SEGMENT REPORTING AND INVESTOR’S CONFIDENCE; EMPIRICAL EVIDENCE FROM LISTED CONSUMER GOODS FIRMS IN NIGERIA

Essien, Esitime Okon

Department of Accountancy

Trinity Polytechnic, Uyo

essienesitime@gmail.com

+2348063921032

ABSTRACT

The study investigates the impact of segment reporting on the investor’s confidence in Nigeria drawing samples from listed consumer goods firms on the floor of the Nigerian Exchange Group market. While investors’ confidence proxied by annual stock returns is the dependent variable, the independent variables adopted for this study include total number of subsidiaries and number of foreign subsidiaries. Furthermore, in line with related extant literature, we employed the variable of capital structure measured in terms of debt to asset ratio to control our model. This study employed the expo-facto research design. The study is longitudinal covering a period of ten (10) years. That is, from 2011 to 2020 employing listed consumer goods firms on the floor of the Nigerian Exchange Group (NGX). The sampling technique employed is purposive since firms were included in the sample on certain selection criteria. The final sample size consists of 16 listed consumer goods firms that were arrived at based on the availability of data for ten years for all the research variables. The econometric techniques adopted in this study are the robust regression techniques. The result shows that number of subsidiaries has a positive and insignificant influence on investor’s confidence. In the same vein, the study shows that number of foreign subsidiaries has a positive and significant influence on investor’s confidence. The empirical result of this study leads to the conclusion that segment reporting increases investor’s confidence. Specifically, the study shows that the number of foreign subsidiaries significantly improves the investor’s confidence. The study recommends that firms that need external financing must first build up investor’s confidence through acquisition of foreign subsidiaries before embarking on external financing for their operations.

KEYWORDS:           Segment Reporting, Number of Subsidiaries, Foreign Subsidiaries, Investors Confidence, Annual Stock Returns

1.0       Introduction

Companies are increasingly international and increasingly diversified. The valuation of an international or a diversified firm requires information not only about overall firm activity, but also about segments of the firm because performance, risk and potential growth of different business or geographical lines vary appreciably (Nguyen & Cai, 2016; Odita, Ehiedu and Kifordu, 2020). Investors and analysts need segment information as they require information to help them in predicting firm’s future cash flows. Without this disaggregation in segments, predicting future cash flows of the firm becomes more difficult (Ehiedu, Onuorah & Okoh, 2021). As a response to user’s requests, regulators require segment disclosure with the objective of providing “information about the different types of business activities in which a firm engages and the different economic environments in which it operates to help users of financial statements to better understand the enterprise’s performance, better assess its prospects for future net cash flows and make more informed judgments about the enterprise as a whole.”.

Prior literature shows that in the absence of disclosure related costs, individuals disclose information to obtain certain benefits (Kajüter & Nienhaus, 2017). In particular, firms will have incentives to voluntarily disclose relevant information to the market to reduce information asymmetry and agency costs (Blanco et al., 2015; Dutta & Nezlobin, 2017; Fosu et al., 2016; Kajüter & Nienhaus, 2017; Kent & Bu, 2020). Managers can obtain these economic benefits related to the provision of information through improvements in the quality of their firms’ reported numbers. However, even if reported numbers provide a true and fair view of the situation of the firm, it is likely that, given that reported numbers are too aggregated, they are not sufficient to make appropriate economic decisions. Segment disclosure is expected to help in disaggregating the information and to facilitate an efficient allocation of resources. Consistent with this expectation, prior empirical research shows that segment reporting decreases information asymmetries (Kent & Bu, 2020) and agency costs (Kajüter & Nienhaus, 2017; Ehiedu, Onuorah and Okoh, 2021).

Managers of firms providing better earnings quality will be keen on complementing earnings information with additional segment disclosure to additionally decrease information asymmetries and increase firm value. However, the provision of this information might bear some costs, as it could compromise the firms’ competitive position by providing strategic information to potential competitors (Franzen & Weißenberger, 2018). Thus, incentives to voluntarily provide segment information will be limited by the existence of proprietary costs (Franzen & Weißenberger, 2018; Kajüter & Nienhaus, 2017; Leung & Verriest, 2015). However, when information quality increases, the manager has more incentives to disclose private information, since the market is more likely to interpret nondisclosure as bad news (Ehiedu, Onuorah and Okoh, 2021).

