Corporate Sustainability Reporting and Financial Performance of Listed Manufacturing Companies in Nigeria

February 4, 2023
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Corporate Sustainability Reporting and Financial Performance of Listed Manufacturing Companies in Nigeria

Tags : Environmental Sustainability Governance Sustainability Panel Regression Return on Asset Social Sustainability

Category : Latest Publications

CORPORATE SUSTAINABILITY REPORTING AND FINANCIAL PERFORMANCE OF LISTED MANUFACTURING COMPANIES IN NIGERIA

Peters George Tamunotonye¹

Department of Accountancy, Faculty of Management Sciences,

Rivers State University, Port Harcourt, Nigeria.

peters.george@ust.edu.ng

+234-806 4810 451

Ogaluzor Odinakachukwu Ifeanyichukwu²

Department of Accountancy, Faculty of Management Sciences,

Rivers State University, Port Harcourt, Nigeria.

odinakachukwu.ogaluzor@ust.edu.ng

+234-803 7542 980

ABSTRACT

We examined the effect of corporate sustainability reporting on financial performance in Nigeria employing samples from manufacturing firms that are listed on the floor of the Nigerian Exchange Group for the period 2012-2021. In this study, environmental disclosure index, social disclosure index and governance disclosure index are the corporate sustainability reporting employed to examine their effect on financial performance. Financial performance is measured in terms of return on asset. Furthermore, in line with related extant literature, we adopted earnings per share as the control variable. A critical examination of all the diagnostic tests revealed that the model failed the normality assumption of the OLS estimates. However, we carefully interpreted the p-value of the fixed effect regression since the Hausman test had recommended fixed effect regression as the most appropriate over random effects. We concluded that only the variable of governance disclosure appears to significantly affect the financial performance of listed manufacturing firms in Nigeria. However, we documented an insignificant positive effect of environmental and social sustainability on the financial performance of listed manufacturing firms in Nigeria. Following the findings of this study, we recommended that valuable financial, material, and human resources should be channeled on policies that relate to improving governance sustainability if the desire is to gain improved return on asset or improved firm value.

KEYWORDS: Environmental Sustainability, Social Sustainability, Governance Sustainability, Return on Asset, Panel Regression

1.0 Introduction

The objective of any organization is to consistently grow and survive on a long-term basis. Most managers are also aware that their organizations are part of a large system which has profound direct and indirect influence on their operations. This implies that if these organizations must effectively and efficiently meet their objectives, they should properly adapt themselves to their environments (Baboukardos & Rimmel 2016). Adapting organizations (especially firms) to their environments signifies a reciprocal or symbiotic relationship between the ‘duos’ as typified by systems model of viewing business. Considering the current environmental crisis, businesses must give more to their environment. In 2011, the International Federation of Accountants (IFAC) developed a sustainability framework, enabling business organizations to incorporate sustainability issues in their business approach, process, and reporting practices. The reporting aspect of IFAC’s sustainability framework involves providing audit and assurance on sustainability performance to enhance the credibility of sustainability reports, incorporating sustainability impacts in financial statements, and employing narrative reporting to capture sustainability information not included in financial statements.

There is continuing concern about nature fragmentation and loss of biodiversity, shortages in freshwater availability, over-fishing of the seas, global warming, extreme weather events, air pollution, water pollution, environmental noise and utter neglect and disregard for the protection of the immediate environment, much more the future environment. This type of environmental unsustainability associated with continuously rising demand and a shrinking resource base now spills over into social and economic instability. Therefore, many are looking to business to be part of the solutions. For instance, Welford (2004) maintains that business seems content to see the natural system on the planet disintegrating, people starving and social structures falling apart. Business is central to the problem and must be central to the solution. Indeed, the expectations of corporate responsibility in areas such as environmental protection, human rights, human capital, and product safety are rising rapidly. Key stakeholders such as shareholders, employees, and financial institutions want business to be responsible, accountable, and transparent. Unerman, Bebbington and O’Dwyer (2007) on the other hand states that human activities taking place today are regarded by some people as having a detrimental impact on the society, ecology, and economy which future generations will experience.

Many people argue that the growing social injustice experienced by ever larger numbers of people, and the growing damage to the ecosphere, are a result of a dominant – and almost unquestioned – objective of maximizing economic growth. In these terms economic growth (characterized by energy and material-intensive production and exploitative social relations) is socially and environmentally unsustainable. (Unerman et al, 2007). In the view of Hu, Du and Zhang (2020) responding to these issues by business leaders help companies to mitigate risks, protect corporate brand and gain competitive advantage while helping to reduce poverty and improve the quality of life for many. In some extreme cases, companies may see their licenses to operate threatened overnight if their key stakeholders perceived significant discrepancies between their own and the company’s values. Unerman et al (2007) maintains that one way to look at these issues is in terms of long-term need to ensure that economic activity is socially and environmentally sustainable. In the short-term it may be possible to have economic growth, while damaging society and the environment. In the long-term this is impossible. For example, businesses need a stable society in which to operate profitably (although some business might generate profit from addressing the outcomes of social conflicts, such as businesses offering security service).

People all over the world are expressing considerable concern for damage to the environment by companies and its effects on their lives. There has been call concerning environmental degradation for firms to engage in activities in sustainable and responsible manner. Unfortunately, Adegboyegun, Alade, Ben-Caleb, Ademola, Eluyela, and Oladipo (2020) observed that such call were not really heard as information about the sustainability are not really been captured in the annual reports of some firms which then makes them not accountable to their immediate environment. Nevertheless, there is now an increasing awareness that companies should be made responsible for consequential environmental and social impact of their activities to the host communities and other stakeholders. The increased awareness put pressure on companies to reassure the public of their good behaviour. As a result, companies are no longer paying attention to the maximization of shareholders wealth alone but are now embracing activities that tend to maximize the benefits accruable to all the stakeholders.

Presently, there is increase in number of firms providing sustainability information. This led to a considerable number of research on different aspect of sustainability reporting. Some extant studies focus on determinants influencing sustainability disclosures in firms (Sharma, Panday & Dangwal, 2020; Vitolla, Raimo, Rubino & Garzoni, 2020; Dyduch & Krasodomska, 2017; Kuzey & Uyar, 2017; Giannarakis, 2014; Hahn & Kühnen, 2013). Others focused on value relevance of sustainability disclosures (Aureli, Gigli, Medei & Supino, 2020; Cordazzo, Bini & Marzo, 2020; Baboukardos & Rimmel, 2016; Ntim, Opong & Danbolt, 2012). Another category of research on sustainability reporting are those that examined the link between sustainability disclosures and firm performance. This study relates closely to this last category of research. Existing research on effect of sustainability reporting and firm performance produce conflicting views. For instance, Albitar, Hussainey, Kolade and Gerged, (2020); Hongming, Ahmed, Hussain, Rehman, Ullah and Khan (2020); Emeka-Nwokeji and Osisioma (2019); Amran and Siti-Nabiha (2022) Guthrie, Cuganesan and Ward (2016); Ifurueze, Lydon and Bingilar (2013) and Menassa (2010) document positive association between different measures of sustainability, social and environmental disclosures, and performance of firms in different countries. On the other hand, Ezejiofor, Rachael and Chigbo (2016); Dibua and Onwuchekwa (2015); Emeakponuzo and Udih (2015); Bessong and Tapang (2016), established a negative but insignificant link between sustainability disclosures and firm performance. In the light of these contradictory results of existing literature, inability to obtain updated knowledge from Nigerian environment, this study is therefore set to find out the effect of corporate sustainability reporting on firm performance of listed companies in Nigeria. The study intends to provide up to date knowledge by providing evidence from sectors that previous Nigerian authors did not consider.

