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Archives of Business Research – Vol. 11, No. 9
Publication Date: September 25, 2023
DOI:10.14738/abr.119.15449.
Akinadewo, I. S., Al-Amen, S., Dagunduro, M. E., & Akinadewo, J. O. (2023). Empirical Assessment of the Effect of Financial Reporting
Components on Investment Decisions of Small and Medium Enterprises in Nigeria. Archives of Business Research, 11(9). 30-49.
Services for Science and Education – United Kingdom
Empirical Assessment of the Effect of Financial Reporting
Components on Investment Decisions of Small and Medium
Enterprises in Nigeria
Israel S. Akinadewo
Department of Accounting,
Afe Babalola University, Ado-Ekiti, Ekiti State, Nigeria
Saliu Al-Amen
Department of Accounting,
Afe Babalola University, Ado-Ekiti, Ekiti State, Nigeria
Muyiwa E. Dagunduro
Department of Accounting,
Afe Babalola University, Ado-Ekiti, Ekiti State, Nigeria
Jeremiah O. Akinadewo
Department of Accounting,
Afe Babalola University, Ado-Ekiti, Ekiti State, Nigeria
ABSTRACT
Financial reporting is a critical aspect of business operations that enables
companies to communicate relevant financial information to their stakeholders.
The primary goal of financial reporting is to provide investors with information that
can assist them in making informed investment decisions. Therefore, this study
aimed to investigate the effect of financial reporting on the investment decisions of
SMEs. The study made use of primary data. Primary data was collected using an
interview guide and questionnaires, with respondents being those in charge of
making investment decisions in the firm under study or their agents. The
questionnaire included both closed-ended and Likert-type questions. 150
questionnaires were administered out of which 100 were completed and returned.
In order to ensure the reliability of the measures used in this research, the
researcher conducted a random re-test exercise within the population sample of
the study. The study findings indicate that financial reporting has a significant
impact on the investment decisions of SMEs. The comprehensive income statement,
statement of financial position, cash flow statement, and the statement of changes
in shareholder's equity were found to have a significant positive effect on
investment decisions. This finding implies that investors consider the information
contained in these financial statements when making investment decisions. The
study results state the importance of including all financial statements in financial
reporting, as each statement provides unique information that can be relevant to
investors. The study therefore recommended among other things; The Nigerian
government and regulatory bodies should strive to improve financial reporting
standards for SMEs, SMEs in Nigeria should be encouraged to undergo financial
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Akinadewo, I. S., Al-Amen, S., Dagunduro, M. E., & Akinadewo, J. O. (2023). Empirical Assessment of the Effect of Financial Reporting Components on
Investment Decisions of Small and Medium Enterprises in Nigeria. Archives of Business Research, 11(9). 30-49.
URL: http://dx.doi.org/10.14738/abr.119.15449
literacy education to improve their understanding of financial statements, the
government should provide incentives such as tax breaks and subsidies to SMEs
that prepare and disseminate comprehensive financial report.
Keywords: Financial reporting, financial statements, investment decisions, small and
medium-scale enterprises.
INTRODUCTION
In the dynamic landscape of global economies, numerous nations have demonstrated a strong
aspiration for advancing social welfare and maintaining consistent economic growth. This has
prompted the necessity for countries to cultivate environments conducive to business
activities, ultimately creating opportunities for sustained economic progress (Umar, 2022). One
of the primary focal points in this endeavor has been the deliberate formulation of
governmental policies and laws aimed at providing support to Small and Medium Enterprises
(SMEs) as catalysts for economic expansion and job generation (Ahmed et al., 2022). The
commendable development of SMEs has been hailed for its pivotal role in nurturing grassroots
economic advancement and promoting equitable and enduring development and for this
reason, Akinadewo (2020) opined that they are pivotal to entrepreneurial advancement,
poverty alleviation, and financial inclusion strategies of government. This trend has resulted in
a noticeable upsurge in entrepreneurial engagements within the SME sector, especially in
emerging economies (Dagunduro et al., 2022).
In accordance with the study conducted by the Organization for Economic Co-operation and
Development (OECD, 2000) on bolstering SMEs to achieve sustainable development, it is
evident that SMEs hold significance in both transitional and emerging economies. The evolution
of SMEs emerges as a pivotal tool in initiatives aimed at poverty reduction, and their progress
is indispensable for sustaining economic growth (Ige et al., 2023). This is due to their integral
role within a country's economic framework, as their prosperity profoundly influences job
creation, economic expansion, and innovative activities, thereby impacting the overall well- being of communities.
