ABSTRACT
This study investigates the
influence of equity ownership structure on the operating performance of quoted
Nigerian banks from 1998 to 2007.
A dataset on bank equity
ownership structure and bank profitability, covering one hundred and eighty
observations from eighteen out of the presently quoted twenty one banks was
used for the study. A non probability sampling method was applied to select the
banks used in the study. Overall, the study provided strong empirical
validation of the link between equity ownership structure and bank’s operating
performance. Using pooled cross sectional regression techniques for the entire
sample for the ten-year period with ROA, ROE, and NIM/TA, as alternate measures
of performance, the signs of the regression coefficients and their significance
levels are almost consistent across the different measures of profit. The
results challenge many of the widely held opinion concerning the impact of
equity ownership structure on bank profitability. First, there is no
discernible or systematic relationship between directors’ equity ownership
structure and bank profitability. The results remained robust to alternative
measures of operating performance. Further analyses of the sub sample provided
limited evidence supporting the alignment or convergence of interest hypothesis
propounded by Jensen and Meckling (1983). Secondly, the results are not
consistent with the theoretical framework evidenced in the earlier work of
Sanda, et. al. (2003), that ownership concentration enhances corporate
performance and differed significantly from the empirical work of Adenikinju
et. al. (2003). This intriguing result suggests that, though the Nigerian
banking industry is highly concentrated, with only five percent of the
shareholders controlling two out of every three shares in the industry, it does
not result to superior returns on total assets or shareholders equity. This
unusual result has been attributed to the events that shaped banks operations
during the study period, especially the bank recapitalization exercise. Banks’
total assets and capitalization increased significantly during this period
without sufficient commensurate investment windows to enhance their
profitability. In addition, the results give confirmation to the fact that
mutual and equity investment trusts are not well established in Nigeria. The
result of the relationship between ownership mix and bank profitability yielded
mixed results. The coefficient of government equity holding is rightly signed,
indicating that with government equity holding in Nigerian banks at
approximately four per cent,` the theoretical negative expectation is confirmed
by this study. Again, this result indicates that there is negative, rather than
a positive impact of foreign equity ownership on bank profitability. However,
the alternative estimation method used in the study, yielded a rightly signed
relationship between equity ownership of foreigners and bank profitability.
This confirms generally accepted belief that foreign direct investment has
significant and positive impact on the economy.
The result supports the apex
bank’s policy of limiting government’s equity interest in any bank to a maximum
of ten per cent.
The study recommends policy
initiatives that would fast track the growth and development of institutional
investors in Nigeria as well as enhancement in corporate governance practices
to sustain the financial health of the banking sector.
CHAPTER
ONE
INTRODUCTION
1.1
Background of The Study
The relationship between equity ownership structure and firm
operating performance has become a vital issue in understanding the
effectiveness of alternative corporate governance mechanisms. Since the seminal
work of Bearle and Means (1932), the notion that the characteristics of a
firm’s ownership can affect operating performance of the firm has received considerable
attention in recent literature (Cornett et al, 2008; Barros et al, 2007; Micco
et al, 2007; Cornett et al, 2007; Iannotta et al, 2007; Wang, C, 2005; Cho,
1998; Hermalen and Weisbach, 1991; and McConnell and Searves, 1990).
There is consensus these among empiricists that the
role of ownership structure in shaping the operating performance of firms is
more pronounced in developing countries than in developed countries, as a
result of the relatively undeveloped structure of the capital market in
emerging economies (Kim, et al, 2004; and Wang, 2005). This submission appears
to have informed the continuous efforts by governments in emerging economies to
encourage the reorganisation of corporate ownership structure for enhanced
efficiency and effectiveness. In Nigeria, this restructuring has taken the form
of indigenization, divestiture of government holding,
privatisation, conversion to public limited liability company and subsequent
quotation on the Nigerian stock Exchange. Ownership structure covers both the
ownership mix and ownership concentration. The broad spectrum of ownership
encompasses government, institutions, management, individuals, and foreigners.
