International Journal of

Scientific Research in Social Sciences & Management Studies | IJSRSSMS

ISSN Print: 2579 - 101X | ISSN Online: 2579 – 1928 | Volume 2, Number 1 September, 2017

Determinants of Financial Reporting Quality: Evidence

from Listed Agriculture and Natural Resources Firms in
Nigeria

1 2 3
John Echobu, Nkiru Philomena Okika & Luka Mailafia
1
Department of Accounting, Federal University Dutsin-Ma
2&3
Department of Accounting, Ahmadu Bello University

Corresponding Author: John Echobu

Abstract

T
his paper investigates the determinants of financial reporting quality in
listed Agriculture and Natural Resources firms in Nigeria. Owing to the
widespread advocacy to diversify the Nigerian economy, the choice of the
Agriculture and Natural Resources sectors, being a prospective mainstay of the
economy is necessary, so that investors and other stakeholders will understand the
financial reporting practices in the sectors. The sectors comprise of 9 listed
Agriculture and Natural Resources Firms, made up of 5 Agriculture and 4 Natural
Resources firms. A sample of 7 firms was drawn from the population. Data was
collected through secondary sources from annual financial reports of the firms
from 2008-2015. The study adopted the correlation and ex-post factor research
designs and employed the use regression as a tool for data analysis. The results
showed a positive significant relationship between leverage, liquidity, board size
and financial reporting quality, measured using residuals from the modified Jones
model by Dechow, et al. (1995). It is recommended among others that managers of
firms in the Agriculture and Natural Resources sectors maintain an optimum
liquidity level and finance their operations from more of debt instruments, so as to
ensure quality of reported accounting numbers. The Nigeria Stock Exchange (NSE)
should review its monitoring rules to ensure specific rules for the prevention of
window dressing activities by management in financial reporting.

Keywords: Earnings management, Financial reporting quality, Firm characteristics

and Nigerian listed agriculture, Natural Resources firms.

http://internationalpolicybrief.org/journals/ijasr-online-journals/intl-jrnl-of-sci-research-in-social-sciences-mgt-studies-vol2-no1-sept-2017

IJSRSSMS | 66
Background to the Study
The need for producing quality financial report has become a global phenomenon. The
global financial crises of the 1930s and the recent one in 2008 necessitated the demand for
unbiased financial reporting, with the accounting figures not just free of error, but also a
true reection of an organization's activities for the period being reported. Shehu and
Farouk (2014) observe that due to the financial crises, accounting earnings reported by
corporations may be far from being relevant, reliable and effective. Regulators and other
stakeholders place a very high premium on the veracity of financial report. The
truthfulness of the report depends on the reliability of reported earnings.

A major managerial function is decision making. Management takes decision on the

appropriate accounting policies that underlies the preparation of financial reports.
Appropriate measures and values are given to items that make up the financial statements.
Management could be subjective in the way it recognizes, measure and allocate values to
certain items of expenditure and revenues in the financial report. Pattaraporn (2016)
observes that investors give more attention to earnings in the financial reports more than
other accounting information; therefore, management becomes prone to inuencing
accounting earnings in order to meet investors' expectations. According to Shehu (2013)
due to income smoothening activities, management can manipulate certain items in the
financials to achieve a desired result. Manipulation of earnings impairs on the quality of
financial reports and diminishes investors' confidence (Shehu & Abubakar, 2012).

Earnings management is a fundamental aspect of financial reporting quality. How

earnings are recognized and measured is essential to the quality of financial reporting.
Corporations, through their managers are duty bound to report business activities for the
benefit of shareholders, potential investors, regulators/policy makers, suppliers of finance
and other stakeholders. This is usually done through the production of annual reports
covering their economic, financial, environmental and social activities. These reports are
expected to be high quality information, portraying a true and fair view of transactions.
However, the practice of earnings management aws this process of producing quality
financial reports and questions the credibility of the quality of reported earnings, Shehu &
Abubakar (2012).