Propositions as to why segment disclosures have value largely accord with the “fineness theorem” (Obi and Ehiedu, 2020, Ugwuanyi, Ani, Ugwu & Ugwunta 2012), which posits that a finer information structure is more valuable to a decision-maker than a coarser information structure (Kajüter & Nienhaus, 2017). Analysts and investors endorse this view in relation to segment reporting, claiming it improves analysis of the risk profiles and growth of diversified entities and allows better integration of entity data with external data, and thus improves the accuracy of, and confidence in, earnings forecasts (Ehiedu, Odita and Kifordu, 2020; Wan 2016). Prior studies confirm the expectation of improved accuracy for earlier segment reporting efforts (Ehiedu, Onuorah and Okoh, 2021); (Ehiedu and Toria, 2022; Wanjira, Ngoze & Wanjere 2018) and the later SFAS 14 requirements (Kent & Bu, 2020) but there has been little attention given to changes in segment reporting regulation and the impact on forecasting confidence especially in a developing economy like Nigeria. On the basis of the foregoing, this study examines the effect of segment reporting on investor’s confidence by employing samples from listed consumer goods firms in Nigeria.

2.0       Literature Review

Investor’s Confidence

Investor confidence is the investors’ willingness to engage in the investment opportunities and associated intermediation channels available to them based on their perception of risk and return. “Investor confidence” has been a long-standing subject of interest among financial market observers, participants, researchers, and regulators. The addition of sentiment to the variables underlying the arguments put forward by finance theory has contributed towards a more integral understanding of investor behavior. The consideration of psychological or behavioral factors broadens the approach to this topic and helps to explain it in rational decision-making terms. Kajüter & Nienhaus, 2017 and Schwarz (2002), among others, argue that emotions influence information processing, and therefore have a bearing on market-related decisions. In broad terms, investor sentiment is a belief about future cash flows and investment risks that cannot be justified by the fundamentals (Baker and Wurgler, 2007; Chan et al, 2012). Baker and Wurgler (2006, 2007) define it more specifically as optimism (high sentiment) or pessimism (low sentiment) about stocks in general, although they also identify it with the propensity to speculate. They assert that there are two potential channels for the influence of investor sentiment on stock prices: limits to arbitrage and difficulty of firm valuation. With respect to the first of these mechanisms, they state that limits to arbitrage vary across stocks, while sentiment is uniform. With respect to the second, they claim that sentiment drives the relative demand for stocks that are vulnerable to speculation thereby causing cross-sectional effects even if arbitrage forces are the same across stocks. Both channels appear to affect the same type of stocks, or, put another way, some assets are more vulnerable than others to speculative demand and are therefore the most strongly influenced by investor sentiment.

Segment Reporting

Segment reporting requirements have been extended worldwide in response to calls from the investment community and as part of harmonisations projects between countries. Current segment reporting standards include IFRS 8 Operating Segments (IASB) and SFAS 131. Segment reporting is important as research studies in accounting have found noticeable variation in the level of segment disclosure across listed reporting entities and this suggests a need for regulators to further monitor the enforcement of required segment disclosures. The management approach to determining segments is based on the way that management disaggregates the enterprise for making operating decisions (Kajüter & Nienhaus, 2017). These disaggregated components are referred to as operating segments, which should be evident from the enterprise’s organization structure. All segments that are neither separately reported nor combined should be included in the segment reporting disclosures as an unallocated reconciliation item or in an “all other” category. Where a segment was separately reported in the previous period, it should continue to be reported separately even if the thresholds are not met in the current period, where the segment has been identified as being of continuing significance. Equally, where a segment meets the 10% threshold in the current period it should be separately reported for both the current and the previous period even if it was not separately reported in the previous period, assuming that it is practicable to do so. IFRS 8 does not set an upper limit as to the number of operating segments that should be separately reported. However, the standard sets out that if the number of separately reported segments exceeds ten then it is likely that the information may become too detailed and consequently lose its usefulness.