Small and Medium Enterprises (SMEs) play a pivotal role in driving economic growth, fostering
innovation, and creating employment opportunities (Akinadewo, 2020; Akinadewo et al.,
2020). In Nigeria, SMEs contribute significantly to the nation's Gross Domestic Product (GDP)
and employment, making them a crucial element of the country's economic fabric (Adewara et
al., 2023). The ability of these enterprises to attract investment, optimize resource allocation,
and enhance their overall performance is closely intertwined with the quality and transparency
of their financial reporting. Financial statements serve as the bedrock of information upon
which investors base their decisions. The components of financial statements—such as balance
sheets, income statements, and cash flow statements—provide a comprehensive view of a
company's financial health and performance (Abiola et al., 2021).
Consequently, the accurate and timely communication of financial information is paramount in
influencing investment decisions and facilitating the allocation of resources toward productive
avenues (Akello, 2018). The Nigerian business landscape is characterized by diverse challenges,
including economic volatility, regulatory dynamics, and limited access to capital. In such an
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environment, investors, both domestic and international, face increased uncertainty and risk
(Umar et al., 2022). It is within this context that understanding the relationship between
financial statement components and investment decisions becomes indispensable. By
unraveling the impact of various financial indicators on the decision-making processes of
investors, SMEs can tailor their financial reporting practices to effectively communicate their
financial performance and potential to potential investors (Dagunduro et al., 2022).
The accounting literature has been engaged in a prolonged discourse regarding whether small
non-public companies should adhere to the same financial reporting rules as larger and/or
publicly traded companies (Okpanachi et al., 2019). This debate has captivated the attention of
practitioners, scholars, and standard-setting bodies, leading to the establishment of varied
reporting standards for Small and Medium Enterprises (SMEs) in multiple nations. In this
context, the International Accounting Standards Board (IASB) embraced the International
Financial Reporting Standards (IFRS) tailored for SMEs in July 2009, aiming to enhance
accounting and reporting practices for SMEs and thereby bolster their operations.
However, despite their substantial contributions to economies worldwide, SMEs face
formidable challenges, particularly in developing nations (Akinadewo et al., 2020; Andries et
al., 2018; Lee et al., 2015). These obstacles encompass a dearth of access to financial resources,
operational inefficiencies, inadequate managerial capabilities, limited entry to administrative
resources and expertise, as well as substantial regulatory burdens (Adewoye & Adeyemi, 2015).
Consequently, researchers concur that SMEs in regions grappling with these impediments are
unable to achieve the desired growth rates (Amedu, 2012). Amidst the multitude of challenges
confronting SMEs, the scarcity of financial funding takes on a critical role, given that financing
constitutes the bedrock of effective business management and the enduring success that
extends across generations (Ndum, 2022).
As noted by Abiola (2021), the absence of easily obtainable, cost-effective, and easily reachable
funding sources presents a significant challenge for small and medium enterprises (SMEs) in
Nigeria. SMEs constitute 96.9% of enterprises, provide employment for 87.9% of the workforce,
and contribute to around 50% of Nigeria’s total Gross Domestic Product (GDP) (SMEDAN,
2020). Despite these remarkable figures, Nigeria's economic growth has been inconsistent, and
its SMEs have struggled to establish and sustain a viable growth trajectory (Akinadewo, 2020).
The inability of SMEs to access financing could impede their expansion and, in certain cases,
prevent them from pursuing sustainable development and capitalizing on promising
opportunities (Erdogan, 2019).
This empirical study delves into the intricate interplay between the components of financial
statements and investment decisions within the context of Nigerian SMEs. By analyzing the
intricate relationship between financial indicators and investment choices, this research aims
to contribute to the existing body of knowledge surrounding investment behavior and decision- making strategies. Furthermore, the study seeks to shed light on the extent to which financial
literacy, regulatory compliance, and other contextual factors influence investment preferences
among SMEs in Nigeria. The remainder of this journal publication is organized as follows:
Section 2 provides a comprehensive review of relevant literature, highlighting key theoretical
frameworks and empirical studies that have explored the nexus between financial statements
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Akinadewo, I. S., Al-Amen, S., Dagunduro, M. E., & Akinadewo, J. O. (2023). Empirical Assessment of the Effect of Financial Reporting Components on
Investment Decisions of Small and Medium Enterprises in Nigeria. Archives of Business Research, 11(9). 30-49.