Several studies have been conducted on the quality of reported earnings in relation
tospecific firm characteristics of corporations in Nigeria. The outcomes of these studies
have documented varying and conicting results, thereby pointing to the
inconclusiveness of the subject matter. Besides, though some studies have been carried out
in the non financial sector of the Nigerian economy, to the best of the researchers'
knowledge, no study have been done in the Agriculture and Natural Resources Sectors on
the subject under investigation. Moreover, the call to diversify the Nigerian economy from
its overdependence on oil revenue, to other productive sectors is gathering increased
momentum. It is therefore expected that the inux of investors into these productive
sectors will increase, hence the need to study their financial reporting quality, as investors
depend on financial reports to make decisions, Kibiya, Ahmad and Amran, (2016). The
choice of studying the Agriculture and Natural Resources sectors is predicated on the

IJSRSSMS | 67
credence that the sectors have great potential to generate revenue to the Nigerian economy.
On this basis, it is therefore important and equally necessary to identify the determinants of
quality financial reporting. This paper therefore seeks to investigate the determinants of
financial reporting quality with a bias for listed Agriculture and Natural Resources firms in
Nigeria.

The general intention of this research work is to investigate the determinants of financial
reporting quality of listed Agriculture and Natural Resources firms in Nigeria. The specific
objectives are to determine the relationship and the impact that firm age, leverage,
liquidity, audit committee independence, board size has on financial reporting quality of
listed Agriculture and Natural Resources firms in Nigeria.

Understanding the financial reporting practices of Agriculture and Natural Resources

firms in Nigeria in relation to specific firm attributes will help regulators and other policy
makers to make well informed decisions, regulations and policies to check unhealthy
practices of earnings management. Also, the study will reveal the interplay between firm
features and financial reporting quality. This will help managers of business and investors
and other stakeholders to make knowledgeable investment decisions as they will be able to
identify company features that enhance the quality of reported earnings. This research will
compliment previous studies done in other sectors and industries in Nigeria, and provide a
premise for further researches.

The remaining part of this paper is structured as follows: section two reviews empirical
literature, develops the hypotheses of the study and provides the theoretical framework for
the study, section three discuses the research methodology and model specification. The
empirical results of the research are presented and discussed and the policy implications
are highlighted in section four. Section five is devoted to conclusion and recommendations.

Empirical Literature Review, Hypothesis Development and Theoretical Framework

The age of a firm is considered as one of the essential determinants of financial reporting
quality. The internal control system of a firm gets stronger with age, and a strong and well
structured internal control system guarantees quality financial reporting process, (Huang,
Ena & Lee, 2012). As firms advance in age, they also improve in their governance
mechanisms, and as a result, become more closely monitored by government regulatory
agencies. This is expected to produce a corresponding improved financial reporting
practice (Chalaki, Didar, & Riahnezhad, 2012). Based on these studies, the study expects a
positive significant relationship between age and financial reporting quality. Thus, the first
hypothesis of the study is that age has a positive significant impact on financial reporting
quality in listed Agriculture and Natural Resources firms in Nigeria.

In their study of one hundred and thirty six (136) listed firms in the Tehran Stock Exchange
(TSE), Chalaki, et al. (2012) used age of firms as a control variable, and found that age is not
statistically significant with financial reporting quality. Huang, et al. (2012), Hossain (2008)
also reported insignificant relationship. The result of the study of non financials firms in
Nigeria by Kibiya, et al. (2016) used firm age as a control variable, and found a significant

IJSRSSMS | 68
association between age and financial reporting quality. Researchers use different
measures of age to compute the age of firm. While some use the date of incorporation to
the year of reporting (Olowokure, Tanko and Nyor (2016) others use of listing years,
which is the number of years the firm has been on the stock exchange (Haniffa & Cook,
2002; Ojeka, Mukoro & Kanu, 2015). Scholars have the liberty to choose which measure is
more appropriate, depending on the objectives of their study. The age firm from date of
listing on the NSE, to the various reporting years is used for this study. This is because
investors have more confidence in firms listed on the stock exchange in addition to the
increased monitoring and scrutiny demanded by the stock exchange rules

Leverage refers to the proportion of debt financing in the total capital structure of a firm. It
is believed that a proper mix of debt and equity capital increases the value of a firm.
Leverage is also connected to financial reporting choices. Agency theory clarifies this link.
According to this theory, highly leveraged firms have an inducement to voluntary
increase the level of corporate reporting to stakeholders through conventional financial
statements (Jensen & Meckling, 1976). Disclosure of financial information lessens agency
costs and also makes it easy for creditors to evaluate the volatility of a company, and likely
ask more information to safeguard their resources (Botosan & Plumlee, 2002; Fathi, 2013).