The ownership mix will ultimately have consequence on managerial behaviour and
corporate performance.
Ownership concentration refers to the degree to which
ownership of a firm revolves around a few closely knit people or otherwise. The
implication is that the higher the percentage of shareholding in the hands of
one or a few dominant shareholders, the higher the concentration and vice
versa. There are realistic reasons for the departure of ownership structure
from the small diversified shareholding structure recommended by economic
theory, especially where legal protections are weak. Dyck (2000) posits that
ownership concentration and ownership structure in general can fill the gap by
providing the functions of corporate governance, enhance the fulfilment of
promise, management monitoring and lower costs of resolving competing claims.
Claessens et al. (2000), for example examined corporate
ownership in East Asian firms and found that owners exert significant control
over their firms which is not surprising given that managers and owners are
often the same people. This is likely the same scenario in Nigeria, where
original owners by arrangement still retain significant control over their
firms even after public offers.
Again, as a result of the relatively undeveloped market
structure in emerging markets, the degree of information asymmetry among
participants is usually high; thus granting influential manager-owners greater
latitude to engage in and act upon their desires.
Hence, significant managerial ownership in a developing
economy may support both managerial alignment effects and entrenchment effects.
Jensen and Meckling, (1976) posits that agency costs will be
mitigated as a result of the existence of significant managerial ownership.
The higher degree of information asymmetry between managers
and outside shareholders in an emerging market compels a greater need for
alignment of managerial interests with shareholders interest.
Accordingly, the study investigated the relationship between
bank equity ownership structure and bank operating performance, using Nigerian
commercial banks.
Again, paraphrasing Alchian (1965), how does it happen that
millions of individuals are willing to turn over a significant portion of their
wealth to organisations run by managers who have so little interest in their
own welfare? What is even more astonishing is that they are willing to make
these commitments as residual claimants, that is, on the expectation that
managers will operate the firm so that there will be earnings which accrue to
the shareholders. The residual claimants here connote the income that will come
to the shareholders, after other prior claims have been settled.
The emphasis in this thesis is the banking sector. This is
because of our firm belief in the critical role of this sector of the economy.
The banking sector is strategically important to all sectors of the economy.
Consequently, the desired overall development of the country demands that the
sector remains healthy. This will translate to good returns to all stakeholders
in the industry. Besides, the recent history of the banking industry in Nigeria
makes it an attractive laboratory to examine the impact of equity ownership
structure on bank operating performance. In particular, the cycle of boom, bust
and distress syndrome which necessitated the recent recapitalisation programme
readily comes to mind. Another issue that makes a study in this sector relevant
is the active and well regulated corporate control mechanism in the banking
sector. This has developed to the extent that corporate governance expectations
have been codified by the Central Bank of Nigeria. The code, among other
things, emphasizes that good corporate governance rests ultimately with the
board of directors. A list of practices and omissions considered unethical/unprofessional
as well as procedures and sanctions for redressing them are amongst its
significant highlights.
Perhaps more importantly, it is worthwhile to note that the
banking firm has significant differences with respect to corporations in other economic
sectors and this justifies a special academic interest in its governance
challenges. For instance, banks face a clear conflict of interest arising from
differences between the interests of shareholders and the interest of
depositors. While shareholders are willing to encourage stakes in high –risk
projects that increase share value at the expense of deposits, the depositors,
if anything, are interested in the security of their deposits. This
becomes especially important in this study, as IPO’s and other means of
ownership restructuring frequently result to significant heterogeneous
shareholding structure, which can impact board membership and managerial
selection......
================================================================
Item Type: Ph.D Material | Attribute: 201 pages | Chapters: 1-5
Format: MS Word | Price: N3,000 | Delivery: Within 30Mins.
================================================================
No comments:
Post a Comment