2.0 Literature and Conceptual Framework

Firm Performance

The subject of firm performance has received significant attention from scholars in the various areas of business and strategic management (Jat, 2006). It has also been the primary concern of business practitioners (managers and entrepreneurs in all types of organizations because corporate performance is essential as exemplified in high performance organizations which are success stories because of their perceived effectiveness and efficiency in managing their operations and their positive contributions to the well-being of their stakeholders. Whereas low performance organizations are not owing to their lack of such essential attributes (Makhamreh, 2000). Performance is, however, a difficult concept, in terms of definition and measurement. It has been defined as the end result of activity, and the appropriate measure selected to assess corporate performance is considered to depend on the type of organization to be evaluated and the objectives to be achieved through that evaluation (Hunger & Wheelan, 1997 in Jat, 2006).

Corporate Sustainability Reporting

There is no single, generally accepted definition of sustainability reporting. It is a broad term generally used to describe a company’s reporting on its economic, environmental, and social performance. It can be synonymous with triple bottom line reporting, corporate responsibility reporting and sustainable development reporting, but increasingly these terms are becoming more specific in meaning and therefore subsets of Sustainability Reporting (KPMG, 2008). Schaltegger (2004) defines Sustainability Reporting as a subset of accounting and reporting that deals with activities, methods, and systems to record, analyses and report, firstly, environmentally, and socially induced financial impacts and secondly, ecological, and social impacts of a defined economic system (example, a company, production site, and nation). Thirdly, Sustainability Reporting deals with the measurement, analysis and communication of interactions and links between social, environmental, and economic issues constituting the three dimensions of sustainability. Sustainability Reporting is becoming more prevalent, driven by a growing recognition that sustainability related issues can materially affect a company’s performance, demands from various stakeholder groups for increased levels of transparency and disclosure and the need for companies (and the business community more generally) to appropriately respond to issues of sustainable development (KPMG 2008, Ivan, 2009).

Environmental Sustainability Reporting

Environmental reports ensure business transparency and create the reputation of a company as a responsible partner that contributes to environmental protection and the quality of life of the local community. They are considered to be responsible business practices that demonstrate company’s commitment to solving environmental issues. Environmental reporting is a contemporary management tool that companies can use to provide information to external stakeholders and to find opportunities to improve internal processes, gain benefits and ensure its own sustainability. Environmental reports enable greater distinction of companies in terms of environmental risk, which is the purpose sought by the business community; and (b) adequate accountability to the community, which is the purpose sought by the regulating entities, non-government organizations, and by society (Borges and Bergamini, 2001). Companies report environmental information to respond to stakeholder expectations and contribute to the welfare of society (Morsing and Schultz, 2006), to manage their own legitimacy (Reverte, 2009), to preserve their reputation (Reynolds and Yuthas, 2008), and to make profit and in the long run reduce information asymmetry (Merkl-Davies and Brennan, 2007; Du, 2010). Environmental reporting is an important part of sustainability reporting which instills discipline and helps a company think about and define its long-term while raising awareness of sustainable practices in the whole organization (ACCA, 2013). Environmental reports result from the functioning of an internal system which collects, analyzes and processes data on the company’s environmental aspects. Hence, it is a systematic and formal approach to addressing environmental impacts and integrating environmental issues into business processes. Hence, the study hypothesizes that;

H0₁: Environmental performance index has no significant effect on firm performance of listed manufacturing firms in Nigeria.

Social Sustainability Reporting

Rodriguez and Fernandez (2015) stated that the company’s concern increases when it focuses on social issues, while maximizing economic performance in order to satisfy shareholders and undertake social responsibility for the benefit of the society. By revealing the social aspects of sustainability report, company will also support many issues pertaining to the international organization concern. Social responsibility is not only for external, but also for internal stakeholders. The responsibility to the internal side means that the company is required to pay attention to employee health and safety, equality of opportunity in competition between male and female employees, and human rights aspects. Meanwhile, for the external parties, the company is required to promote anti-corruption policies, anti-competitive and monopolistic practices that can harm the stakeholders. Labeling products for the health and safety of customers is also a part of this schedule. According to Ernst & Young (2014) implementation and disclosure of social responsibility towards stakeholders will not only increase the prices of company’s stock, it also improves welfare and employee loyalty, lower turnover rate of employees, consequently increasing productivity. When productivity increases, the company may further enhance the image or company’s value in the eyes of all stakeholders. However, to obtain a comparable measure across all companies, which will then be useful for mainstream investment analyses, it is important that environmental social and governance information is transformed into consistent units and is presented in a balanced and consistent manner. Hence, the study hypothesizes that;

H0₂: Social performance index has no significant effect on firm performance of listed manufacturing firms in Nigeria.

Governance Sustainability Reporting and Firm Performance

A Board of Directors assumes a central role in the governance of the corporation. While there are no universal standards for corporate governance, the board generally assumes three core responsibilities: oversight of strategic direction and risk management, ensuring accountability, and evaluating performance and senior level staffing (Epstein and Roy 2002). Boards must therefore pay close attention to concepts and issues that focus on the long-term health of the corporation, such as sustainable development (Ricart, Rodriguez and Sanchez 2006). Legal liabilities for board members vary by jurisdiction. Although board members are under no specific legal obligation to use sustainable development indicators, they are expected to exercise a duty of care to make decisions; prudently and on an informed basis (Fischer and Feldman 2002). Aras and Crowther (2017) argue that both corporate governance and sustainability is essential for the continuous operation of any corporation therefore much attention should be paid to these concepts and their applications. Hence, the study hypothesizes that;

H0₃: Governance performance index has no significant effect on firm performance of listed manufacturing firms in Nigeria.

Theoretical Review

Legitimacy Theory

This study anchors on legitimacy theory propounded by Dowling and Pfeffer in 1975. Legitimacy theory is derived from the concept of organizational legitimacy. It posits that organizations continually seek to ensure that they operate within the bounds and norms of their respective societies. Legitimacy theory has often been invoked to explain corporate reporting practices. In accordance with this theory, external stakeholders require the enterprise to take such actions that will make its operations transparent, in line with the law and the principles of economics. The theory is hinged on the assumption that accounting for sustainable development and the associated role of management accountant in sustainable development is used as a communication mechanism to inform and/or manipulate the perception of the entity’s actions (Mistry, Sharma & Low 2014). Among several theories that have explained various factors that influences sustainability disclosure, Legitimacy theory is key to this study because it describes the relationship between a company and the community; it explains companies’ motivations for social, governance and environmental disclosures; present how companies can use legitimacy strategies; determine the impacts of social, governance and environmental disclosures on the society. According to Deegan and Unerman (2011) legitimacy theory depends upon the notion that there is a “social contract” between an organization and the society in which it operates. Therefore, corporation try to legitimize their corporate actions by engaging in corporate social responsibility reporting to get the approval from society (societal approach) and thus, ensuring their continued existence. The social contract as explained by Deegan (2002), represents myriad of expectations that society has and about how an organization should conduct its operations. As stated by Deegan and Unerman (2006) the legitimacy perspective focuses on managing the relationship between the organization and society.

2.3 Empirical Review

Swarnapali (2020), used data of companies listed in the Colombo Stock Exchange (CSE) in Sri Lanka to evaluate whether corporate sustainability disclosure has any effect on the market value and earning quality of firm. The result of the study shows that sustainability reporting has a positive relationship with market value of firm. The study also revealed that sustainability disclosure and earnings quality proxies by discretionary accruals are negatively and significantly related meaning that increase in sustainability disclosure led to a decrease in discretionary accruals which result in high-quality earnings.