Extant literature reports varying interaction between leverage and financial disclosure
quality. Fathi, (2013), Olowokure, et al. (2016), Agyei-Mensah, (2012), Uwuigbe, Uwuigbe
and Okorie (2015), Akhtaruddin, Hossain, Hossain and Yao (2009) did not find any
statistical relationship. On the contrary, the regression result of the work of Shehu (2013),
Amr (2016), Shehu and Farouk (2014), Karami and Akhgar (2014), Kim and Yang (2014)
found positive significant relationship between firm leverage and financial reporting
quality. For the purpose of this study, the second hypothesis is stated thus: Leverage has a
positive significant effect on financial reporting quality of listed Agriculture and Natural
Resources firms in Nigeria.

The ability of a firm to meet its current obligations as they fall due is an indication to
investors and creditors of its continued existence in the future. Thus, it will be willing to
report its liquidity position to the public (Shehu & Farouk, 2014). Liquidity is also an
indication of a healthy financial performance of a firm. A firm with good financial
performance indices such as liquidity has more inducement to provide earnings
information of higher quality, Amr (2016). According to Wallace et al. (1994), Wallace and
Nasser (1995) and Alsaeed (2006) as cited by Shehata, Dahawy & Ismail (2014) firms with
very impressive liquidity are more likely to disclose information on their performance to
investors and other stakeholders. On the other hand, firms with low liquidity may also
reveal more information to show that management is aware of the company's position
and to avoid claims my shareholders.

Empirical researchers have found differing association between liquidity and financial
reporting quality. The findings of Amr (2016), Takhtaei and Mousavi (2012), Shehu and
Farouk (2014) revealed a positive significant relationship between liquidity and financial
reporting quality. Shehu and Ahmad (2013), Shehata, et al. (2014) however reported a

IJSRSSMS | 69
negative significant relationship. Aljifri, Alzarouni, Ng & Tahir (2014) found an
insignificant relationship in their study. This study would however hypothesize that
liquidity has a positive inuence on financial reporting quality of listed Agriculture and
Natural Resources firms in Nigeria.

The Audit Committee is seen as a vital and prominent player in corporate governance of
an organization. In view of this, audit committee maintains and boosts public confidence
in the trustworthiness and the neutrality of financial reporting, through improving the
reporting practices of published information (Bedard & Gendron, 2010; Kelton & Yang,
2008). In the same light, Shehu (2013) stated that an effective audit committee is suppose to
improve financial reporting quality by carrying out its functions of reviewing financial
statements and approving accounting policies among other functions. Audit committee
independence measures the proportion of non executive directors in the audit committee.
Independent directors on audit committee have no financially viable or personal
relationship with management; therefore they are likely to work autonomously and
without bias from management manipulation (Bedard & Gendron, 2010).

Klein (2006) in a study of six hundred and eighty seven (687) sampled US firms listed in
S&P 500 found significant relationship between audit committee independence and
earnings management, only when the composition of the committee is not 100%.
Amazingly a 100% independent committee produced an insignificant relationship. Madi,
Ishak & Manaf (2014), Kibiya, et al. (2016) found a positive significant association.
However, Bala and Kumai (2015) could not find a significant relationship. For this study,
we would test the hypothesis that audit committee independence has a positive
significant impact on financial reporting quality of listed Agriculture and Natural
Resources firms in Nigeria.

The board of directors has been found to impact on quality financial reporting. According
to Obigbemi, Omolehinwa, Mukoro, Ben-Caleb & Olusanmi (2016) the Nigerian Code of
Corporate Governance specifies that the composition of the board of directors must
ensure diversity, so that integrity, compatibility, independence and availability will not
be compromised. Furthermore, the board should be made up of both executive and non-
executive directors to be headed by a Chairman, and the membership should be from 5 to
15 persons. Abu-Siam, Laili, & Bin-Khairi (2014) argue that board of directors play a
supervisory role of controlling the reliability and quality of financial reports, because
managers are prone to manage earnings to the detriment of shareholders.

Empirical results of the relationship between board size and earnings quality have been
documented. A recent study by Akeju and Babantuntde (2017) examined this relationship
for 40 listed firms in Nigeria, for the period 2006-2015. The study reported a positive
significant relationship between board size and financial reporting quality. In the same
vein, Kankanamage (2015), Obigbemi, et al. (2016), Shehu (2013) and Swastika (2013) also
reported positive relationship in their studies. Conversely, an Indonesian study by
Nugroho and Eko (2011) reported an insignificant relationship. This study however
hypothesize that board size has a positive significant inuence on financial reporting
quality of listed Agriculture and Natural Resources firms in Nigeria.

