EFFECTS OF NON FINANCIAL DISCLOSURES ON PROFITABILITY OF FIRMS IN NIGERIA

EFFECTS OF NON FINANCIAL DISCLOSURES ON PROFITABILITY OF FIRMS IN NIGERIA

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Background of the study

Information plays an important role in the corporate world as it can benefit companies in many ways (Katmun, 2012). The information provided in annual reports or corporate reporting includes financial and non-financial information (NFI). However, recent decades has witnessed the rise attention on NFI due to inadequacy of traditional financial information reporting to fulfill the need in assessing the organization value (PWC, 2017). Companies however have moved from passive to active information disclosure, from strict to know compliance disclosure to right to know complete disclosure and they are aspiring to link corporate strategy with one comprehensive stream of nonfinancial and financial data (Maxwell, Smith and Brewster, 2010). The relevance and inclusion of non-financial information in corporate reporting contributes greatly to information transparency and is therefore an issue of great significance in economies throughout the world (Maroun, 2017). A growing number of organizations are publishing information evidencing the impact made by their activities on the environment, corporate governance, society, and human rights. This increased visibility of non-financial information has heightened awareness of the importance of these reports in reflecting organizational status and practices. Over recent years, the level of interest from stakeholders in corporate environmental, social and ethical performance has risen significantly. Non-financial information however enables businesses to be transparent in communicating these non financial aspects of their management and performance. It also enables business to be accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development owing to continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce, their families, the local community and society at large (Mbabazi, Twesige, Claude and Jaya, 2015). Mbabazi, Twesige, Claude and Jaya (2015) and Hervé and Luc (2018) argue that non financial information is as important as financial information in the decision-making process. Both pieces of information contain valuable insights that can yield interesting results if used correctly. The studies noted that investors disregard non financial information in their investment decision making and only fewer literature have addressed on its usefulness and relevance for investors’ decision making.

In Nigeria, non financial disclosures are regulated by code of corporate governance 2018 which covers all the categories of non financial disclosures (environment, governance, human resources, risk management and society); National Environmental Standards and Regulations Enforcement Agency (Establishment) Act 2007 & 2008; Environmental Impact Assessment Act 2004; Harmful Waste (Special Criminal Provision) Act 2004; Nuclear Safety and Radiation Protection Act 2007 etc which centered on review of regulations on air and water quality, discharge of effluents and other harmful substances as well as control of other forms of environmental pollution. These laws covered the environmental and societal aspect of non financial disclosures. At international level, non financial disclosures have attracted considerable interest from a number of key stakeholders such as the United Nations Global Compact, the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TFCD) and European Commission Guidelines on Reporting Nevertheless, Global Reporting Initiative (GRI) guidelines on reporting principles and standard disclosures are still the most authoritative in the international arena (KPMG, 2017; Laura, Maria, and Helena, 2018). Based on a survey of the theoretical and empirical literature on GRI, the guideline on content index in accordance with G3or G3.1or G4 is strenuous but provides most effective result (Haller 2017). The guidelines however covered all the categories of non financial disclosures raging from environment, governance, human resources, risk management and society The disclosure of non-financial information is a strategic action that fundamentally improves the communication of organizations with their stakeholders (Miska, Christof, Günter, and Mark, 2013). Thus, a recent study by Ernst and Young (2017) highlighted the major significance of this information for users, and pointed out that 38% of investors acknowledged making use of such reports in reaching their investment decisions and over the past two decades, there have been many ideas to improve business reporting, and nearly all of them focus on the importance of companies providing more NFI. Based on this observation, this, the present study is established to examine the relationship between non financial disclosures and performance of firms.

