing and Publishing / Paper Products Sector between
2006 and 2013
Source: Author’s Computation, 2016.

Table 2 presented the percentage changes in earnings

Figure 7: Trend Analysis of Earnings Quality (EQ) in quality of the companies in the study over the period of
Health Care Sector between 2006 and 2013 eight years under study, i. e 2006 to 2013. The accrual
Source: Author’s Computation, 2016. ratio for the companies in building materials sector for
2006 was -0.81 which subsequently returned a negative
The pattern of accrual ratio of printing and publishing / decrease in percentage change of about 533% in its
paper products sector was presented in Table 2 with the accrual ratio between 2006 and 2007. There was a sharp
percentage change in accrual ratio in Table 3 as well as increase in the percentage increase of about 649%
the graphical representation of the trend in figure 8. between 2007 and 2008 as well as further increase of
From the analysis, it could be seen that the ratio was on about 33% between 2008 and 2009. Whereas, the
the increase between 2006 and 2007, and between 2007 subsequent period witnessed a negative decline of about
and 2008 implying that the earnings quality for those 19% in its accrual ratio, while the pattern was reversed
period was low. However, between 2008 and 2009, during the period of 2010 and 2011 by about 96%
2009 and 2010 as well as 2010 and 2011, there was a change increase. There was a fall in the ratio between
consistent decrease in the accrual ratio implying a 2011 and 2012 with a negative decrease of about 139%
consistent increase in the quality of earnings of the in the percentage change in the accrual ratio. Between
sector within the stated periods. Between 2011 and 2012 and 2013 there was a marginal increase of about
2012, the accrual ratio increased by a percentage change 52% in the value of the accrual ratio. The trend for
of about 22%. The increase became more prominent building materials became clearer on the line graph
with a further percentage of about 298. Earnings quality represented in figure 9. Earnings quality building
fell within the last periods in the sector which was materials showed irregular and fluctuating pattern
capable of provoking a serious concern about the within the eight years under study.
financial strength and health of the companies in the
category. Some of the companies in the sector The fluctuations witnessed in the pattern of earnings
experienced stiff operating conditions ranging from high quality might have resulted from unfriendly operating
operating cost, lack of access to credit facility with conditions in form of worsening power supply,
increased rate of lending from banks. This contributed incessant increase in crude oil prices which drove
significantly to a declined volume of trade, increase in significant increases in raw material prices for some of
debtors, recurrent loses and the attendant the companies in this sector. However, the sector
recapitalisation. This result is consistent with the emerged strong by making in-roads into new markets
findings of Hassan and Farouk (2014) on the significant and created new consumer segments that were more
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):62-74 (ISSN: 2141-7016)

profitable. This might account for the competitive Despite the volatility and uncertainties that
advantage and the good quality of earnings reported by characterised the entire economy and especially, those
the sector. in the manufacturing industries, information and
technology sector had improved earnings in most of the
EQ periods under investigation. The good earning quality
pattern as found in this study, might be due to the
vigorous expansion of the operations to several sectors
barring certain unforeseen circumstances and
government policies.

The financial sector was also not spared from

fluctuation in the trend of its earnings quality. This
could be seen from Table 2 and figure 11 where the first
two years under study had the earnings quality dropping
by about 52% but immediately picked up to -109%. The
improvement in the sector‟s earnings quality was
prominent between 2008 and 2009 while the trend
fluctuated sharply between 2009 and 2010 and mildly
Figure 9: Trend Analysis of Earnings Quality (EQ) in between 2010 and 2011. However, the situation from
Building Materials Sector between 2006 and 2013 2011 through 2013 revealed a continuous decrease in
Source: Author’s Computation, 2016. the earnings quality of the financial sector. The
fluctuating trend of earnings of Nigerian financial sector
In information technology services sector, the trend of might have been complicated by the recapitalisation
the accrual ratio as computed showed a fluctuating between 2006 and 2008, the adoption of new accounting
pattern between 2006 and 2007, and 2007 and 2008, standards (IFRS) or changes in accounting
2008 and 2009 and the fluctuation took a varied pattern methodologies, other banking reforms as well as the
for the remaining period under study. There was a mandatory uniform accounting year end which
marginal increase in accrual ratio of about 24% between prevented banks from manipulation of earnings. These
2008 and 2009 and a further increase of about 40% in changes in accounting standards might have materially
the ratio between 2009 and 2010. The fluctuating affected related ratios which would necessitate
pattern in figure 10 showed a marginal negative decline adjustments to be able to perform trend analysis.
in the accrual ratio of about 25% between 2010 and
2011. The decline became prominent between 2011 and EQ
2012 while between 2012 and 2013, the accrual ratio
returned a marginal increase of about 12%. This result is
consistent with the study of Dichev and Graham (2013)
which proved that quality earnings are sustainable and
repeatable.
EQ