IJSRSSMS | 70
Several theories have been used to explain the association between firm attributes and
financial reporting quality. This includes the agency theory, the political cost theory and
opportunistic theory among others. The agency theory defines the principal-agent
relationship. The principal here are shareholders while agents refer to the managers.
These parties have divergent interests, thus giving rise to agency costs, Shehata (2014).
Disclosures by way of financial reporting and regulation help to mitigate the agency
problem as it requires that management of corporations report both mandatory and
voluntary information for the benefit of shareholders and other interest parties. By and
large, since managers have first hand information about operations of a business, they are
duty bound by the agency theory to report as appropriate to the owners of the businesses.
This paper therefore adopts the agency theory as the theoretical support for this research
work.

Methodology and Model Specification

For this study, the correlation and ex-post research design is used. Correlation research
design is adopted because it is usually employed to investigate the relationship between
two variables or more. Also, the ex-post factor design helps to investigate possible cause
and effect relationships among variables. The population of the study is nine (9) listed
st
Agriculture and Natural Resources firms in Nigeria as at 31 December, 2015, comprising
of five (5) Agriculture Firms and four (4) Natural Resources Firms. Censoring sampling
technique which is based on availability of data and the period of the study provided a
basis for the selection of samples of the population of study. The study period is from 2008-
2015. This was chosen so as to have a good representation of firms in the population, as
two of the firms were listed on the NSE in 2008. This means that a study period prior to
2008 will not include these two firms, which will not give a justifiable representation of the
population. Consequently, two firms were eliminated, one apiece from each sectors,
leaving a sample of seven (7) firms for the study. The study used longitudinal balanced
panel data from secondary sources because it is a quantitative study with positivism
paradigm. The data were extracted from the audited financial reports of the selected firms
within the period of the study. Multiple regression is adopted to examine the model of the
study. Longitudinal panel data is used to account for individual diversity of the sample
companies.

Two steps regression is employed. Firstly, the residuals from the modified Jones Model by
Dechow, Sloan & Sweeny (1995) which represent the discretionary portion of accruals is
used to derive values for financial reporting quality, which is the dependent variable of
the study and secondly, the regression of the model of the study. The modified Jones
model by Dechow, et al. (1995) adjusted to separate the discretionary accruals (DA)
portion from the non discretionary portion of total accruals is given as:

DA= TA/A t-1- β1 (1/At-1) + β2 (Δ in Revit - Δ in Recit) /At-1) + β3 (PPE/At-1)

The values so derived for financial reporting quality are substituted as values for FRQ in
the model of the study which is given as:

FRQit= β0it+ β1FAGEit+ β2LEVEit + β3LIQUit + β4ACIN + β5BSIZ + ϵit,

IJSRSSMS | 71
where FRQ is financial reporting quality; FAGE is firm age; LEVE is leverage; LIQU is
liquidity; ACIN is audit committee independence; BSIZ is board size; β0 is Intercept; β1-5 are
Coefficients of the independent variables; ϵ is the error term; i is firm and t is year.

Results and Discussions

This section presents the descriptive statistics, correlation matrix and the summary of the
regression results followed by analysis and discussions of what the figures portrays.

Table 1: Descriptive Statistics

Variables No. of Mean Standard Minimum Maximum
Observations Deviation
FRQ 56 0.0789 0.0737 0.0033 0.3423
FAGE 56 19.3571 12.3088 1 38
LEVE 56 0.4703 0.1764 0.062 0.8121
LIQU 56 1.3552 1.3750 0.043 7.7884
ACIN 56 0.5006 0.0295 0.3333 0.6
BSIZ 56 8.0714 2.1647 4 12
Source: Output of STATA result

Table 1 presents the descriptive statistics for all the variables of the study. From the
description, it is observed that for the sampled firms and for the period covered by the
study, the average value for financial reporting quality (FRQ) is 0.0789 with standard
deviation of 0.0737 which is very close to the mean. Also, the least and highest numbers of
years (FAGE) of listing on the NSE are 1 and 38 respectively. The mean value leverage
(LEVE) of 0.47 or 47% is an indication that debt financing in the Agriculture and Natural
Resources sectors is to the tune of 47% of the total finance sources. The remaining 53% are
sourced from equity financing. The liquidity (LIQU) position of the firms on the average of
1.36 falls below the safety benchmark of 2.0. This signals that the samples firms may be
grappling with liquidity challenges, barely able to meet current obligations as they fall
due. Audit committee independence (ACIN) has a mean value of 0.50, suggesting that the
composition of the audit committee between shareholders and directors are equal at 50%
each. The minimum and maximum board size of 4 and 12 respectively shows that the
provisions of the Nigerian code of corporate governance is not fully complied with as the
minimum number of directors should be 5.