In a study on whether there is a relationship between sustainable disclosure and performance Pajuelo Moreno and Duarte-Atoche (2019), extended Ullmann’s model. The study introduces economic performance, size, and membership in sensitive sectors as determinant of sustainability disclosure and sustainable performance link. Specifically, the study shows those firms that are concerned with sustainability and act sustainably have higher sustainability disclosure in their annual report. Also, the greater the economic performance, the greater the effect it has on sustainability disclosures.

Wasara and Ganda (2019) explored the relationship between corporate sustainability disclosure and return on investment of ten Johannesburg Stock Exchange (JSE)-listed mining companies, for the period 2010 to 2014. Content analysis approach on the data set with a multi-regression analysis was used to show that there is a negative relationship between environmental disclosure and return on investment. On the other hand, the research reveals that there is a positive association between social disclosure and return on investment which implies that an increase in corporate reporting of social issues results in heightened ﬁnancial performance through an increase in return on investment. The study recommends the adoption of corporate social disclosure since it will encourage ﬁrms to be socially responsible, while also generating ﬁnancial benefits.

Sampong et al (2018) employed hand collected data of South African listed companies with an application of the GRI G3.1 guidelines, as a measure of disclosure performance to investigate the relationship between the extent of corporate social responsibility (CSR) disclosure performance and ﬁrm value. Based on the panel data fixed effect model, the authors document a positive but insignificant relationship between CSR disclosure performance and firm value. Secondly, a negative and insignificant relationship was found between environmental disclosure performance and firm value. Lastly, the authors found a positive and statistically significant relationship between social disclosure performance and firm value. Overall, the findings suggest that CSR disclosure has a limited effect on firm value and that the incorporation of sustainability disclosure, on the basis of GRI, is moderately high among the selected companies. Implications of the results suggest that CSR disclosure may not necessarily influence firm value, despite its numerous benefits.

Mahmood, Kouser, Ali, Zubair, and Salman (2018) concludes that a large board size consisting of a female director and a Corporate Social Responsibility Committee (CSRC) is better able to check and control management decisions regarding sustainability issues (be they economic, environment, or social) hence, better sustainability disclosure. Ordinary least-square regression analysis was used in analyzing the study data set.

The results from the study of Ortas; Alrarez and Zubeitzu (2017) clearly demonstrate that market value of a company and sustainability reporting practices are positively associated for only active sustainability companies. The investigation tends to find out the association between companies’ financial factors and corporate sustainability reporting from a sample of 3,931 companies among 51 industries in 59 different countries. The study employed content analysis technique and quantile regression estimation techniques to measure corporate social responsibility based on GRI framework. The study also came up with the result which indicated that firms’ financial performance served as a significant driver of corporate sustainability and that the impact of corporate social disclosure on firm performance was significant at upper quantiles of the distribution of the response variable.

Aditya and Juniarti (2016) aim to examine the effect of corporate social responsibility on accrual quality in Indonesia by exploring the topic “Corporate Social Responsibility (CSR) Performance and Accrual Quality. The study employed the ordinary least square regression data analysis technique and found that corporate social responsibility performance does not explain the changes in accrual quality. Hence the study concludes that miscellaneous industry in Indonesia will carry out corporate social responsibility only to comply to government regulation as formality but no moral justification for such action. Furthermore, the study recommends private debt financing for Indonesian firms since private lenders will have easier access to firm’s business and financial information, and also have right to monitor management, so that management can’t use accrual policy to manage earning.

3.0 Methodology and Model Specification

Ex-post facto research design and the descriptive research design have been employed in this study. The population of this study is made up of all manufacturing companies that are listed on the floor of the Nigerian Exchange Group during a 10year period i.e. between 2012 and 2021. As of 31^st December 2021, there were fifty-nine (59) manufacturing companies listed on the floor of the Nigerian Exchange Group Specifically, the sample size of this study is determined using Krejcie and Morgan, (1970) sample size computation technique or approach. Particularly, the final sample size is drawn through a procedure of purposive non-probability sampling technique which takes cognizance of availability and accessibility of relevant information (data) needed for the study. First, the study deselects all firms that joined the Nigerian Exchange Group after year 2012 which connotes the start period for this study. This will be done to ensure a balanced panel data structure via a homogenous periodic scope necessary for the estimation process. We also deselect all firms lacking complete information (in relation to data requirements) needed for the estimation. Hence, the final sample size consists of forty-five (45) listed manufacturing companies. This study employed analytical software of Stata version 16 and Microsoft excel for the analysis. The secondary data collected was analyzed using descriptive statistics, correlation, and regression analysis. The descriptive statistics was used to evaluate the characteristics of the data: mean maximum, minimum, and standard deviation and also check for normality of the data. Correlation analysis was employed to evaluate the association between the variables and to check for multicollinearity. Fixed and random effect regression analysis technique was employed to find the cause effect relationship between the independent variables and the dependent variables. However, this method of analysis helps to establish the relationship between the independent variables and the dependent variable of interest and to identify the direction of the relationship. It reflects the level to which a set of variables is capable of predicting a specific outcome. In order to test the three hypotheses formulated in the study and to achieve the objectives of the research, the following model is formulated.

RETA_it = b₀ + b₁ENDI_it + b₂SOCI_it + b₃GODI_it + b₄FSIZ_it + e_it

Where:

RETA = Return on Asset

ENDI = Environmental Sustainability Disclosure Index

SOCI = Social Sustainability Disclosure Index

GODI = Governance Sustainability Disclosure Index

FSIZ = Firm size

“{i}” = Cross Section (Sample Companies)

“t” = Time Frame (2011 to 2020)

e_it = Stochastic error Term

Operationalization of Variables

Variable	Measurement	Sources
Return on Asset (Dependent variable)	Return on Asset is measured as the ratio of Profit after tax to total asset	Ioannou and Serafeim (2015)
Environmental sustainability disclosure (Independent variable).	Measured in line with GRI standard	Lo & Sheu, (2007)
Social sustainability disclosure (Independent variable).	Measured in line with GRI standard	Daniel, Mogaka, Makori, Ambrose and Jagongo,(2013)
Governance sustainability disclosure (Independent variable)	Measured in line with GRI standard	Dobbs and Standa (2016)
Earnings Per Share (Control Variable)	Measured as profit after tax divided by outstanding shares	Dobbs and Standa (2016)

Authors Compilation 2023

4.0 Results and Discussion

In this study, the researcher examines the effect of corporate sustainability reporting on financial performance in Nigeria employing samples from manufacturing firms that are listed on the floor of the Nigerian Exchange Group for the period 2012-2021. In this study, environmental disclosure index, social disclosure index and governance disclosure index are the corporate sustainability reporting employed to examine their effect on financial performance. Financial performance is measured in terms of return on asset. Furthermore, in line with related extant literature, the researcher adopts earnings per share as the control variable. In testing for the effect of the independent variables of interest on the financial performance of listed manufacturing firms in Nigeria, the researcher conducts Panel Least Square Regression analysis then proceed to check (diagnose) for inconsistencies with the basic assumptions of the Least Square Regression estimation technique. Succinctly, the diagnostics tests include test for multicollinearity as well as test for heteroscedasticity.

Descriptive Statistics

In this section, the researcher provides some basic information for both the explanatory and dependent variables of interest. Each variable is described based on the mean, standard deviation, maximum and minimum. Table 1 displays the descriptive statistics for the study.

