Earnings Persistence and Firm Performance: Implications of Analysts? Accurate Forecast Ability from the Emerging Market of Nigeria

Abstract

This paper empirically examined the potency and value relevance of earnings persistence (EPERS) and its effect on firm performance and the implications of the analysts’ accurate forecast ability from the emerging market of Nigeria. The study adopted the expo facto research design and sampled 51 companies listed on the Nigerian Stock Exchange using stratified random sampling techniques from all the sectors from the 2000-2016 periods. Descriptive and Panel data regression statistics were employed in the analysis of the effect of earnings persistence on firm performance. Pre and post estimation tests were carried out: variance inflation factor (VIF) showed no evidence of multi-collinearity among the variables, correlation matrix test did not revealed any multi-collinearity problem, normality test using Jarque-Bera test of normality posed no problem to the study. While Breusch-Pagan/Cook-Wesberg tests to assess the variance in the error terms (residuals) of the models, the results indicated that all the models did not suffer from heteroskedasticity. Notwithstanding, panel robust standard error (PRSR) was employed to control the heteroscedasticity. The study revealed that earnings persistence (EPERS) had a negative and no significant effect on firm performance (Tobin’s Q). Leverage (LEV) exhibited a positive relationship whereas firm size (FRMSIZE) revealed a negative relationship with Tobin’s Q (TQ). Also based on findings, a weak growth trend was established between EPERS and Tobin’s Q. Earnings persistence resulting from discretionary and opportunistic earnings could give inaccurate forecasting ability. Consequently, the study recommended that analysts should be watchful of the stable occurrence of earnings when evaluating reported financial statements, without which, predictions made from them could have negative and misleading implications.