Table 2: Correlation Matrix

VARIABLES FRQ FAGE LEVE LIQU ACIN BSIZ
FRQ 1
FAGE 0.1953 1
LEVE 0.2820 0.1516 1
LIQU 0.2221 -0.1962 -0.4428 1
ACIN 0.1861 0.0645 0.0333 0.0121 1
BSIZ 0.1557 -0.1177 -0.1230 -0.0373 0.1608 1

Source: Output of STATA result

IJSRSSMS | 72
Table 2 captures the correlation values between the independent variables and dependent
variable as well as among independent variables themselves. From the table it is revealed
that all the independent variables of the study are weakly but positively associated with
FRQ of listed Agriculture and Natural Resources Firms in Nigerian. The correlation
matrix also revealed that no two explanatory variables were perfectly correlated. This
means that there is the absence of multicolinearity problem in the model.

Table 3: Summary of Regression Result – Fixed Effects Model

Variance
Coefficient
FRQ t- test Probability Ination Factor
(VIF)
FAGE 0.0044 1.11 0.271 1.07
LEVE 0.1863 2.53 0.015 1.28
LIQU 0.0296 3.37 0.002 1.29
ACIN 0.1074 0.35 0.726 1.04
BSIZ 0.0158 1.88 0.067 1.08
INTERCEPT -0.3158 -2.04 0.047 -
R2=0.2609 FStat=3.11 P>F=0.0174
Hausman: Ch2=38.24 pro>chi2=0.0000

Source: Output of STATA result

Table 3 is the regression result of the fixed effect model. The model was selected for
interpretation because the hausman specification test favors the fixed effect model with,
probability of 0.000 which is significant at 1%. The cumulative R2 of 0.26 is the multiple
coefficient of determination which shows the percentage of the total variation in the
dependent variable explained by the independent variable together. Therefore, it
indicates that 26% of total change in financial reporting quality of Listed Nigerian
Agriculture and Natural Resources firms is explained by their level of age, leverage,
liquidity, audit committee independence and board size. The value of F- statistics of 3.11 is
significant at 5% level of significance. This indicates that the model is fit and the
explanatory variable are properly selected, combined and used. The results of the VIF
further prove the absence of perfect multicollinearity among the independent variables,
because the maximum Variance Ination Factor (VIF) is 1.29. The rule of thumb is that a
value of VIF of 10 and above is a suggestion of multicolinearity among the explanatory
variables (Gujarati, 2004).

Test of Hypothesis and Policy Implication

The result shows that firm age is positive but not significantly related to financial
reporting quality. This implies that the higher the listing years of Agriculture and Natural
Resources firms in the NSE, the higher the financial reporting quality. However, the result
shows that listing age does not improve on their financial reporting quality. Most
investors have more confidence in the operations of firms listed on the NSE than the
unlisted ones, because of the increased monitoring and scrutiny by the NSE rules. The
insignificant impact of age on financial reporting quality in the study may be a pointer that
the additional monitoring rules by the NSE are not sufficient to check earnings

IJSRSSMS | 73
management practices of the firms. It may also be a reection that the internal control
systems in the sampled firms is weak. As a matter of policy implication, the NSE may wish
to review its monitoring rules to ensure specific rules for the prevention of window
dressing activities by management in financial reporting. Therefore, the study rejects the
hypothesis that age has a positive significant impact on financial reporting quality of listed
Agriculture and Natural Resources firms in Nigeria. The statistically insignificant result of
this study between age and financial reporting quality agrees with the results from the
work of Huang, et al. (2012), Chalaki, et al. (2012) and Hossain (2008) among others.

The relationship between leverage (which is measured as the ratio of total liabilities to total
asset) and financial reporting quality is positively significant at 5%. This is an indication
that the higher the leverage level in the Listed Agriculture and Natural Resources firms,
the higher the quality of reported earnings. This may be the result of strict monitoring of
the activities of the business by providers of debt financing, in order to safeguard their
interest, thereby compelling an incentive to voluntary reporting by managers. Thus, the
hypothesis that leverage has a positive significant inuence on financial reporting quality
of listed Agriculture and Natural Resources firms in Nigeria is accepted. This result
concurs with the study of Shehu (2013), Karami and Akhgar (2014), Kim and Yang (2014),
Shehu and Farouk (2014) and Amr (2016). Management and shareholders of firms in the
Agriculture and Natural Resources firms in Nigeria as an issue of internal policy decision,
may agree to increase leverage position to a level high enough to maintain the incentive to
report quality accounting numbers, while also noting the financial risk of maintaining an
unprecedented leverage level.