Table 1: Descriptive Statistics

VARIABLES	MEAN	SD	MIN	MAX	NO OBS
RETA	3.63	15.64	-179.92	108.90	449
ENDI	0.07	0.18	0	0.75	450
SOCI	0.71	0.22	0	1	450
GOD	69.32	14.26	7.69	112.5	450
EAPS	2.06	6.28	-7.32	57.63	448

Source: Author (2023)

The mean value of firm performance as proxied by return on asset (RETA) is 3.62 with a standard deviation of 15.64. Return on asset has a minimum and maximum value of -179.92 and 108.90 respectively. In the case of the independent variables, the table shows that the mean of environmental disclosure index (ENDI) was 0.07, indicating that about 7% of the firms in the sample disclose information about environmental performance. In the same vein, the table shows a mean of 0.71 for the variable of social disclosure index (SOCI). This indicates that about 71% of the firms in the sample disclose information about their social engagements. The independent variable of governance disclosure index (GODI) shows a mean of 69.32 with a standard deviation of 14.26. In the case of the control variable, the study shows that earnings per share (EAPS) had a mean of 2.06 with a standard deviation of 6.28.

Correlation Analysis

In examining the association among the variables, the researcher employed the Spearman Rank Correlation Coefficient (correlation matrix), and the results are presented in the table below.

Table 2: Correlation analysis

	RETA	ENDI	SOCI	GODI	EAPS
RETA	1.00
ENDI	0.21	1.00
SOCI	0.28	0.32	1.00
GODI	0.02	0.05	0.16	1.00
EAPS	0.79	0.33	0.33	0.04	1.00

Author’s computation (2023)

In the case of the correlation between corporate sustainability reporting and financial performance, the above results show that there exists a positive and moderate association between environmental disclosure index and financial performance as proxied with return on asset (0.21). There exists a positive and moderate association between social disclosure index and financial performance as proxied with return on asset (0.28). There exists a positive and weak association between governance disclosure index and financial performance as proxied with return on asset (0.02). The control variable of earnings per share has a positive and high association with financial performance as proxied with return on asset (0.79). However, to test our hypotheses a regression results will be needed since correlation test does not capture cause-effect relationship.

Regression Analysis

Specifically, to examine the effect of the independent variables on the dependent variables as well as to test the formulated hypotheses, panel fixed, and random regression analysis is employed since the results reveal the presence of heteroskedasticity. However, results from panel fixed and random regression and those from the Panel Least Square regression analysis are presented and discussed below.

Table 3 Regression Analysis

	RETA Model (Pooled OLS)	RETA Model (FIXED Effect)	RETA Model (RANDOM Effect)
C	-0.40 {0.917}	14.44 {0.001} **	8.03 {0.057}
ENDI	0.28 {0.943}	-5.46 {0.510}	-1.15 {0.837}
SOCI	9.58 {0.0003} **	-3.92 {0.415}	2.74 {0.490}
GODI	-0.07 {0.173}	-0.15 {0.006} **	-0.12 {0.015} **
EAPS	0.87 {0.000} ***	0.38 {0.000} ***	1.10 {0.000} ***
F-statistics/Wald Statistics	21.10 (0.00) ***	14.53 (0.00) ***	63.24 (0.00) ***
R- Squared	0.1601	0.1272	0.1210
VIF Test	1.07
Heteroscedasticity Test	13.84 (0.0002) **
HAUSMAN		Prob>chi2 = 16.01 (0.0030)

Note: t & z -statistics and respective probabilities are represented in () and {}

Where: ** represents 5% & *** represent 1% level of significance

Source: Authors’ Computations (2023)

As noted, we first conduct a panel least square regression analysis as seen in the table above then proceed to check for inconsistencies with the basic assumptions of the least square regression. These regression diagnostics tests include test for multicollinearity and test for heteroscedasticity. In this study like in most other related studies, we employ variance inflation factor (VIF) technique to diagnose the presence or absence of multicollinearity. A cut-off means VIF value of 10 is given for regarding a VIF as high. This is consistent with the recommendation of Gujarati (2004) which allows the mean VIF to be less than 10. The table above shows a mean VIF value of 1.07 for the model of financial performance which is less than the benchmark value of 10 indicating the absence of multicollinearity in the specified models. On the other hand, the assumption of homoscedasticity states that if the errors are heteroscedastic then it will be difficult to trust the standard errors of the least square estimates. Hence, the confidence intervals will be either too narrow or too wide. We conduct this test by employing the Breusch Pagan module in Stata 14. The result obtained from the model as shown in the table above reveals the probability value as P-value: 0.0002 for the model. These results indicates that the assumption of homoscedasticity has been violated due to very low P-values which is statistically significant at 1% level. This suggests that a panel fixed, and random regression analysis approach will be needed to control for heteroscedasticity as recommended by Greene, (2003). From the table shown above, a careful examination of the results provided by the effects models show that the model of interest suggests appropriateness as it relates to the dependent variable of financial performance for the period under investigation. However, a look at the p-value of the Hausman test (0.0030) implies that we should reject the null hypothesis since the p-values of the Hausman test is insignificant at 5% or 1% level. This suggests that the fixed effect results tend to be more appealing statistically when compared to the random effect results. Specifically, the researcher provides interpretation and makes policy recommendation with the random effect regression model. The model goodness of fit as captured by the Wald statistics and the corresponding probability value (0.0000) for the models shows a 1% statistically significant level suggesting that the entire model is fit and can be employed for interpretation and policy implication. An R2 value of 0.1272 indicates that about 13% of the variation in the dependent variable is being explained by all the independent variables in the models. This also means that about 87% of the variation in the dependent variable is left unexplained but have been captured by the error term.

The results obtained from the fixed effect regression reveals that environmental disclosure index {-5.46 (0.510)} as an independent variable to financial performance as proxied by return on asset appears to have a negative and insignificant effect on financial performance. This therefore means we should accept the null hypothesis and reject the alternate hypothesis. Hence, environmental disclosure index has no significant effect on the financial performance of listed manufacturing firms in Nigeria during the period under study. Notably, the result suggest that more disclosure of environmental sustainability matters insignificantly decreases financial performance during the period the under consideration. This finding contradicts the findings of Ali (2015) whose study revealed a negative effect and linked it to high cost associated with environmental sustainability reporting activities which invariably lowers the quality and quantity of these reports. Furthermore, the researcher finds that the result from this study is not consistent with the findings of Plumlee, Brown Hayes and Marshall (2015) who assert that companies who provide report on environmental performance incurs more expenses hence would perform below expectation in the long run. They noted that companies who do not report nor carry out environmental responsibilities are likely to be surrounded with demonstrations and protests (like those prevalent in the Niger Delta area of Nigeria) and this goes a long way to hinder a free work environment which may consequently affect performance.

The results obtained from the fixed effect regression reveals that social disclosure index {-3.92 (0.415)} as an independent variable to financial performance as proxied by return on asset appears to have a negative and insignificant effect on financial performance. This therefore means we should accept the null hypothesis and reject the alternate hypothesis. Hence, social disclosure index has no significant effect on the financial performance of listed manufacturing firms in Nigeria during the period under study. This result is inconsistent with those of Asuquo (2012) who stated that although corporate social responsibility disclosure appears to be in its early stages in Nigeria, some firms have been recognized as being pro-active in this field while others are not. The results are inconsistent with those of Odetayo Adeyemi and Sajujigbe (2014) who reported that corporate social activities increase long-term profits or survival of a firm through positive public relations and high ethical standards reduces business and legal risk which also build shareholder trust. Odetayo et al. (2014) notes that in order to ensure sustainable growth, it is necessary for a company to make positive impact on the surrounding environment, as well as on its stakeholders, such as its consumers, employees, investors, communities, and others. The findings are also inconsistent with those of Margolis et al. (2007) who found that corporate social responsibility engagement helps firms to gain a competitive advantage while ensuring the protection of their stakeholders. They also note that socially responsible firms are more likely to survive in the long term. Specifically, our finding strongly supports those of Nik Ahmad and Abdul Rahim, 2003; Rashid and Ibrahim, 2002 who noted that a proactive approach to corporate social responsibility may help a firm get access to pools of capital it might not otherwise be able to tap into.