URL: http://dx.doi.org/10.14738/abr.119.15449
and investment decisions. Section 3 outlines the research methodology, detailing the data
collection process, variables considered, and statistical techniques employed. Section 4
presents the empirical findings, offering insights into the impact of specific financial statement
components on investment preferences among Nigerian SMEs. Finally, Section 5 discusses the
implications of the study's findings, offering recommendations for SMEs, policymakers, and
future research directions.
LITERATURE REVIEW
Conceptual Review
This part of the chapter examines viewpoints presented by other authors and researchers who
have explored the influence of financial reporting on choices related to investments.
Concept of Investment Decision Making:
This concept is divided into two components: decision-making and investment. Decision- making, according to Amedu (2012), involves the process through which individuals, groups,
or organizations determine the actions to take based on specific objectives and limited
resources. Ahmed et al., 2022) add that decision-making is the selection of the most suitable
action to achieve objectives using available tangible and intangible resources. The second
aspect is investment. Adewoye and Adeyemi (2015) defined investment as the allocation of
resources today (time, money, and energy) with the goal of acquiring more or improved
resources in the future. Investment decisions encompass the management of resources and
funds to maximize future gains. The decision to invest relies on an investor's objectives,
financial capacity, and means of funding.
Information provided by businesses to current and potential shareholders forms the basis for
sound investment decisions, crucial for the successful development of capital markets and
efficient resource utilization (Ajibowu, 2020). Virtually all investors share a common primary
goal: to increase investment growth while minimizing risk. Rational investors employ financial
tools and risk-return analyses to guide their investment strategies. To predict future earnings,
financial statements and other business data are evaluated within the context of the company's
environment. Investors assess various investment options considering risk, which signifies the
uncertainty linked to future returns. The variation between actual and anticipated returns is
known as the risk premium, reflecting the degree of uncertainty involved (Umar et al., 2022).
The investment decision-making process can be likened to a three-legged stool. One leg
involves analyzing the business, its securities, and its industry. The second leg encompasses
assessing the economic environment, which involves scrutinizing the business prospects,
interest rates, financial markets, global trade finance, and political and regulatory changes. The
third step involves portfolio decisions, where these two sets of information are amalgamated
to formulate an investment analysis aligned with the investor's objectives, whether they are an
individual or a fund manager. In this stage, the investor (or portfolio manager) seeks the
optimal combination of securities that can yield the highest feasible returns within the preset
risk limitations of the portfolio. These portfolio decisions involve ranking projected rates of
return in relation to risk. At every investment juncture, comparisons are drawn between
different types of securities to identify the most appealing (highest) returns relative to risk.
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Subsequently, comparisons are made between companies within each category, followed by
comparisons within the same company over a specific time period (Umar, 2022).
SMEs are characterized based on measurable attributes, although some of these might pose
challenges in quantification. According to Osiorenoya and Jonathan (2018), there exist several
methods for assessing the size of an organization, encompassing factors like employee count,
sales revenue, total assets, and net worth. Among these indicators, the employee count is the
most commonly utilized measure of size in global qualitative definitions of small businesses
(Kawugana et al., 2019). However, these quantitative characterizations of small businesses
have limitations. As stated by Osiorenoya and Jonathan (2018), while these definitions are
crucial as they establish a framework for research and statistical compilation, they also offer
quantifiable standards for cross-country comparative analyses of SMEs. Nonetheless, the
measurable attributes of small firms exhibit variability across industries. For instance, what
may be considered modest for a company in one sector, such as cement manufacturing, might
be deemed substantial in another sector like hospitality or education. In the context of this
study, companies with fewer than 100 employees were classified as small or medium-sized
enterprises.
Qualitative determinations delineate the status of SMEs within a specific industry. According to
Kawugana et al. (2019), the subsequent aspects are identified as the most commonly observed
qualitative attributes in relevant literature: the owners' legal autonomy, prominent ownership
involvement reflecting the personal management principle, a straightforward organizational
structure, distinct financial operations, and the funding approach. The organizational structure
holds pivotal importance among these qualitative criteria, as underscored by Duncan (2015)
who posited that a firm is as large as the management structure requires.