Furthermore, the interaction between liquidity (measured as current ratio) and financial
reporting quality shows that a positive significant relationship is also reported, with
probability value of 0.002 which is significant at 1%. This means that a strong and high
liquidity position of the listed Agriculture and Natural Resources firms in Nigeria will
enhance financial reporting quality. This finding corroborates the position that firms with
good performance indices such as liquidity, profitability, etc, will like to disclose their
performance in the financial report. Moreover, regulators, investors, analysts and other
users of financial reports are interested in the liquidity with regard to the going concern of
the firm and its ability to meet current obligations. This provides an evidence to fail to
reject the hypothesis that liquidity has a positive significant effect on financial reporting
quality of listed Agriculture and Natural Resources firms in Nigeria. Positive significant
relationship is also reported by Takhtaei and Mousavi (2012), Amr (2016) and Shehu and
Farouk (2014). This understanding of the positive relationship between liquidity and
financial reporting quality in the Agriculture and Natural Resources sectors could elicit, as
a matter of policy, the maintenance of an optimum level of liquidity by management.

The regression result between audit committee independence (measured as the ratio of
non-executive members to total committee members) and financial reporting quality
disclose a positive but insignificant relationship between them, with probability value of
0.726. This suggests that the non-executive members of the audit committee of listed
Agriculture and Natural Resources firms in Nigeria may not have the capacity to check

IJSRSSMS | 74
income smoothening activities of management. Possible causes of this may be that the
independent members of the audit committee lack requisite knowledge, skill and
exposure to adequately perform their role. Policy makers should not define independence
of the audit committee more on the number of independent members, but on the
possession of essential knowledge and experience, in order to check unethical practices in
financial reporting. Consequently, the study rejects the hypothesis that audit committee
independence has a positive significant impact on financial reporting quality of listed
Agriculture and Natural Resources firms in Nigeria. Previous studies by Bala and Kumai
(2015), Temple (2016), Hamdan, Mushtaha & Al-Sartawi (2013), Nelson and Jamil (2011),
documented similar results with this study.

Finally, the regression effect for board size (measured as the number of board of directors)
and financial reporting quality reects a probability value of 0.067 which is significant at
10% with a t-value of 1.88. This provides a basis for failing to reject the hypothesis that
board size has a positive significant inuence on financial reporting quality. Akhtaruddin,
et al. (2009), Fodio, Ibikunle, & Oba (2013), Kankanamage (2015), Swastika (2013) among
others reported similar result with this study. It goes to say that the number of directors in
listed Agriculture and Natural Resources firms in Nigeria is sufficient to control the
reliability of financial report through effective monitoring and checking the dominance of
the Chief Executive. It is also a reection that the number of directors was selected to
guarantee diversity, so that integrity, compatibility, independence and availability are not
compromised. Policy makers may wish to maintain the status quo in the number of
directors on the board of corporations, while ensuring diversity, integrity and
independence among members of the board.

Conclusion and Recommendations

The listed Agriculture and Natural Resources sectors in Nigeria was the focus of this
study, due to the inherent potentials in these sectors of becoming the mainstay of the
Nigerian economy, and for regulators, investors as well as potential investors, to know the
financial reporting practices in the sectors. From the findings of the study, it is concluded
that corporate features especially leverage, liquidity, and board size determine financial
reporting quality in listed Agriculture and Natural Resources firms in Nigeria. The study
therefore recommends that the firms may increase their leverage levels, which apart from
enjoying the benefits of debt financing such as tax shield, provides an incentive to quality
earnings reporting. A good liquidity position should be maintained as it has been found
not only to preserve the going concern of the firm but also a strong feature for enhancing
the quality of financial reporting. The board size of between 4 and 12 is recommended as it
has been found that this size is adequate to check earnings manipulation in the sectors.
Emphasis should not be placed on the number of independent members of the audit
committee, but on their ability to checkmate management tendencies to manipulate the
financials. The NSE should review its monitoring rules to ensure definite rules for the
prevention of window dressing behavior of management in financial reporting. This will
further boost investors' confidence in listed firms in the NSE.

IJSRSSMS | 75
This study focused only on the Agriculture and Natural Resources sectors of the Nigerian
economy. Further studies could explore the subject matter in other productive sectors of
the economy, incorporating explanatory variables such as audit fees, committee
meetings, ownership structure and other corporate features not considered in this study.