The results obtained from the fixed effect regression reveals that governance disclosure index {-0.15 (0.006)} as an independent variable to financial performance as proxied by return on asset appears to have a negative and significant effect on financial performance. This therefore means we should reject the null hypothesis and accept the alternate hypothesis. Hence, governance disclosure index has a significant effect on the financial performance of listed manufacturing firms in Nigeria during the period under study. This result is consistent with the findings obtained from the studies of Haryono and Paminto (2015), Ioannou and Serafeim (2014), Bubbico et al (2012) and Gull et al (2013) who document that corporate governance has a significant effect on financial performance. It also agrees with the finding of Fallatah and Dickins (2012) who posited that corporate governance characteristics significantly relates to firm value measured by Tobin Q, leads to substantial growth specifically to increase shareholder’s wealth, the economic value of the firms with higher productivity and lower risk (Hermalin & Weisbach, 2003; Walumbwa & Lawler, 2003). However, on the other hand, the result of this study contradicts the finding of Aggarwal (2013) who noted that corporate governance sustainability disclosure has an insignificant impact on profitability. Corporate governance elements are treated as the organization’s checks and balances system because strategic policy regarding sustainability disclosure is imperative to management.

5.0 Conclusion and Recommendation

Business is central to the problem and must be central to the solution. Indeed, the expectations of corporate responsibility in areas such as environmental protection, human rights, human capital, and product safety are rising rapidly. Key stakeholders such as shareholders, employees, and financial institutions want business to be responsible, accountable, and transparent. Human activities taking place today are regarded by some people as having a detrimental impact on the society, ecology, and economy which future generations will experience. In this study, the researcher concludes that only the variable of governance sustainability disclosure appears to significantly affect the financial performance of listed manufacturing firms in Nigeria. However, the researcher documents and insignificant positive effect of environmental and social sustainability on the financial performance of listed manufacturing firms in Nigeria. Following the findings of this study, the researcher recommends that valuable financial, material, and human resources should be channeled on policies that relate to improving governance sustainability if the desire is to gain improved return on asset or improved firm value. This is due since the result from our analysis suggest a statistically weak effect running from governance sustainability on the performance measures of return on asset during the period under consideration. Furthermore, the cost of environmental disclosure should be minimized as the study shows it is reducing the performance of the firms under study. Finally, policies on social disclosure should also be reevaluated as the study shows it is negatively affecting the performance of the firms under study.

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Corporate Governance Mechanisms and Annual Report Readability of Listed Oil and Gas Firms in Nigeria

Tags : Annual Report Readability Corporate Governance Panel Regression

Category : Latest Publications

CORPORATE GOVERNANCE MECHANISMS AND ANNUAL REPORT READABILITY OF LISTED OIL AND GAS FIRMS IN NIGERIA

Etuk, Mfon Unyime

Department of Accounting

Akwa Ibom State University Obio Akpa Campus

unyrobet@gmail.com

+2348038813923

Dorathy Christopher Akpan (PhD, ACA)

Department of Accounting

Akwa Ibom State University Obio Akpa Campus

dorathyakpan@aksu.edu.ng

+2348036056169

ABSTRACT

The study examined the effect of corporate governance mechanism on annual report readability in Nigeria by drawing samples from oil and gas firms that were listed on the floor of the Nigerian Exchange Group (NGX) from 2012-2021. In this study, board size, audit firm type, and ownership structure were the corporate governance mechanism employed. The dependent variable of annual report readability was proxied in terms of annual report page length in line with related extant literature. Furthermore, the study controlled its model’s goodness of fit using the variable of firm age. Specifically, to examine the cause-effect relationships between the dependent variables and independent variables as well as to test the formulated hypotheses, the study used a panel regression analysis. The result showed that board effectiveness has a significant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. However, audit quality had an insignificant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. Furthermore, ownership concentration had an insignificant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. Specifically, it was concluded that a large board size will increase annual report readability of listed oil and gas firms in Nigeria. It was also recommended that the size of the board should be considerably increased in order to increase annual report readability. Specifically, a good and effective board which should monitor the financial discretion as well as ensuring that accounting choices made by corporate managers are valid.

Keywords: Corporate Governance, Annual Report Readability, Panel Regression

1.0 Introduction

Financial statements of business firms have been always one of the most important information resources for the decision-making of capital market practitioners (including shareholders, creditors, and financial analysts), capital market legislators and other stakeholders. Hence, such financial information should be easily understandable, and capital market legislators, including the Securities and Exchange Commission, have always emphasized the significance of financial statement readability and understandability of annual reports to preserve the interests of shareholders (Hasan, 2017). American Stock Exchange Commission established a study group in 1967 to present some guidelines for improving the readability and understandability of annual reports of firms. The results of this report indicated that all investors were not able to quickly understand complicated reports of firms, so firms should avoid publishing intricate, lengthy, and vague reports.

However, much argument had been made about the effectiveness of disclosing information to stakeholders in annual reports due to the increased complexity of accounting rules and the technical language of financial information (Kumar, 2014; Guay et al., 2016). These factors may in turn lead to complex and incomprehensible language in annual reports that may result in failure to communicate the intended information. Consequently, some academic researchers in the accounting field have suggested overcoming this issue by increasing narrative disclosures in annual reports to clarify the intended meanings and convey the required information (Jones, 1988; Iu and Clowes, 2001). A large body of literature claims that the readability of corporate disclosures is crucial to mitigate the information asymmetry and improve stakeholders’ perception of the firm (Stanton and Stanton, 2002; Courtis, 2004; Merkl-Davies and Brennan, 2007; Brennan et al., 2009; Bayerlein and Davidson, 2011; Lawrence, 2013).

Hence, corporate governance systems, including issues of information disclosures and transparency, have witnessed significant improvements in developed economies following the devastating collapse of many corporate giants, such as Enron in the USA and Parmalat in the European Union (EU). However, developing economies, including Nigeria, continue to lag behind, despite efforts at improving overall corporate governance (Papadopoulos, 2019). Nigeria’s adoption of international financial reporting standards (IFRS) and corporate governance best practice guidelines were expected to improve overall firm-level corporate governance, financial reporting, information disclosure and transparency (Appiah et al., 2016; Tawiah and Boolaky, 2019) and succinctly increasing annual report readability. A good system of corporate governance ensures that directors and manager of firms carry out their duties within the framework of accountability, transparency and thus ensure readability of the annual report. It is on the basis of the foregoing that this study examined the effect of corporate board mechanism on annual report readability of listed firms in Nigeria.

Although many prior studies have examined the relationship between corporate governance and annual report readability, the empirical findings were inconclusive and mixed (Samaha et al., 2015). The closely related studies were Phuong et al (2022) investigated whether the longer length of annual reports was difficult to read using a sample of 20-F firms listed on the US stock exchange. Hidayatullah and Setyaningrum (2019) investigated the impact of IFRS on annual report readability in Indonesia using a sample of 52 non-finance firms, Cheung, and Lau (2016) examined the readability of the notes to financial statements and adoption of IFRS in Australia using a sample of 50 Australian listed firms and finally Morunga and Bradbury (2012) investigated the impact of IFRS on annual report length in New Zealand using a sample of 38 firms listed on the New Zealand stock exchange. It is evident that most of the studies were done using samples from developed countries. Therefore, the study aims to bridge this gap by examining the effect of corporate board mechanism on annual report readability of listed firms in Nigeria.