1.2 Statement of the problem

The issue of non financial information has been debated in the recent years, latest analyses by Mbabazi, Twesige, Claude and Jaya (2015) and Hervé and Luc (2018) reported that most investors disregard non financial information (NFI) disclosures in investment decision making process as it could not meet their expectations. Consistent with this argument, Ernst and Young (2017) pointed out that only 38 percent of investors acknowledged making use of NFI in reaching investment decisions as emphasis were on financial information. Odili (2018) also noted that ratio analysis and other interpretation techniques on the financial statements cannot measure all aspects of performance. For example, the effect of a business on the environment cannot be measured using financial criteria, but is increasingly regarded as an important aspect for investors’ decision making. Despite the continued use of financial information in the decision making by private sectors in Nigeria, there has been a continued failure of private entities in Nigeria. The study however expressed concerns over the significant rise in the need for non-financial reporting (NFR) in the recent years and its relevance for investors’ decision making is yet to be investigated. Several stakeholders have also expressed concerns over the need for NFI to meet their expectations and not much have been done in academic literature in addressing the usefulness and relevance of non financial information disclosures for investors decision making. In the developed nations, attempts were made as follows; Rahim, Atan and Amrizah (2017) and Abd. Hamid, Abdul Aziz, Dora and Said (2017) investigated intellectual capital disclosure (ICD) and firms’ performance in Germany and France respectively using disclosure index by GRI G4 and found insignificant effect. Deumes and Knechel, (2016) and Hashim and Koon (2016) found insignificant negative effect on risk management disclosure (RMD) and firms performance. On the contrary, Oliveira, Rodrigues and Craig (2015) found significant positive effect. Wan and Sulong (2015) also reported that corporate governance disclosure (CGD) using disclosure index by GRI G4 did not correlate with financial performance of firms. In contrast, Rouf (2016) found that corporate governance disclosure (CGD) was positively related with firms’ profitability. The previous literatures researched in the developed nations as shown above discussed non financial disclosures (NFDs) measured using IC, RM and CG independently which couldn’t meet the expectations of the investors (Rahim, Atan and Amrizah 2017; Deumes and Knechel, 2016; Hashim and Koon, 2016; Oliveira, Rodrigues and Craig, 2015 etc). Owing to the investors’ needs, those categories of non financial disclosures (IC, RM and CG) were combined to develop a model fit on Non Financial Disclosures ranging from human resources, risk management, to governance as there is a gap in knowledge on the joint effect of these categories of NFDs on firms’ performance in the developed nations. In the developing nations, efforts were made in examining the usefulness and relevance of non financial information disclosures in meeting the expectations of the investors as follows; Raheman, Salleh, Afza and Chek (2014) examined intellectual capital disclosure (ICD), risk management disclosures (RMD) and firms’ profitability and reported significant positive effect. This disagrees with Okoye (2016) who found insignificant effect between intellectual capital disclosure (ICD) and firms’ performance. Nahiba (2017) on the same note found significant positive effect between corporate governance disclosures and firms performance. Ismail and Rahman (2013) found significant positive relationship between risk management disclosures (RMD) and firms’ performance. In agreement, Yusuf (2016); reported significant positive effect on risk management disclosure (RMD) and firms’ performance As it can also be seen in the literature reviewed in the developing nations, the following lapses were noted; none of these studies adopted any guideline by international key stakeholders especially the GRI guideline on content index in accordance with G3or G3.1or G4 which stills the most authoritative in the international arena (KPMG, 2017; Laura, Maria, and Helena, 2018). Secondly, the studies covered only financial service sector, oil and gas sector, consumer goods sector and industrial goods sector. Thirdly, only the study of Raheman, Salleh, Afza and Chek (2014) attempted and covered 2 major categories of NFDs leaving the other categories unattended which calls for further investigation and no study had addressed on this in both developed and developing nations. Based on these observations in both developed and developing nations, the present study adapted and modified the models of Okoye (2016), Wan and Sulong (2015) and Hashim and Koon (2016) into a model covering (governance, human resources and risk management) with reference to all the non financial firms quoted on Nigerian Stock Exchange. This is to capture the real effect of these categories of NFDs on firms’ performance in order to meet the expectations of the investors and also identify the category of NFI disclosure that has the highest level of influence on firm’s performance.

1.3 Objective of the study

This study aims to analysis effects of non financial disclosures on profitability of firms in Nigeria. In addition, other definite objectives of this research are to;

Examine the effect of Intellectual Capital Disclosure on firms Performance

Find out the effect of Risk Management Disclosure on firms Performance

Analyse the effect of Corporate Governance Disclosure on firms Performance

1.4 Research Questions

What is the effect of Intellectual Capital Disclosure on firms Performance?

What is the effect of Risk Management Disclosure on firms Performance?

What is the effect of Corporate Governance Disclosure on firms Performance?

1.5 Research hypotheses

Hypothesis One

H0: Intellectual Capital Disclosure has no significant effect on firms Performance

Hi: Intellectual Capital Disclosure has a significant effect on firms Performance

Hypothesis Two

H0: Risk Management Disclosure has no significant effect on firms Performance

Hi: Risk Management Disclosure has a significant effect on firms Performance

Hypothesis Three

H0: Corporate Governance Disclosure has no significant effect on firms Performance

Hi: Corporate Governance Disclosure has a significant effect on firms Performance

1.6 Significance of the study

This study will be significant to companies because it will enlighten them on benefits of Intellectual Capital Disclosure on firms Performance, Risk Management Disclosure on firms Performance, and Corporate Governance Disclosure. This study will also add to existing literature on this study area and shall serve as a reference piece to students, scholars and researchers who may wish to carryout further studies on this topic or related domain in the future.

1.7 Scope of the study

This study borders on investigating the effects of non financial disclosures on profitability of firms in Nigeria. This study shall comprise of all non financial firms quoted on Nigerian Stock Exchange from 2014-2021.

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