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Appendix 1: List of Quoted Agriculture and Natural Resources Firms in Nigeria

S/N Name of Company Sector
1 ELLAH LAKES PLC. *** Agriculture
2 FTN COCOA PROCESSORS PLC Agriculture
3 LIVESTOCK FEEDS PLC. Agriculture
4 OKOMU OIL PALM PLC. Agriculture
5 PRESCO PLC Agriculture
6 ALUMINIUM EXTRUSION IND. PLC. Natural Resources
7 B.O.C. GASES PLC. Natural Resources
8 MULTIVERSE MINING AND EXPLORATION PLC Natural Resources
9 THOMAS WYATT NIG. PLC***. Natural Resources

*** Not included in the study due to incomplete financial statement and annual reports.

IJSRSSMS | 79
Appendix 2: Regression Results
First Stage Regression (Derivation of FRQ)

___ ____ ____ ____ ____ (R)

/__ / ____/ / ____/
___/ / /___/ / /___/ 11.0 Copyright 1984-2009
Statistics/Data Analysis StataCorp
4905 Lakeway Drive
Special Edition College Station, Texas 77845 USA
800-STATA-PC http://www.stata.com
979-696-4600 stata@stata.com
979-696-4601 (fax)

Single-user Stata license expires 31 Dec 9999:

Serial number: 71606281563
Licensed to: STATAForAll
STATA
Notes:
1. (/m# option or -set memory-) 50.00 MB allocated to data
2. (/v# option or -set maxvar-) 5000 maximum variables
3. New update available; type -update all-

. edit
. *(6 variables, 56 observations pasted into data editor)

. xtset id fyear, yearly

panel variable: id (strongly balanced)
time variable: fyear, 2008 to 2015
delta: 1 year

.
. reg sloan astiv jrret jppet
Source SS df MS Number of obs = 56
F( 3, 52) = 1.26
Model .046893533 3 .015631178 Prob > F = 0.2989
Residual .646818197 52 .012438811 R-squared = 0.0676
Adj R-squared = 0.0138
Total .69371173 55 .012612941 Root MSE = .11153

sloan Coef. Std. Err. t P>|t| [95% Conf. Interval]

astiv -3.710602 3.665411 -1.01 0.316 -11.06579 3.644583
jrret .0142349 .0288914 0.49 0.624 -.0437398 .0722097
jppet -.0805514 .0619661 -1.30 0.199 -.2048956 .0437927
_cons .0325016 .0434399 0.75 0.458 -.0546669 .1196702

. predict FRQ, residuals

This is the first stage regression to derive the values of the dependent variable, FRQ from
the modified Jones Model by Dechow, et al. (1995).

Sloan is total accrual divided by total asset; astive is 1/total asset; jrret is the difference
between change in revenue and change in receivables all divided by total asset and jppet is
property, plant and equipment divided by total asset.

IJSRSSMS | 80
Second Stage Regression (Model of the Study)
___ ____ ____ ____ ____ (R)
/__ / ____/ / ____/
___/ / /___/ / /___/ 11.0 Copyright 1984-2009
Statistics/Data Analysis StataCorp
4905 Lakeway Drive
Special Edition College Station, Texas 77845 USA
800-STATA-PC http://www.stata.com
979-696-4600 stata@stata.com
979-696-4601 (fax)
Single-user Stata license expires 31 Dec 9999:
Serial number: 71606281563
Licensed to: STATAForAll
STATA
Notes:
1. (/m# option or -set memory-) 50.00 MB allocated to data
2. (/v# option or -set maxvar-) 5000 maximum variables
3. New update available; type -update all-

. edit
. *(8 variables, 56 observations pasted into data editor)

. xtset id fyear, yearly

panel variable: id (strongly balanced)
time variable: fyear, 2008 to 2015
delta: 1 year
.
. summarize frq fage leve liqu acin bsiz

Variable Obs Mean Std. Dev. Min Max

frq 56 .0788821 .0736508 .0033 .3423

fage 56 19.35714 12.3088 1 38
leve 56 .4703179 .1764219 .062 .8121
liqu 56 1.355164 1.375011 .043 7.7884
acin 56 .5005946 .0294708 .3333 .6
bsiz 56 8.071429 2.164651 4 12

. swilk frq fage leve liqu acin bsiz

Shapiro-Wilk W test for normal data

Variable Obs W V z Prob>z

frq 56 0.80898 9.827 4.906 0.00000

fage 56 0.90845 4.710 3.327 0.00044
leve 56 0.98687 0.675 -0.843 0.80028
liqu 56 0.65224 17.890 6.192 0.00000
acin 56 0.71907 14.452 5.734 0.00000
bsiz 56 0.97501 1.286 0.539 0.29482