2.0 Conceptual Issues and Hypotheses Development

Annual Report Readability

Readability is a notion that is utilized in many fields, including linguistics, healthcare, and law; nevertheless, there is no single and specific definition of readability. Some authors employ writing style, coherence, and report organization to determine readability (Klare, 2019) in Loughran and McDonald (2014a). Some authors use the report’s target readers to choose the writing style and vocabulary. Others believe that readability necessitates a combination of factors ranging from writing styles to vocabulary and authors (Dubay, 2017). The definition of Loughran and McDonald (2014a) is highly valued by the research since it focuses on the business environment, which has identified users with adequate business knowledge. They define readability as “individual investors’ and analysts’ capacity to digest valuation-relevant information from a financial disclosure.” The SEC also emphasizes the importance of readability to users and the stock market.

Measuring Annual Report Readability

Length of Reports

The amount of words in a report indicates the length of the report. It is assumed that the longer a report is, the less readable it is because it contains more information and is more complex, therefore investors incur additional processing time and costs. This was one of the simplest measurements to identify, as there were multiple approaches to obtain the data (Kausar and Lennox, 2017; Kohler et al., 2020). The easiest method was to use Microsoft Office software, whereas the other was to use a text manipulation programming language such as Perl. One of the previous studies employs the Lingua:EN:: package. Fathom of Perl can determine the number of words in a report since it concentrates solely on the report’s text, excluding tables and figures that Microsoft Office counts. In contrast to Microsoft Office, the Perl package may be simply applied to enormous sample sets. Despite its simplicity, this evaluation had been harshly criticized for its disproportionate emphasis on constructs above readability.

Corporate Governance

It is difficult to define the concept of corporate governance in a universally acceptable way because definitions vary from country to country. Moreover, countries differ from each other in terms of culture, legal systems and historical developments (Ramon, 2001). According to the National Association of Corporate Directors (2006), corporate governance denotes how an establishment or organization is governed. Systems of good governance may, therefore, be considered as apparatuses for instituting the foundation of control and ownership of institutions within the economy. Company law and other forms of regulations enforce adherence to the existing systems of corporate governance. The known Organization for Economic Corporation and Development (OECD) (1999) also defined corporate governance as “a system on the basis of which companies are directed and managed”.

Board Size and Annual Report Readability

The size of the board is an indicator of the number of board members. A very small board may have difficulty resisting management and dealing with the different risks of the banking sector. A very large board may also be unable to effectively oppose management. This measure had been used in previous work, such as Simpson and Gleason (1999), Sumner and Webb (2005) and Pathan (2009), where they examined the link between board size and bank risks. The number of directors serving on a bank board is relevant to the outcome of the board’s decisions. Board size is the total number of people chosen by the shareholders of the company through an election to run the company and are bound by certain duties such as the duty to act within the scope of their authority and to exercise due care in the performance of their corporate tasks (Peasnell, Pope & Young 2015).Kent and Stewart, (2008)argued that a good and effective board should monitor financial discretion as well as ensure that accounting choices made by corporate managers are valid and thus increasing annual report readability. Hence, we state our first hypothesis as:

H01: Board size does not significantly increase annual report readability of listed oil and gas firms in Nigeria

Audit Firm Type and Annual Report Readability

The type of independent audit firm(s) employed by an entity to execute its audit in compliance with statutory regulation and professional requirements is characterized as auditor firm size. The audit firm is broadly classified in accounting literature based on variances in firm size, most notably big 4/non-big 4 firms. As a result, the study divides auditor types into three categories: single Big4, single non-big4, and combined audit team of Big4/non-big4 audit firms, based on the audit firm structure in Nigeria. The single audit firm category denotes the hiring of a single audit firm, either a Big4 or a non-Big4 company. According to Wibowo and Rosienta (2009), audit quality is frequently linked to an audit firm scale. According to DeAngelo (1981), large audit firms have superior audit quality because they have already invested in major audit equipment and personnel training, and hence are more knowledgeable and accurate in spotting problems linked to misstatement and going concern assumptions than small audit firms. Therefore, we argue that big4 audit tend to increase the page length of annual report and thus decrease annual report readability. Hence, we state our second hypothesis as:

H02: Audit firm type does not significantly increase annual report readability of listed oil and gas firms in Nigeria

Ownership Concentration and Annual Report Readability

According to Waseem and Nailar (2011) ownership concentration is the sum of squares of the fraction of total equity held by each large shareholder. Kamran, Sehrish, Saleem, Yasir and Shehzad (2012) defined ownership concentration as the portion of shares held by top shareholders of the firm while Genc and Angelo (2012) opine that ownership concentration is the percentage of ownership shares of the largest shareholders. In the views of Warrad, Almahamid, Slihat, and Alnimer (2013) ownership concentration is the percentage of the largest and the second largest managerial block holders who own at least 10% of the total shares in a firm. In the case of the relationship between ownership and annual report, Axarloglou and Kouvelis, 2007); Bao and Lewellyn, 2017); Calabrò and Mussolino, 2011); Munisi et al., 2014; Oesterle et al., (2013) noted that concentrated ownership has a positive effect on annual report readability. However, opined that ownership structure has a negative effect on readability of financial statement. Hence, we state our final hypothesis as:

H03: Ownership concentration does not significantly increase annual report readability of listed oil and gas firms in Nigeria

Theoretical Review

Signaling Theory (Spence, 1973)

The signaling theory was propounded by Spence in 1973. The core concept of signaling theory is a circumstance in which corporate management decides to communicate information about their performance to stakeholders or other consumers of financial statements in order to capture their attention (Watts and Zimmerman, 1978). The theory of signaling is primarily concerned with market problems involving information asymmetries, as well as how these inequalities information can be reduced by the party with the more information signaling to the other party (Morris, 1987). According to Spence (1973), there are two major reasons why asymmetric information exists in the market. To begin, sellers of high-quality goods may elect to withdraw their items from the market due to challenges in distinguishing those high-quality products from low-quality ones, implying that their goods are priced in accordance with market standards. As a result, the market made a mistake when judging the quality of the products, which could lead to errors when allocating economic resources to their optimal use. Second, these are the characteristics and efforts that sellers use to provide information to purchasers about the quality of their items. This will motivate the seller to boost its resources for informing purchasers of the excellence of its items (Spence, 1973; Spear and Taylor, 2011). Because of the mandated adoption of IFRS in Nigeria, there is a shift from NGAAP to IFRS, signaling theory is believed to be fundamentally significant for the aim of this research. In essence, IFRS, as a more principle-based standard, would boost disclosure requirements for “good” Nigeria organizations while “filtering” them out of those judged to be of lower quality in the market.

Empirical Review

Phuong and Huong (2022) investigate whether longer annual reports are more difficult to read. Using a sample of 20-F forms published by foreign firms listed on US stock exchanges, they discover a significantly negative relationship between annual report length and readability. According to this finding, longer annual reports are not less readable. The main reason for longer but more readable annual reports is a shift in writing styles toward shorter sentences, which better comply with US Securities and Exchange Commission (SEC) disclosure regulations. They also raise awareness when using annual report length as a proxy for readability in research on the complexity of annual reports.

Abonwara, Ahmad, and Halim (2021) conduct a literature review on the predictors and consequences of IFRS adoption. A total of 48 articles were reviewed, with frequency analysis performed. The findings revealed that IFRS studies focused on the European Union (EU) and conducted tougher studies on several countries. A single country was studied in a small number of studies. Most studies in developed countries focused on the outcome and discovered mixed results regarding the use of IFRS. Adoption is still occurring in developing countries, and studies have revealed that the consequences are mixed, and the predictors are individual-related factors (education, accounting capabilities), organizational (size, age, readiness), and macroeconomic factors (legal system, regulation, political ties). The findings were discussed, and more research is needed to determine the role of IFRS in developing countries.