Small enterprises exhibit a simple organizational framework characterized by centralized
decision-making. SMEs stand out due to the distinctive role of the owner, who holds the top
position in the organizational hierarchy as both an entrepreneur and a manager. A notable
financing approach is also a hallmark of SMEs, with equity being the primary source of funding,
while loans and credits, often secured from family and friends, serve a supplementary role
(Adewara et al., 2023). This attribute plays a particularly significant role during the initial
phases of business establishment. Furthermore, SMEs are recognized for their legal and
financial independence. This independence often sets them apart as more self-reliant and
autonomous in comparison to large corporations (Ndum, 2022)
Concept of Financial Reporting:
Financial reporting involves recording and communicating a company's financial performance
within specified time intervals, often on a quarterly or annual basis, as outlined by Osiorenoya
and Jonathan (2018). These reports help businesses organize accounting data and present their
current financial status. These documents, crucial for projecting future profitability, industry
positioning, and growth, are publicly available for scrutiny. Key financial statements play a vital
role in this reporting process, encompassing cash flow monitoring, assessment of assets and
liabilities, scrutiny of shareholder equity, and evaluation of profitability.
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sales result after deducting costs. Net income is calculated post-tax deductions at the applicable
rate.
The net income can be reinvested or distributed as dividends. There are two formats: a single
format containing an income statement alongside other comprehensive statements, and a
multi-statement format presenting income statements and other comprehensive income in two
distinct formats. This analysis demonstrates how effectively the business generates profits
from its output. Operating income considers expenses such as overhead and equipment
depreciation in addition to the cost of goods sold. This assessment is vital for gauging the
company's profitability compared to prior periods or industry peers. An increase in operating
income is a positive sign. While special items can influence a period's net income favorably or
unfavorably, they are less likely to have a significant impact on long-term matters (Ezeagba,
2017).
The Statement of Financial Position
The statement of financial position, also known as the balance sheet, is a financial statement
that provides an overview of a company's financial position at a specific point in time. It
presents a snapshot of the company's assets, liabilities, and equity as of a particular date. This
statement helps stakeholders, including investors, creditors, and analysts, understand the
company's resources (assets), obligations (liabilities), and the residual interest of the owners
(equity). The statement of financial position aids in assessing the company's financial health,
liquidity, and solvency, offering insights into its ability to meet short-term and long-term
obligations and its overall net worth (Agbemava et al., 2016).
Statement of Cash Flows
The statement of cash flows is defined as a financial statement that provides a summary of a
company's cash inflows and outflows during a specific period. It offers insights into how cash
is generated and utilized by the business in its operating, investing, and financing activities. The
statement is structured into three main sections: operating activities, investing activities, and
financing activities (Ajibowu, 2020). It helps stakeholders, such as investors and creditors,
understand the sources and uses of cash within the company, highlighting its ability to generate
cash, meet financial obligations, and invest for future growth. The Statement of Cash Flows is a
crucial tool for evaluating a company's liquidity, financial flexibility, and overall cash
management practices.
Statement of Changes in Equity
The statement of changes in equity is defined as a financial statement that outlines the changes
in a company's equity over a specific period. It provides a comprehensive overview of how the
various components of equity, including contributions from owners, net income, dividends, and
other adjustments, have evolved during the reporting period (Ahmed et al., 2022). This
statement helps stakeholders understand how the company's ownership interests have
changed over time due to financial activities and performance. The Statement of Changes in
Equity is an integral part of a company's financial reporting, offering insights into its capital
structure, retained earnings, and the allocation of profits and losses among shareholders
Okpanachi et al., 2019).
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Akinadewo, I. S., Al-Amen, S., Dagunduro, M. E., & Akinadewo, J. O. (2023). Empirical Assessment of the Effect of Financial Reporting Components on
Investment Decisions of Small and Medium Enterprises in Nigeria. Archives of Business Research, 11(9). 30-49.
URL: http://dx.doi.org/10.14738/abr.119.15449
Concept of Small and Medium-Scale Enterprises:
Small and medium-scale enterprises (SMEs) were initially introduced in the late 1940s to
stimulate trade and industrialization in developed countries. The definitions of SMEs vary
across nations, shaped by their economic functions, policies, and institutional frameworks
(Dagunduro et al., 2022). For instance, what constitutes a small business in developed
economies like Japan, Germany, or the United States could be classified as medium- or large- scale in developing economies such as Nigeria (Lyndon & Opinion, 2021). The definition of
SMEs has evolved over time, especially in developing countries. In Nigeria, SMEs are defined by
different entities. According to the Federal Ministry of Industries, SMEs are businesses with less
than 300 employees and capital under N200 million. Small-scale enterprises (SSEs) have assets
below N50 million and fewer than 100 employees (Adewara et al., 2023; Umar, 2022)).