Theoretical Review

Agency Theory

Agency theory predicts that, regardless of actual investment efficiency from the shareholder perspective, diversification will typically be in the interests of management. Specifically, managers have incentives to diversify their firms to (a) increase their power, compensation, and perquisites (Jensen, 1986; Jensen and Murphy, 1990; Stulz, 1990), (b) reduce their individual employment risk that is closely related to firm risk (Amihud and Lev, 1981), and (c) to entrench themselves (Kajüter & Nienhaus, 2017). That is, they wish to increase the value differential between themselves and potential replacement managers. Therefore, managers generally tend to overinvest and grow their firms beyond the optimal size. Investment level and type are not necessarily value-maximizing and investing in unprofitable projects, rather than paying out cash to shareholders, is likely to diminish firm value. Obi and Ehiedu, (2020), Ugwuanyi, Ani, Ugwu & Ugwunta (2012) integrate the two agency explanations of diversification – private benefits and risk reduction – into a single combined model. Their evidence does not show that managers diversify their firms to reduce their exposure to risk but supports the notion of private benefits. Finally, Fulghieri and Hodrick (2006) examine the interaction between agency conflicts and synergies, suggesting that the presence of synergies modifies the entrenchment incentive of a divisional manager.

Empirical Review and Hypotheses Development

Recent literature shows that corporate diversification strategies are associated with significant value loss and that increasing corporate focus is value-enhancing. Marinelli (2011) investigates the relationship between diversification and firm performance and concludes that this relationship is not causally attributed to the extent of internal capital markets or to the degree of relatedness among business segments. Australian studies such as Obi and Ehiedu, (2020) investigated the value of industry segment data and found that the earnings surprise was significantly less for the segment reporters. Sinnadurai, Watts and McKinnon (1996) investigated the value relevance of geographic and industry disclosures under the original AASB 1005 Financial Reporting by Segments and found that there was limited support for the disaggregation of geographic segment data and no evidence of incremental explanatory power for industry segments. A U.S. study, Thomas (2000) examined whether geographic segment earnings as reported under SFAS 14 provided value-relevant information. The paper was concerned with the new requirements under SFAS No. 131, as the disclosure of geographic segment earnings would no longer be required. The study, Thomas (2000), found significant evidence that the market does value geographic segment earnings and that such disclosures reflect information used by market participants in setting security prices. Thomas (2000) suggests the FASB may have to reconsider its changes to the segment reporting requirements. Hope, Thomas and Winterbotham (2009) likewise find that these changes to the segment reporting requirements reduce the ability of investors to utilize or generate private information in conjunction with public announcements, and this dampens security trading. However, another study Berger and Hann (2003) found that, SFAS No. 131 by increasing information disaggregation, induced companies to reveal previously “hidden” information about their diversification, and this newly revealed information affected market valuations. So, the findings on SFAS No. 131 impact on market valuations is mixed as some studies find a positive impact, while others find a negative outcome. The research on segmental disclosures under FASB No. 131 is not conclusive and as mentioned above, more research was needed to address the impact on SFAS No. 131.

3.0       Methodology

This study employed the expo-facto research design. The study is longitudinal covering a period of ten (10) years. That is, from 2011 to 2020 employing listed consumer goods firms on the floor of the Nigerian Exchange Group (NGX). The sampling technique employed is purposive since firms were included in the sample on certain selection criteria. These criteria were based on the view that the firms are listed on the Nigerian Exchange Group (NGX) market from 2011-2020; there were access to their annual financial reports within the period and they were not firms operating subsidiaries in Nigeria that are not listed in the Nigerian Exchange Group (NGX). Newly listed firms and delisted firms were excluded from the study. Thus, only firms that had all relevant data due to continuous existence were included in the sample. The final sample size consists of 16 listed consumer goods firms that were arrived at based on the availability of data for ten years for all the research variables. Hence, the study expresses the econometric model as

Where:

