Earnings Persistence and Firm Performance: Implications of Analysts? Accurate Forecast Ability from the Emerging Market of Nigeria

Abstract

This paper empirically examined the potency and value relevance of earnings persistence (EPERS) and its effect on firm performance and the implications of the analysts' accurate forecast ability from the emerging market of Nigeria. The study adopted the expo facto research design and sampled 51 companies listed on the Nigerian Stock Exchange using stratified random sampling techniques from all the sectors from the 2000-2016 periods. Descriptive and Panel data regression statistics were employed in the analysis of the effect of earnings persistence on firm performance. Pre and post estimation tests were carried out: variance inflation factor (VIF) showed no evidence of multicollinearity among the variables, correlation matrix test did not revealed any multi-collinearity problem, normality test using Jarque-Bera test of normality posed no problem to the study. While Breusch-Pagan/Cook-Wesberg tests to assess the variance in the error terms (residuals) of the models, the results indicated that all the models did not suffer from heteroskedasticity. Notwithstanding, panel robust standard error (PRSR) was employed to control the heteroscedasticity. The study revealed that earnings persistence (EPERS) had a negative and no significant effect on firm performance (Tobin's Q). Leverage (LEV) exhibited a positive relationship whereas firm size (FRMSIZE) revealed a negative relationship with Tobin's Q (TQ). Also based on findings, a weak growth trend was established between EPERS and Tobin's Q. Earnings persistence resulting from discretionary and opportunistic earnings could give inaccurate forecasting ability. Consequently, the study recommended that analysts should be watchful of the stable occurrence of earnings when evaluating reported financial statements, without which, predictions made from them could have negative and misleading implications.Aguguom AT, et al. OPEN ACCESS Freely available onlineInt J Account Res, Vol. 7 Iss. 1 No: 198 quality, earnings persistence, earnings predictability and earning smoothness) and market-based earnings quality attributes (value relevance, earnings timeliness, and earnings conservatism) to investigate their effects on firm performance.

Does Earnings Quality Affect Companies’ Performance? New Evidence from the Jordanian Market

“…They found that operating performance is positively affected by earnings quality, and negatively affected by real earnings management. Dang et al (2020), Aguguom et al (2019) and Aguguom and Salawu (2018) documented that earnings quality is highly positively associated with companies' book value, and this refers to the relevance of information disclosure which enhances earnings quality, as well as credibility of reported book value. Chan et al (2006) discussed that stock returns are positively and negatively affected by earnings quality and earnings management, respectively.…”

Examining the impact of corporate governance and corporate financial reporting on firm value: A study of selected banks in Nigeria

“…Investors are motivated by persistent earnings as a property of earnings quality. Aguguom, Dada, and Nwaobia (2019) posit that earnings persistence reflects managerial competence and ethical practices as an incentive to potential investors. Earnings persistence has a close relationship with firm value and economic wealth maximization for the shareholders.…”

“…According to Canina and Potter (2019), earnings predictability considers the ability of earnings to predict themselves. Furthermore, earnings predictability is a desirable earnings attribute that enhances the forecast ability of analysts and investors (Aguguom et al, 2019;Festus, Rufus, & Janet, 2020). Earnings predictability is also a desirable property of earnings quality as it creates the impression of sustainable earnings based on the time-series properties of persistent earnings over the years.…”

Asimetri Informasi Memoderasi Pengaruh Earning Persistence Dan Income Smoothing Terhadap Future Earning Response Coefficient

“…Cheng, 2005). Penelitian yang dilakukan oleh (Dawar, 2014) dan Aguguom et al (2019) dengan menguji hubungan antara earnings persistence dan harga saham pada pasar yang sedang berkembang terhadap future earnings response coefficient (FERC) menunjukkan bahwa earnings persistence berpengaruh positif terhadap FERC. Sejalan dengan penelitian yang dilakukan oleh Jang, et al (2007) yang juga menunjukkan bahwa earnings persistence berpengaruh positif terhadap FERC, yang berarti bahwa semakin tinggi earnings persistence yang dihasilkan perusahaan, maka kualitas laba perusahaan menjadi semakin tinggi juga.…”