The Central Bank's definition considers medium-scale enterprises as those with operating
assets and yearly revenue less than N150 million, and fewer than 300 employees. In this
context, small and medium-scale enterprises have operating assets under N10 million, annual
revenue under N10 million, and fewer than 100 employees. NERFUND (2000) defines SMEs as
businesses with operating assets under N40 million, yearly revenue under N40 million, and
staff ranging from 3 to 35 people. These varying definitions reflect the diverse approaches to
categorizing SMEs based on their scale, assets, revenue, and employee count (Ige et al., 2023:
Okpanachi et al., 2019).
Theoretical Review
This study underpinned by the Neoclassical Theory of Investment behavior, originating from
Roos and Victor’s work in 1943, presents an alternative perspective on investment decisions,
challenging the Acceleration Theory of Investment. This theory links investment decision- making with factor prices in production, moving beyond the notion that investment decisions
are solely driven by output. Instead, it is grounded in an ideal capital accumulation path, where
the desired level of capital services is established by maximizing the present value of future
expected net revenue, with this ideal level seen as a function of relative prices (Olaniyi &
Olokoyo, 2017). In the context of small and medium-scale enterprises (SMEs), this theory has
important implications. SMEs, like larger corporations, engage in investment decisions
influenced by factors such as capital and labor utilization. The theory's emphasis on the role of
the marginal product of capital (MPK) and labor cost of capital, or real rental cost of capital, in
investment choices remains relevant for SMEs. These factors play a crucial role in determining
the addition to the capital stock, affecting the growth of production (Umar, 2020).
Jorgenson (1963) and Eisner and Nadiri (1968) reinforce the core concept of the neoclassical
theory, highlighting that capital demand reacts to changes in relative factor prices or the ratio
of factor prices to output prices. This notion aligns with the investment decisions of SMEs,
where cost considerations, revenue expectations, and relative prices are key determinants.
SMEs, like corporations, strive to achieve an equilibrium value of capital in their investment
choices. Therefore, the Neoclassical theory offers valuable insights into the investment
behaviors of SMEs by considering the interplay of factor prices, costs, and future revenue
expectations.
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Empirical Review
Akello Edel Quinn (2018) conducted a study investigating the impact of financial reporting on
the growth of small and medium enterprises in Tororo Municipality. The research aimed to
determine how financial reporting affects the performance and growth of small and medium
enterprises in Nyangole Trading Center within Tororo Municipality. The researcher utilized a
mixed-methods approach, combining both qualitative and quantitative techniques through
cross-sectional surveys. Data collection involved questionnaires, interviews, and non- participatory observation methods, with data analysis utilizing tables and scatter plot graphs.
The study's findings underscored the importance of financial reporting for small and medium
enterprises, highlighting its role in planning, performance analysis, fraud prevention, and
decision-making support.
In a separate study, Kawugana et al. (2019) investigated the significance of financial statements
in influencing investment decision-making. The research aimed to understand how financial
statements impact investment choices. Data was collected through questionnaires and
interviews, with percentage calculation used to analyze questionnaire results. The study
revealed that financial statements play a pivotal role in shaping investment decisions. An
avenue for further research lies in exploring how ratio analysis can serve as a tool for
investment decisions, utilizing ratios to enhance estimation accuracy.
Furthermore, Amahalu et al. (2020) examined the influence of financial statement quality on
investment decisions of quoted deposit money banks in Nigeria. The research aimed to assess
the impact of financial statement quality on the investment decisions of quoted deposit money
banks over a specific period. The study employed an Ex-Post Facto research design and
collected secondary data from a sample of seven deposit money banks. Statistical techniques
like Pearson correlation and Ordinary Least Square (OLS) regression analysis were used to
analyze the data. The results indicated that financial statement verifiability, timeliness, and
understandability significantly and positively affected the Return on Equity of quoted Deposit
Money Banks in Nigeria. The study suggested a potential research gap concerning the impact of
corporate reporting on investment decisions, which warrants further investigation.
In addition, Akinadewo (2020) investigated the nexus between microfinance banks and the
development of MSMEs in Nigeria. The study, which utilized primary data through structured
and self-administered questionnaire, and used logit regression analysis to test the hypotheses.
