The appraisal of equity investments by Nigerian investors

Purpose – The purpose of this paper is to examine how investors and stockbrokers in Nigeria value shares and whether their approach to share valuation differs from that documented in other countries. In particular, the paper investigates whether the investors and stockbrokers use fundamental, technical and/or risk analysis differently to appraise investments. The information which investors and stockbrokers employ for share valuation purposes is also considered to see whether differences from developed market countries exist.

Design/methodology/approach – A series of semi-structured interviews was conducted with eight stockbrokers and ten investors from Nigeria.

Findings – The main approach to share valuation employed by the Nigerian interviewees was fundamental analysis; investors and brokers forecast earnings for a company and multiplied this prediction by a P/E ratio to estimate the intrinsic worth of a share. This intrinsic value was then compared with the current share price to see if the equity was under- or over-valued. Thus, Nigerian investors are similar to their counterparts in other countries in terms of the main approach to share valuation employed. Other company fundamentals considered in the valuation process included cash flows and dividend information. Technical and risk analyses were also undertaken to supplement any initial conclusions reached. Indeed, the findings suggest that there was a greater use of risk analysis by Nigerian investors in comparison to the results documented for other countries. Company financial statements and stockbroker reports were the main sources of information used by investors although qualitative information, such as that obtained from meetings with company executives, was also important. However, access to senior executives was not uniform across all interviewees.

Practical implications – Investors and stockbrokers in Nigeria behave in a similar fashion to their counterparts in developed countries. However, political risk assumes a greater prominence in the equity valuation process within Nigeria; a reduction in this risk might help Nigerian equity values to increase.

Originality/value – The paper reports the views of senior stockbrokers and investors in Nigeria. To date, most work in this area has focused on developed markets; the current paper considers the case for an emerging market which is important in Africa. This market plays an important role in furthering the economic aims of the Government via their privitisation programmes. In addition, the market is attracting the attention of foreign investors who wish to invest in Nigerian equities.