Figure 11: Trend Analysis of Earnings Quality (EQ) in

Figure 10: Trend Analysis of Earnings Quality (EQ) in Financial Sector between 2006 and 2013
IT Services Sector between 2006 and 2013 Source: Author’s Computation, 2016
Source: Author’s Computation, 2016.
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):62-74 (ISSN: 2141-7016)

Analysis of trend of the earnings quality in energy EQ

equipment, petroleum and petrol product sector of the
companies listed on the floor of Nigerian Stock
Exchange was provided by Table 2 and figure 12. The
figure revealed a decline in accrual ratio between 2006
and 2007, 2007 and 2008 through 2008 and 2009 which
invariably implied an improvement in the earnings
quality of the sector. The ratio increased spuriously
between 2009 and 2010 by about 675%, and persisted
through 2010 and 2011with a further increase of 190%
of the accrual ratio. However, between 2011 and 2012,
there was improvement evident by negative decline of
about 1,344% but between 2012 and 2013; the
improvement was immediately reversed by about
1,243% increase in the computed accrual ratio.
Evidently, the sector witnessed setback due to
Figure 13: Trend Analysis of Earnings Quality (EQ) in
combination of disruptive factors including the failure
Household Durables Sector between 2006 and 2013
of reform initiatives of the government such as the
Source: Author’s Computation, 2016.
Petroleum Industry Bill, poor state of infrastructure
including power supply. The crisis in the energy sector
The results of the accrual ratio as computed on the
must have greatly impacted on the low quality of
companies in the Packaging and Containers sector
earnings in comparison to other sectors.
showed a fluctuation in the trend. There was a negative
decline in the percentage change of about 13% between
EQ
2006 and 2007; a marginal increase in the percentage
change between 2007 and 2008 of about 15% while
accrual ratio negatively decreased by about 11%
between 2008 and 2009. Between 2009 and 2010, a
negative reduction about 1% showed a marginal
improvement in the earnings quality of the companies in
the packaging and containers sector. Between 2010 and
2011, a further negative reduction in the ratio
represented an improvement. The upward rise in the
value of the accrual ratio between 2011 and 2012 and,
between 2012 and 2013 was marginal and the
fluctuation within the study period taken together
ranged between 0.12 and -0.03. Figure 14 showed a
clear picture of the reported pattern.

EQ
Year
Figure 12: Trend Analysis of Earnings Quality (EQ) in
Energy Equipment, Petroleum and Petrol Product Sector
between 2006 and 2013
Source: Author’s Computation, 2016.

The pattern of the accrual ratio computed on the

companies in household durables sector presented a rise
in the ratio between 2006 and 2007, 2008 and 2009,
2010 and 2011 as well as between 2011 and 2012. For
all these periods, the quality declined while
improvement in earnings quality was evident between
Figure 14: Trend Analysis of Earnings Quality (EQ) in
2007 and 2008, 2009 and 2010 and between 2012 and
Packaging and Containers Sector between 2006 and
2013. The details of the accrual were presented in
2013
Tables 2 and 3 and in figure 13. Source: Author’s Computation, 2016.
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):62-74 (ISSN: 2141-7016)

The accrual ratio for chemical sector for the study financial statements which is an indication of future
period ranged between -0.002 and 0.015. Although, the danger in the sector.
ratio presented a fluctuating pattern, the trend revealed
only marginal changes both upward and downward as EQ
presented in Table 2 as well as the graphical
representation in figure 15. The specific years in which
the earnings quality of the companies in this sector
decline were 2009 and 2012. This trend is attested by
the comments of both the management and chairman of
the sampled company which were to attributed to
unfavourable operation environment ranging from legal,
illegal and political constraints during periods under
study.

EQ

Figure 16: Trend Analysis of Earnings Quality (EQ) in

Tools and Machines Sector between 2006 and 2013
Source: Author’s Computation, 2016.