The results showed a significant positive relationship between the explanatory variable
through the proxies and MSMEs. The study suggested the need for government to institute a
stronger and more effective regulatory team in ensuring that microfinance banks do not derail
from their primary responsibilities to MSMEs.
Ajibowu (2020) conducted a study focusing on the influence of financial statements on
investment decisions, using Eco Bank Nigeria PLC as a case study. The research aimed to gauge
the impact of financial statements on investment choices within the context of Eco Bank Nigeria
Plc. The study employed both descriptive survey and ex-post facto research designs, using
primary data collected through online questionnaires and secondary data from the bank's
annual published financial statements. Data analysis involved descriptive and inferential
statistical methods, including Mann-Kendall’s test and regression analysis. The study revealed
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Akinadewo, I. S., Al-Amen, S., Dagunduro, M. E., & Akinadewo, J. O. (2023). Empirical Assessment of the Effect of Financial Reporting Components on
Investment Decisions of Small and Medium Enterprises in Nigeria. Archives of Business Research, 11(9). 30-49.
URL: http://dx.doi.org/10.14738/abr.119.15449
ID = f (SFP, SCF, SCI, SCE) ........................................................ (1)
Where:
ID: Investment Decisions
SFP: Statement of Financial Position
SCF: Statement of Cash Flow
SPL: Statement of Comprehensive Income
SCE: Statement of Changes in Equity
The equation of the model is given as;
ID = (β0 + β1SFP + β2SCF + β3SCI + β4SCE + μt)................................................(2)
β0 = Intercept of equation
β1 =Coefficient of the Independent Variable
μt = Other variables not in the equation.
RESULTS AND DISCUSSIONS
Demographic Information and Table
The demographic details of the study’s respondents are covered in this section. This includes
the gender, age, level of employment at the moment, and the highest degree or professional
certification.
Table 4.1: Characteristics of the Respondents
Characteristics Frequency Percentage
Gender of Respondents
Female 52 52
Male 48 48
Age of the Respondents
Under 20 22 22
21-30 30 30
31-40 28 28
41-50 12 12
Over 50 8 8
Rank/Level
Trainee 16 16
Lower Manager 14 14
Middle Manager 38 38
Top Manager 32 32
Highest Education Qualification
WASSCE/GCE 9 9
OND/NCE 14 14
B.Sc./BA/HND Equivalent 42 42
M.Sc./MBA 28 28
Ph.D./DBA 7 7
Professional Qualification
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Akinadewo, I. S., Al-Amen, S., Dagunduro, M. E., & Akinadewo, J. O. (2023). Empirical Assessment of the Effect of Financial Reporting Components on
Investment Decisions of Small and Medium Enterprises in Nigeria. Archives of Business Research, 11(9). 30-49.
URL: http://dx.doi.org/10.14738/abr.119.15449
Do you believe that the decision to invest is based on the financial status of the firm’s?
No 13 13
Yes 87 87
Source: Field survey (2023)
According to the survey pertaining to the frequency with which the firm prepares financial
reports as shown in Table 4.2, 13 (13 per cent) have no idea about the frequency of financial
reports preparation, eight (8 per cent) believe it is just once in a while, 34(34 per cent) report
it is quarterly while 45 (45 per cent) report it is yearly. In terms of types of financial reports
kept by firms, 44(44 per cent) report they keep cash flow statement, 12(12 per cent) indicate
they keep income statement, 20(20 per cent) keep statement of change in equity, six (6 per
cent) keep statement of financial position while 18(18 per cent) keep all the above listed
financial reports.
More so, regarding financial report contains adequate information for making decision, nine
reports it does have while 91 believes it does not. In response to whether it influences potential
investors buyer of shares, 16 per cent said no that it does not while the remaining 84 said yes
it does, and this applies to whether it reveals the management competency as 15 per cent said
no it does not, while 85 said yes that it reveals firm’s competency.
Descriptive Analysis Presentations:
The third and following sections on the survey asked respondents for their thoughts on the
statement of financial position, the comprehensive income statement, the cash flow statements,
the statement of changes in owner’s equity, and investment decisions. A five-point rating scale,
ranging from 1 (strongly agree) to 5 (strongly disagree), was used to build up on the responses
to these sub-variables.
Table 4.3: Effects of Financial Reporting on Investment Decisions of SMEs
Source: Author’s compilation (2023)
Table 4.3 shows the results of the effect of financial reporting, broken into four different factors;
namely, statement of financial position (SFP), comprehensive income statement (SCI), cash flow
statements (SCF) and statement of changes in shareholder's equity (SCE) on the investment
decisions (ID) of small and medium scale enterprises.
