Abstract
The purpose of this study is to examine whether impairment of financial assets affects the behaviour of equity investors in the insurance industry in Nigeria. Using a sample of 102 firm-year observations drawn from 17 insurance firms, and another sample of insurance firms whose shares traded at more than par value, the study investigated whether share prices are associated with insurance receivables and with other financial assets. Findings show that share prices are not significantly associated with insurance receivables, or with other financial assets. This is possibly because the shares of many insurance firms in Nigeria traded mostly at par value within the sample period-2012 to 2017. Empirical results further reveal that for the sample of firms whose shares traded at more than par value, there is a significant negative relationship between impairment charges of financial assets and market value, suggesting that investors negatively view impairment charges and regard them as evidence of decline in the economic value of organisational assets. Even with the sample of firms whose shares traded at more than par value, there is an insignificant relationship between insurance receivables and market value, suggesting that investors do not regard the impairment of trade receivables as sufficiently reliable to include them in their assessment of firm value. Regulators of the insurance industry must therefore emphasise confidence-boosting strategies such as the merger of weak insurance firms. This will create larger firms with greater capacity and better performance, as well as improve investors’ perception of the insurance industry in Nigeria.
Highlights
The financial services sector is central to the effective performance of any economy because of its role in financial intermediation, investment financing, and provision of coverage over many types of risks
Share prices range from 50 kobo to N2.96, with a mean price of 68 kobo, suggesting that the average share price in the industry is slightly higher than 50 kobo, the par value of shares in the industry
The lower amount of impairment of financial assets relative to that of trade receivables may be due to the fact that the measurement of financial asset impairment allows for greater managerial discretion than the determination of impairment of insurance receivables
Summary
The financial services sector is central to the effective performance of any economy because of its role in financial intermediation, investment financing, and provision of coverage over many types of risks. The quality of assets recognised by firms in this sector reveals their competitive potential, going concern status, as well as their ability to deliver services efficiently and attract investors (Ikwuetoghu, 2018). In 2016, the assets of a prominent bank in Nigeria (Skye Bank Plc) were reported to be heavily impaired (Egene, 2016); two years thereafter the bank failed. This suggests that investors and other market participants should give attention to asset impairment charges reported by firms. To guard against sharp practices in the industry, insurance firms must comply with the provisions of the Insurance Act and with the guidelines issued by the National Insurance Commission (NAICOM) from time to time
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