ANSR             =          Annual Stock Return

NUBS             =          Number of Total Subsidiaries

NUFS              =          Number of Foreign Subsidiaries

DETA             =          Debt to Asset

β₀                            =          Constant

β₁– β₃               =          Slope Coefficient

                      =          Stochastic disturbance

i                       =          i^thfirms

t                       =          time-period

Thus, our apriori expectations are stated as; Х₁-X₃>0: which means that a rise in the determinant variables of segment reporting and the control variable of firms’ size will lead to a rise in the investors’ confidence of listed consumer goods firms in Nigeria. The econometric techniques adopted in this study are the robust regression techniques. The dependent variable in this study is investors’ confidence which is measured in terms of annual stock returns. Annual stock returns in percentage is the change in current year share closing share price and previous year’s closing share price. In terms of the independent variable, segment reporting is measured in terms of total number of operating segment and number of foreign segments. Furthermore, to control the model’s goodness of fits, the study employed the variable of capital structure which is measured as the ratio of debt to asset.

4.0       Empirical Results and Discussion

The study investigates the impact of segment reporting on the investor’s confidence in Nigeria drawing samples from listed consumer goods firms on the floor of the Nigerian Exchange Group market. While investors’ confidence proxied by annual stock returns is the dependent variable, the independent variables adopted for this study includes total number of subsidiaries and number of foreign subsidiaries. Furthermore, in line with related extant literature, we employed the variable of capital structure measured in terms of debt to asset ratio to control our model. Data set employed in this study spans through the periods between 2011 and 2020. Table 4.1 below describes the data in terms of the firms which they belong. Overall, the descriptive statistics provides some insight into the nature of the selected Nigerian listed firms that were employed in this study. 

Descriptive Analysis

In this section, we examine the descriptive statistics for both the explanatory and dependent variables of interest. Each variable is examined based on the mean, standard deviation, maximum and minimum. Table 1 below displays the descriptive statistics for the study.

Table 1: Descriptive Statistics

VARIABLES	MEAN	SD	MIN	MAX	NO OBS
ANSR	4.74	55.66	-70.63	307.47	160
NUBS	2.07	5.20	0	24	160
NUFS	0.08	0.38	0	2	160
DETA	60.13	19.78	12.42	150.45	160

Source: Author (2023)

The table above shows the summary of the descriptive statistics of the study. From the table it is observed that investor’s confidence (ANSR) had a mean of 4.74 with a standard deviation of 55.66. The table also shows that the mean of number of subsidiaries (NUBS) was 2.07 and a standard deviation of 5.20. The table also shows that the mean of number of foreign subsidiaries (NUFS) was 0.08 with a standard deviation of 0.38. In the case of the control variable, the table shows that the mean of capital structure measured in terms of the ratio of debt to asset ratio (DETA) was 60.13 with a standard deviation of 19.78.

Correlation Analysis

In examining the association among the variables, we employed the Pearson correlation coefficient (correlation matrix), and the results are presented in the table below. 

Table 2: Correlation analysis

	ANSR	NUBS	NUFS	DETA
ANSR	1.00
NUBS	0.08	1.00
NUFS	0.12	0.36	1.00
DETA	0.13	-0.00	0.12	1.00

Source: Author’s computation (2023)

In the case of the correlation between the variables of interest, the above results show that there exists a positive and weak association between number of subsidiaries and investor’s confidence measured in terms of annual stock returns (0.08). There exists a positive and weak association between number of foreign subsidiaries and investor’s confidence measured in terms of annual on stock returns (0.11). The control variable of capital structure has a positive and weak association investor’s confidence measured in terms of annual stock returns (0.13). To test our hypotheses a regression results will be needed since correlation test does not capture cause-effect relationship.

Regression Results

Specifically, to examine the cause-effect relationships between the dependent variables and independent variables as well as to test the formulated hypotheses, we present a robust regression and an OLS pooled results in the table below.