Effect of Statement of Financial Position on Investment Decisions in SMEs:
From the table, the coefficient of statement of financial position (SFP) is positive with a value
of 0.129, and this implies that a rise in the financial position of the firm on the average improves
Variable Coefficients std. Error t-stat. P-value
Constant 0.612 0.206 2.971 0.004
SFP 0.129 0.050 2.580 0.008
SCI 0.201 0.096 2.097 0.039
SCF 0.031 0.009 3.445 0.034
SCE 0.347 0.083 4.184 0.0000
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the investment decision of the firm. Specifically, when the financial position a firm goes up by
one unit, on the average the investment decision of the firm improves by about 0.129 units.
There are several empirical studies that support the finding that the financial position of a firm
has a positive effect on investment decisions. Adewoye & Adeyemi (2015), found that financial
reporting significantly influences investment decisions of shareholders in Nigeria. The study
concluded that financial statements such as balance sheets, income statements, and cash flow
statements are crucial in helping investors make informed decisions about their investments.
Also, the study of Kawugana et al. (2019) found that financial statement analysis significantly
affects investment decisions of investors in the Dhaka Stock Exchange (DSE). The study
concluded that financial ratios such as liquidity ratios, profitability ratios, and solvency ratios
are important in helping investors make investment decisions. Lastly, Ajibowu (2020) found
that financial ratios such as current ratio, debt-to-equity ratio, and return on assets have a
significant impact on investment decisions of investors in Malaysia. The study concluded that
financial ratios play a crucial role in helping investors make informed investment decisions.
Effect of Comprehensive Income Statement on Investment Decisions in SMEs:
From the table, the coefficient of comprehensive income statement (SCI) is positive with a value
of 0.201, and this implies that a rise in the income statement of the firm on the average improves
the investment decision of the firm. Specifically, when the income statement goes up by one
unit, on the average the investment decision of the firm improves by about 0.201 units. There
are studies that provide some support for the finding that the comprehensive income statement
has a positive effect on investment decisions in Nigeria. Such studies include, a study by
Akinboade et al. (2019) found that financial reporting significantly affects investment decision- making of listed companies in Nigeria. The study concluded that financial reports, especially
the income statement, provide investors with information that they use to evaluate the
profitability and growth prospects of a company.
Also, a study by Akello (2018) found that financial reporting plays a significant role in
investment decision-making in Nigeria. The study concluded that financial reports, especially
the income statement, provide investors with information that they use to evaluate the financial
performance and future prospects of a company and lastly, Amedu (2012) found that financial
statements, including the income statement, have a significant impact on investment decision- making in the Nigerian banking sector. The study concluded that investors use financial
statements to evaluate the profitability and risk of an investment opportunity.
Effect of Cash Flow Statements on Investment Decisions in SMEs:
From the table, the coefficient of cash flow statements (cashfl_statmnt) is positive with a value
of 0.031, and this implies that a rise in the cash flow statements of the firm on the average
improves the investment decision of the firm. Specifically, when the cash flow statement of a
firm goes up by one unit, on the average the investment decision of the firm improves by about
0.031units. There are some studies that provide some support for the finding that cash flow
statements have a positive effect on investment decisions in Nigeria such as a study by
Agbemava et al. (2016) found that financial reports, including the cash flow statement, have a
significant impact on investment decision-making in Nigeria.
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Archives of Business Research (ABR) Vol. 11, Issue 9, September-2023
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Hypothesis 3
➢ H0: Cash flow statements does not have significant effect on investment decisions in
SMEs.
From the table 4.3, the value of the t-statistics for the coefficients of cash flow statements is
3.445 and the corresponding critical t-value at 5 per cent level of significance is 1.980. Given
that the computed t-statistic vale of 3.445 is greater than the critical t-value of 1.980, the study
rejects the null hypothesis. This implies that cash flow statements do have a significant effect
on investment decisions in SMEs.
Hypothesis 4
➢ H0: Statement of changes in shareholder's equity does not have significant effect on
investment decisions in SMEs.
From the table 4.3, the value of the t-statistics for the coefficients of statement of changes in
shareholder's equity is 4.184 and the corresponding critical t-value at 5 per cent level of
significance is 1.980. Given that the computed t-statistic vale of 4.184 is greater than the critical
t-value of 1.980, the study rejects the null hypothesis. This implies that statement of changes in
shareholder's equity has a significant effect on investment decisions in SMEs.