EQ

Figure 15: Trend Analysis of Earnings Quality (EQ) in

Chemicals Sector between 2006 and 2013
Source: Author’s Computation, 2016

Figure 16 showed the trend of earnings quality in tools

and machines sector of the companies listed on the floor
of Nigerian Stock Exchange. The details of the trend
were provided by Table 2 as well as the percentage
change of the accrual ratio provided in Table 3. The
figure revealed a decline in accrual ratio between 2006 Figure 17: Trend Analysis of Earnings Quality (EQ) in
and 2007, 2007 and 2008 which invariably implied an Construction Sector between 2006 and 2013
improvement in earnings quality of the sector. The ratio Source: Author‟s Computation, 2016.
increased slightly between 2008 and 2009 by about 6%,
but the situation persisted as the ratio further increased Trend analysis of earnings quality in construction sector
between 2009 and 2010 by about 27%. (figure 17) revealed a repeated improvement through
the period under study with the exemption of years 2009
However, between 2010 and 2011, there was and 2013 respectively. The range of the improvement
improvement by 26% which was followed by was between 0.066 and -0.045. The sector witnessed
fluctuation in the trend by decline in the earnings increasingly better quality of earnings between 2006
quality from 2011 and 2012 through 2012 and 2013. and 2007, 2007 and 2008. But, between 2008 and 2009,
The persistent decline in the earnings quality of the there was a downward change in the earnings quality as
sector might be due to increase in finance costs, short revealed by the accrual ratio computed. Subsequently,
and long term borrowings as against other items of the the quality appreciated by -0.30% between 2009 and
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 8(1):62-74 (ISSN: 2141-7016)

2010. There was further appreciation between 2010 and Bricker, R., Previts, G., Robinson, T., & Young, S.
2011. The improvement persisted until 2011 and 2012 (1995). Financial Analyst Assessment of
while between 2012 and 2013, accrual ratio increased Company Earnings Quality, Journal of
by about 8%. Accounting, Auditing & Finance, 10 (3), 541-
554.
CONCLUSION Chasteen, L., G., Flaherty, R., E., & O'Connor, M., C.
The results of the trend analysis of earnings quality (4th ed) (1992). Intermediate Accounting, New
showed that IT Services sector (0.00097) had the best York: McGraw Hill.
average earnings quality performance, followed by De Angelo, L.E. (1986). Accounting Numbers as
packaging and containers (0.01246), construction Market Valuation Substitutes: A Study of
(0.0148), chemical (0.0349), while agric/agro-allied Management Buyouts of Public Stockholders.
(0.614) and food beverages (1.027) had the least The Accounting Review, 61(3) 400-420.
average earnings quality. The study focused only on Dechow, P.M., &Dichev, I. D. (2002). The Quality of
companieslisted on the floor of Nigerian Stock Accounting and Earnings: The Role of
Exchange, while unquoted companies were excluded. Accrual Estimation Errors. The Accounting
At the same time, the number of companies in each Review 77, 35-59.
sampled sector was uneven as a result of the fact that Dechow, P., W. Ge, & C. Schrand. (2010).
only companies which remained in operation during the Understanding Earnings Quality: A Review
study periods with complete data were considered. of the Proxies, their determinants and
Consequences. Journal of Accounting and
The study concluded that stock market participants Economics 50, 344-401.
could perform more excellently by analysing the Dechow, P., &Schrand, C., (2004). Earnings Quality.
earning quality trends of various listed companies as a The Research Foundation of CFA Institute.
further measure to strengthening their evaluations as DeFond, M. L., & Park, C. (1997). Smoothing Income
well as enhancing the bases of making economic in Anticipation of Future Earnings. Journal of
decisions. It was recommended that companies listed on Accounting and Economics, 23, 115-139.
the floor of Nigerian Stock Exchange should improve Dichev, I. D. & Graham, J. R. (2013). Earnings Quality:
on measures that contribute to improving the quality of Evidence from the Field. Journal of Accounting
earnings reported so as to satisfy the expectation of the and Economics,56, 1–33.
shareholders and other direct and indirect stakeholders Francis, J, Lafond, R., Olsson, M. P. &Schipper, K.
without engaging in unscrupulous activities. (2004). Cost of Capital and Earnings Attribute,
The Accounting Review, 79(4) 969-1010.
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