Hidayatullah and Setyaningrum (2019) investigated the impact of IFRS adoption on annual report readability in Indonesia. This study’s sample includes 52 non-financial firms over a four-year period, 2010-2011 and 2013-2014, with 208-year observations. Multiple linear regression analysis is used to test hypotheses. The study showed that IFRS adoption had a significant and negative impact on disclosure readability in Indonesian public companies. The study’s implication was that IFRS adoption necessitates more sophisticated and/or competent users of financial statements, as measured by higher requirements for years of education required to comprehend the disclosures.

Cheung and Lau (2016) investigated the relationship between financial disclosure readability and the adoption of International Financial Reporting Standards (IFRS) in Australia by assessing: (1) the impact of IFRS adoption on the readability of Notes to Financial Statements in the Australian context; and (2) the potential accounting policies that drive the increased length of Notes to Financial Statements post-IFRS. Financial reports are significantly longer but more readable in the post-IFRS period, according to the findings. Furthermore, since the adoption of IFRS, the length of disclosures in the Summary of Significant Accounting Policies, Financial Instruments, and Intangible Assets has increased significantly.

Kumar (2014) investigated on the effect of secrecy, ownership dispersion, and profitability on the readability of annual reports of Asian companies listed in the United States. The author investigated the effect of secrecy on readability using a measure of secrecy developed by Hope. et. al. (2008). The study’s sample includes all 68 Asian companies from nine countries that are listed on NYSE/NASDAQ and are registered and reporting with the SEC. The univariate and multivariate analyses show that companies with a more secretive domestic culture produce less readable financial statements. This is an intriguing and significant result that is consistent with efforts to achieve convergence in the international accounting field. Despite the fact that a large number of these companies prepare their financial statements in accordance with IFRS and US GAAP. The findings also showed that companies with more diverse ownership provide more readable annual reports. The findings do not support the hypothesis regarding the effect of profitability. Finally, the findings indicated that larger sample companies provide more difficult-to-read financial statements.

3.0 Methodology

The study is longitudinal covering a period of ten (10) years. That is, from 2012 to 2021 employing listed oil and gas firms on the floor of the Nigerian Exchange Group (NGX). The sampling technique employed was purposive since firms were included in the sample on certain selection criteria. These criteria were based on the view that the firms were listed on the Nigerian Exchange Group (NGX) market from 2012-2021; there was 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 oil and gas firms and delisted oil and gas firms were excluded from the study. Thus, only oil and gas firms that had all relevant data due to continuous existence were included in the sample. The final sample size consisted of 6 oil and gas firms that were arrived based on the availability of data for ten years for all the research variables. To examine the effect of corporate governance mechanism on annual report readability, a modified model of Caldarelli et al., (2022 was usedto express the econometric model as

Where:

PGLT = Annual report page length

BODS = Board size

AUFS = Audit firm size

OWNC = Ownership concentration

FIRA = Firm Listing Age

β₀= Constant

β₁– β₄ = Slope Coefficient

= Stochastic disturbance

i = i^th firm

t = time-period

Variable Measurement

In this study, annual report readability was measured with annual report page length in line with the studies of Cheung and Lau, (2016). In the case of the independent variable, board size was measured as the total number of all directors of a company including the Chairman +Vice Chairman + CEO/Managing director + Executive Directors +Non-Executive Directors or Independent Directors but excluding the company secretary. Audit firm size was measured as “1” for Companies that use PWC, Deloitte, E&Y and KPMG as external auditors and “0” otherwise. Ownership concentration in percentage was the shares ownership concentration of all the block shareholders with 5% and above controlling interest. In the case of the control variable, firm age was measured as the listing age of the firms under study. The econometric techniques adopted in this study were the panel fixed and Random effect regression techniques. The rationale for its usage was based on the following justifications: the data collected may have time and cross-sectional attributes as well as across the sampled firms (cross-section); panel data regression provided better results since it used large observation and reduced the problem of degree of freedom; it avoided the problem of multicollinearity and help to capture the individual cross-sectional (or firm-specific) effects that the various pools may exhibit with respect to the dependent variable in the model.

4.0 Empirical Results and Discussion

Descriptive Analysis

In this section, the descriptive statistics for both the explanatory and dependent variables of interest were examined. Each variable was 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
PGLT	84.65	29.72	30	173	60
BODS	8.61	2.05	4	14	59
AUFS	0.60	0.49	0	1	60
OWNC	54.37	24.80	6	78	60
FIRA	29.67	11.05	8	44	60

Source: Author (2022)

The results obtained from the descriptive statistics of the study is presented in table 1. The table showed that the mean of annual report readability when measured in terms of annual report page length (PGLT) is 85 pages with a standard deviation of 29.72. This implies that on the average, the oil and gas firms under study had about 85 pages of annual report which can be regarded as industry standard during the period under study. Table 1 also showed that the minimum number of pages on the average was 30 pages with the maximum being 173 pages. In the case of the explanatory variable, table 1 showed that board size (BODS) which was our proxy for board effectiveness, had a mean of 9 members and a standard deviation of 2 members. This implied that on the average, the board of directors of the firms under study was about 9 members during the period under study. The table also showed that the minimum board constituted about 4 members while the maximum board was about 14 members during the period under investigation. Table 1 showed that the mean of audit firm size (AUFS) which was our measure of audit quality was 0.60 and a standard deviation of 0.49. These implied that on the average, about 60% of the firms under study engaged the services of big4 auditors while the remaining 40% engage the service of non-big4 auditors. Ownership concentration (0WNC) had a mean of 54.37 and a standard deviation of 24.80. In the case of the control variable, the table showed that firm age (FIRA) had a mean of 29.67 and a standard deviation of 11.05. These implied that on the average, the firms were at least 30years old. However, it was discovered that the youngest firm in our sample was 8 years and the oldest firm was 44 years.

Correlation Analysis

In examining the association among the variables, the Spearman Rank Correlation Coefficient (correlation matrix) was employed, and the results were presented in the table below.

Table 2: Correlation analysis

	PGLT	BODS	AUFS	OWNC	FIRA
PGLT	1.0000
BODS	-0.0961	1.0000
AUFS	0.1929	-0.2735	1.0000
OWNC	0.1518	0.3356	-0.0599	1.0000
FIRA	0.4912	-0.0057	0.3553	0.5946	1.0000

Author’s computation (2023)

Table 2 showed the results of the correlation matrix for this study. Particularly, the table showed that all the independent variables were positively associated to the dependent variable of annual report readability when measured in terms of annual report page length except for the variable of board size that had a negative association. Particularly, the study showed that audit firm size (0.1929), ownership concentration (0.1518), and the control variable of firm age (0.4912) were positively associated with the dependent variable of annual report readability when measured in terms of annual report page length. However, the table showed that the independent variable of board size (-0.0961) was negatively associated with the dependent variable of annual report readability when measured in terms of annual report page length. However, all association were seen to be weak, hence there was no need to suspect the presence of multicollinearity in the model. Furthermore, to test the hypotheses a regression results was used since correlation test does not capture cause-effect relationship.

Regression Analyses

Specifically, to examine the cause-effect relationships between the dependent variables and independent variables as well as to test the formulated hypotheses, the study used a panel regression analysis. The OLS pooled results and the panel regression results obtained were presented and discussed below.