CONCLUSION AND RECOMMENDATIONS
This study was an investigation of the effect of Financial Reporting on the Investment Decisions
of Small and Medium scale enterprises in Nigeria. In this study, Financial Reporting was
disaggregated: Comprehensive income statement, statement of financial position, Cash flow
statements and statement of changes in shareholder's equity. The findings showed that
Comprehensive income statement has a significant positive effect on investment decisions in
SMEs; Statement of financial position has a significant positive effect on investment decisions
in SMEs; Cash flow statement has a significant positive effect on investment decisions in SMEs;
and Statement of changes in shareholder's equity has a significant positive effect on investment
decisions in SMEs. It was concluded that financial reporting is a critical aspect of business
operations that enables companies to communicate relevant financial information to their
stakeholders. The primary goal of financial reporting is to provide investors with information
that can assist them in making informed investment decisions. Therefore, this study aimed to
investigate the effect of financial reporting on the investment decisions of SMEs.
The study findings indicate that financial reporting has a significant impact on the investment
decisions of SMEs. The comprehensive income statement, statement of financial position, cash
flow statement and the statement of changes in shareholder's equity were found to have a
significant positive effect on investment decisions. This finding implies that investors consider
the information contained in these financial statements when making investment decisions.
The study results underscore the importance of including all financial statements in financial
reporting, as each statement provides unique information that can be relevant to investors.
Based on the findings of the study on the effect of financial reporting on the investment
decisions of small and medium enterprises (SMEs) in Nigeria, the following recommendations
are suggested: The Nigerian government and regulatory bodies should strive to improve
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Akinadewo, I. S., Al-Amen, S., Dagunduro, M. E., & Akinadewo, J. O. (2023). Empirical Assessment of the Effect of Financial Reporting Components on
Investment Decisions of Small and Medium Enterprises in Nigeria. Archives of Business Research, 11(9). 30-49.
URL: http://dx.doi.org/10.14738/abr.119.15449
financial reporting standards for SMEs. This can be achieved by providing guidelines that
ensure SMEs prepare and disseminate financial reports that meet the needs of investors. SMEs
in Nigeria should be encouraged to undergo financial literacy education to improve their
understanding of financial statements. This will enable them to make informed decisions when
investing in other SMEs. The government should provide incentives such as tax breaks and
subsidies to SMEs that prepare and disseminate comprehensive financial reports. This will
encourage SMEs to prioritize the preparation and dissemination of financial reports that
contain detailed information on comprehensive income and changes in shareholder's equity.
Investors in Nigeria should be educated on the importance of comprehensive financial
reporting by SMEs. This can be achieved by organizing workshops and seminars to educate
investors on the relevance of financial reports in investment decision-making. SMEs in Nigeria
should be provided with improved access to capital to enable them to prepare and disseminate
comprehensive financial reports. This can be achieved by providing loans and grants to SMEs
to cover the cost of preparing and disseminating financial reports. SMEs are encouraged to
make investments in information technology tools because doing so enhances their
performance overall.
SUGGESTIONS FOR FURTHER STUDY
The following are suggestions for further studies that can build upon the findings of this study
on the effect of financial reporting on the investment decisions of small and medium enterprises
(SMEs): A comparative study can be conducted to compare the effect of financial reporting on
investment decisions of SMEs in Nigeria with those of other countries. This study can also
examine the similarities and differences in financial reporting practices across countries. A
sector-specific study can be conducted to investigate the effect of financial reporting on the
investment decisions of SMEs in specific sectors of the Nigerian economy. This can provide
insights into the financial reporting practices of SMEs in different sectors and the impact of such
practices on investment decisions.
A qualitative study can be conducted to investigate the perceptions and attitudes of investors
towards financial reporting by SMEs in Nigeria. This can provide insights into the factors that
influence the investment decisions of investors and their reliance on financial reports. An
experimental study can be conducted to investigate the causal relationship between financial
reporting and investment decisions of SMEs. This can provide a deeper understanding of the
impact of financial reporting on investment decisions and the factors that influence such
decisions.
LIMITATION OF THE STUDY
Financial constraints- Insufficient fund tends to impede the efficiency of the researcher in
sourcing for the relevant materials, literature or information and in the process of data
collection (internet, questionnaire and interview). Time constraint- the researcher will
simultaneously engage with the study of other academic work. This consequently will cut down
the time devoted for research work.
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