. pwcorr frq fage leve liqu acin bsiz

frq fage leve liqu acin bsiz

frq 1.0000
fage 0.1953 1.0000
leve 0.2820 0.1516 1.0000
liqu 0.2221 -0.1962 -0.4428 1.0000
acin 0.1861 0.0645 0.0333 0.0121 1.0000
bsiz 0.1557 -0.1177 -0.1230 -0.0373 0.1608 1.0000

. reg frq fage leve liqu acin bsiz

Source SS df MS Number of obs = 56

F( 5, 50) = 5.47
Model .10548513 5 .021097026 Prob > F = 0.0004
Residual .192859153 50 .003857183 R-squared = 0.3536
Adj R-squared = 0.2889
Total .298344283 55 .005424442 Root MSE = .06211

frq Coef. Std. Err. t P>|t| [95% Conf. Interval]

fage .0014342 .0007033 2.04 0.047 .0000215 .0028468

leve .2050551 .0537924 3.81 0.000 .0970098 .3131004
liqu .0264866 .0069289 3.82 0.000 .0125696 .0404037
acin .2719277 .2897696 0.94 0.353 -.3100916 .853947
bsiz .0083447 .004012 2.08 0.043 .0002862 .0164031
_cons -.2846928 .1451203 -1.96 0.055 -.5761755 .0067899

IJSRSSMS | 81
. vif

Variable VIF 1/VIF

liqu 1.29 0.772629

leve 1.28 0.778682
bsiz 1.08 0.929823
fage 1.07 0.935816
acin 1.04 0.961651

Mean VIF 1.15

. hettest

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of frq

chi2(1) = 10.88
Prob > chi2 = 0.0010

. xtreg frq fage leve liqu acin bsiz,fe

Fixed-effects (within) regression Number of obs = 56

Group variable: id Number of groups = 7

R-sq: within = 0.2609 Obs per group: min = 8

between = 0.4251 avg = 8.0
overall = 0.2627 max = 8

F(5,44) = 3.11
corr(u_i, Xb) = -0.6632 Prob > F = 0.0174

frq Coef. Std. Err. t P>|t| [95% Conf. Interval]

fage .0044391 .0039854 1.11 0.271 -.003593 .0124712

leve .1863156 .0735379 2.53 0.015 .0381097 .3345215
liqu .0296216 .0088001 3.37 0.002 .0118861 .0473571
acin .1073949 .3048666 0.35 0.726 -.5070234 .7218132
bsiz .0157611 .0084044 1.88 0.067 -.0011767 .032699
_cons -.3157917 .1548268 -2.04 0.047 -.6278245 -.0037588

sigma_u .04893433
sigma_e .05946645
rho .40374954 (fraction of variance due to u_i)

F test that all u_i=0: F(6, 44) = 1.76 Prob > F = 0.1306

. est store fe

. xtreg frq fage leve liqu acin bsiz,re

Random-effects GLS regression Number of obs = 56

Group variable: id Number of groups = 7

R-sq: within = 0.2308 Obs per group: min = 8

between = 0.6479 avg = 8.0
overall = 0.3536 max = 8

Random effects u_i ~ Gaussian Wald chi2(5) = 27.35

corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

frq Coef. Std. Err. z P>|z| [95% Conf. Interval]

fage .0014342 .0007033 2.04 0.041 .0000557 .0028126

leve .2050551 .0537924 3.81 0.000 .0996238 .3104863
liqu .0264866 .0069289 3.82 0.000 .0129063 .040067
acin .2719277 .2897696 0.94 0.348 -.2960102 .8398657
bsiz .0083447 .004012 2.08 0.038 .0004812 .0162081
_cons -.2846928 .1451203 -1.96 0.050 -.5691234 -.0002622

sigma_u 0
sigma_e .05946645
rho 0 (fraction of variance due to u_i)

. est store re

. hausman fe re

Coefficients
(b) (B) (b-B) sqrt(diag(V_b-V_B))
fe re Difference S.E.

fage .0044391 .0014342 .0030049 .0039229

leve .1863156 .2050551 -.0187394 .0501418
liqu .0296216 .0264866 .003135 .0054252
acin .1073949 .2719277 -.1645329 .0947484
bsiz .0157611 .0083447 .0074165 .0073849

b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(5) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 38.24
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)

IJSRSSMS | 82