Table 3: Regression Result

Variables	PGLT Model (Pooled OLS)	PGLT Model (FIXED Effect)	PGLT Model (RANDOM Effect)	PGLT Model (LSDV Regression)
CONS.	3.908 {0.000} ***	2.108 {0.003} **	3.908 {0.000} ***	1.880 {0.028} **
BODS	0.005 {0.834}	0.076 {0.009} **	0.005 {0.833}	0.076 {0.009} **
AUFS	-0.024 {0.816}	0.016 {0.919}	-0.024 {0.815}	0.016 {0.919}
OWNC	-0.007 {0.032} **	-0.002 {0.707}	-0.007 {0.027} **	-0.002 {0.707}
FIRA	0.027 {0.000} ***	0.057 {0.000} ***	0.027 {0.000} ***	0.057 {0.000} ***
F-Statistics	5.08 (0.0015)	6.32 (0.0003)	20.32 (0.0004)	5.54 (0.0000)
R- Squared	0.2734	0.3404	0.2292	0.5045
VIF Test	1.96
Het. Test	71.01 (0.0000)
Hausman	54.03 (0.0000)
Presence of FE/RE		YES {4.57 (0.0017)}	NO {0.00 (1.0000)}

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

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

The results of the Pool OLS and panel regression from STATA were shown in the table 3. The results from the Pool OLS regression shows an R-square value of 0.2734 which indicated that about 27% of the systematic variations in annual report readability were proxied using annual report page length and were jointly explained by the independent and control variables in the model during the period under study. This implies that variations in annual report readability of listed oil and gas firms in Nigeria cannot be 100 percent explain by the corporate governance mechanisms employed in this study. However, the unexplained changes in annual report readability were attributed to the exclusion of other independent variables that were not within the scope of our study but had been captured as error term. Furthermore, the F-statistic value of 5.08 with the associated P-value of 0.0015 indicated that the model of the Pool OLS regression was statistically significant at 5% level. This means that the model of the Pool OLS regression was valid and can be used for statistical inference. To further validate the estimate of the pool OLS regression results in the table above, some basic diagnostic test was carried out. These regression diagnostics tests included test for multicollinearity and test for heteroscedasticity. The study employed the variance inflation factor (VIF) technique to determine the presence or absence of multicollinearity in this study, as in most studies. A cut-off VIF value of 10 was used to determine whether a VIF is high. These were in line with Gujarati, (2004) recommendations that the mean VIF should be less than ten. Table 3 showed a mean VIF value of 1.96. The result implied that the mean VIF was within the benchmark of 10 as recommended by Gujarati, (2004). Hence, there was no room to suspect multicollinearity in the model under study. For the test for homoscedasticity assumption, the result obtained from the test was shown in the table above , which revealed a significant P-value of the Chi2 at 1% level. These results indicated that the assumption of homoscedasticity had been violated due to very low P-values. This suggested that the estimate of the OLS regression cannot be relied upon for policy recommendation. The study therefore, employed the panel regression technique to control for the violation of the homoscedasticity assumption of the OLS regression was shown in table 3.

The F-statistic and Wald-statistic value 6.32 (0.0003) and 20.32 (0.0004) for fixed and random effect regression respectively showed that both models were valid for drawing inference since they were both statistically significant at 5%. In the case of the coefficient of determination (R-squared), it was observed that 34% and 23% systematic variations in annual report readability was proxied using annual report page length and were jointly explained by the independent and control variables in the model during the period under study. These implied that variations in annual report readability of listed oil and gas firms in Nigeria cannot be 100 percent explain by the corporate governance mechanisms employed in this study. However, the unexplained changes in annual report readability are attributed to the exclusion of other independent variables that are not within the scope of our study but have been captured as error term.In selecting from the two panel regression estimation results, the Hausman test was conducted, and the test was based on the null hypothesis that the random effect model was preferred to the fixed effect model. Specifically, a look at the p-value of the Hausman test (0.0000), implies that the null hypothesis should be rejected and accept the alternative hypothesis. These implied that the fixed effect panel regression results should be adopted in drawing our conclusion and recommendations. These also implied that the fixed effect results tend to be more appealing statistically when compared to the random effect. The presence of fixed effect means that there are unobserved heterogeneity effects in the model, hence the least square dummy variable (LSDV) regression was employed to control for this effect. The results of the Least Square Dummy Variable regression showed an R-square value of 0.5045 which indicated that about 50% of the systematic variations in annual report readability was proxied using annual report page length and were jointly explained by the independent and control variables in the model during the period under study. These implied that variations in annual report readability of listed oil and gas firms in Nigeria cannot be 100 percent explained by the corporate governance mechanisms employed in this study. However, the unexplained changes in annual report readability were attributed to the exclusion of other independent variables that were not within the scope of our study but have been captured as error term. Furthermore, the F-statistic value of 5.54 with the associated P-value of 0.0000 indicated that the model of the Least Square Dummy Variable regression was statistically significant at 1% level. This means that the model of the Least Square Dummy Variable regression was valid and can be used for statistical inference

Discussions of Findings

The results obtained from the least square dummy variable regression model revealed that board effectiveness was measured by board size (Coef. = 0.076; P -value = 0.006) and had a significant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. Our result indicated that board effectiveness represented by large board significantly increase the annual report page length of listed oil and gas firms in Nigeria. The result implied that the hypothesis that board effectiveness does not significantly increase annual report readability of listed oil and gas firms in Nigeria was rejected. Hence, the results implied that a large board size will increase annual report readability of listed oil and gas firms in Nigeria. The result contradicted with those of Kent and Stewart, (2008) who noted that a good and effective board should monitor financial discretion as well as ensuring that accounting choices made by corporate managers were valid.

Furthermore, table 3 showed that audit quality was measured by audit firm type (Coef. = 0.016; P -value = 0.919) had an insignificant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. The result indicated that audit quality ensured by big 4 audit firms insignificantly increased the annual report page length of listed oil and gas firms in Nigeria. The result implied that the hypothesis that,audit firm type does not significantly increase annual report readability of listed oil and gas firms in Nigeria is accepted. Hence, the results implied that the big 4 audit firms will insignificantly increase annual report readability of listed oil and gas firms in Nigeria. This finding contradicts prior studies which showed that higher readability of accounting information was associated with higher audit effort reflected by big four audit firms (Abernathy et al. 2019); (Blanc et al., 2019).

Finally, evidence from table 3 shows that ownership concentration (Coef. = -0.002; P -value = 0.707) had an insignificant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. The result indicated that concentrated ownership insignificantly decreases the annual report page length of listed oil and gas firms in Nigeria. The result implies that the hypothesis ownership concentration does not significantly increase annual report readability of listed oil and gas firms in Nigeria was accepted. Hence, the results implied that a concentrated ownership will insignificantly decrease annual report readability of listed oil and gas firms in Nigeria. The findings from this study negates those of Axarloglou and Kouvelis, 2007); Bao and Lewellyn, 2017); Calabrò and Mussolino, 2011); Munisi et al., 2014; Oesterle et al., (2013) who documented that ownership structure significantly improves annual report readability.

5.0 Conclusion and Recommendation

The study examined the effect of corporate governance mechanism on annual report readability in Nigeria by drawing samples from oil and gas firms that were listed on the floor of the Nigerian Exchange Group (NGX) from 2012-2021. In this study, board size, audit quality, and ownership structure were the corporate governance mechanism employed. The dependent variable of annual report readability was proxied in terms of annual report page length in line with related extant literature. Furthermore, the study controlled the model’s goodness of fit using the variable of firm age. Specifically, to achieve the objective of the study, a pool least square regression was conducted before proceeding to check for inconsistencies with the basic assumptions of the OLS regression. Specifically, to examine the cause-effect relationships between the dependent variables and independent variables as well as to test the formulated hypotheses, the study used a panel regression analysis. The result showed that board effectiveness has a significant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. However, audit quality hasan insignificant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. Furthermore, ownership concentration had an insignificant effect on annual report readability when proxied in terms of annual report page length of listed oil and gas firms in Nigeria. Specifically, it was concluded that a large board size will increase annual report readability of listed oil and gas firms in Nigeria. Hence, it was recommended that the size of the board should be considerably increased in order to increase annual report readability. Good and effective board should monitor the financial discretion as well as ensure that accounting choices made by corporate managers are valid.

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