Table 3: Regression Result

	ANSR Model (Pooled OLS)	ANSR Model (Robust Regression)
CONS	-33.99 {0.015} **	-23.76 {0.011} **
NUBS	-0.71 {0.410}	0.19 {0.740}
NUFS	8.10 {0.488}	15.44 {0.049} **
DETA	0.66 {0.003} **	0.25 {0.086}
F-statistics/Wald Statistics	3.28  (0.02) **	2.77 (0.04) **
R- Squared	0.06	0.06
VIF Test	1.04
Heteroscedasticity Test	32.67 (0.0000) ***

Note:      (1) bracket {} are p-values 

(2) **, ***, implies statistical significance at 5% and 1% levels respectively

In the table above, we observed from the OLS pooled regression that the R-squared value of 0.06 shows that about 6% of the systematic variations in investor’s confidence as measured by annual stock returns in the pooled consumer goods firms over the period of interest was jointly explained by the independent variables and the control variable in the model. This implies that investor’s confidence in Nigeria cannot be 100 percent explained by segment reporting and our control variables. The unexplained part of the investor’s confidence can be attributed to exclusion of other independent variables that can impact on investor’s confidence but were excluded because they are outside the scope of this study.  The F-statistic value of 3.28 and its associated P-value of 0.02 shows that the OLS regression model on the overall is statistically significant at 5% level, this means that the regression model is valid and can be used for statistical inference.  The table above also shows a mean VIF value of 1.04 which is less than the benchmark value of 10, this indicates the absence of multicollinearity, and this means no independent should be dropped from the model. Also, from the table above, it can be observed that the OLS results had heteroscedasticity problems since its probability value was significant at 1% [32.67 (0.00)]. The presence of heteroscedasticity clearly shows that our sampled companies are not homogeneous. This therefore means that a robust or panel regression approach will be needed to capture the impact of each company heteroscedasticity on the results. In this study we adopted the robust regression method.

Discussion of Findings

Since, the study is an extension of existing studies, only few findings in literature are not in agreement with the current positions of this study. Specifically, the study shows that number of subsidiaries (Robust regression = 0.19 (0.740)) as an independent variable to investor’s confidence appears to have a positive and insignificant influence on investor’s confidence. This therefore means the study should accept the null hypothesis {H0₁: Total number of subsidiaries has no significant effect on investor’s confidence of listed consumer goods firms in Nigeria}. This suggests that an increase in the total number of subsidiaries will insignificantly increase investor’s confidence during the period under consideration. The results agree with the study of Sanyal and Shankar (2011), but negate the study of Pennathur, Subrahmanyam and Vishwasrao (2012). In the same vein, the study shows that number of foreign subsidiaries (Robust regression = 15.44 (0.049)) as an independent variable to investor’s confidence appears to have a positive and significant influence on investor’s confidence. This therefore means the study should reject the null hypothesis {H0₂: Number of foreign subsidiaries has no significant effect on investor’s confidence of listed consumer goods firms in Nigeria}. This suggests that an increase in the number of foreign of subsidiaries will significantly increase investor’s confidence during the period under consideration. The results agree with a recent study by Kajüeter and Nienhaus (2016), examined German companies’ segment reports between 2007-2010 comparing IAS 14 and the recently adopted IFRS 8. They found that segment earnings do improve the explanatory power of the model but not segment book value of equity. Therefore, information users find segment earnings to be useful in valuation. They also find that the recent standard IFRS 8 is more value relevant compared to IAS 14. The study also follows the position of Birt and Shailer (2013) who investigate whether segment earnings and segment book value of equity are value relevant for Australian firms. The results confirm that the inclusion of segment data in a valuation model does result in greater explanatory power compared to a model based on consolidated values alone.

5.0       Conclusion and Recommendation

It is no gainsaying that Investors and analysts need segment information as they require information to help them in predicting firm’s future cash flows. Without this disaggregation in segments, predicting future cash flows of the firm becomes more difficult. As a response to user’s requests, regulators require segment disclosure with the objective of providing information about the different types of business activities in which a firm engages and the different economic environments in which it operates to help users of financial statements to better understand the enterprise’s performance, better assess its prospects for future net cash flows and make more informed judgments about the enterprise. This study examines the effect of segment reporting on investor’s confidence of listed consumer goods firms in Nigeria. The empirical result of this study leads to the conclusion that segment reporting increases investors’ confidence. Specifically, the study shows that the number of foreign subsidiaries significantly improves the investor’s confidence. The study recommends that firms that need external financing must first build up investor’s confidence through acquisition of foreign subsidiaries before embarking on external financing for their operations.

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