ABSTRACT
This work focused on the study of the effect of corporate governance structure and institutional investment on corporate performance of selected quoted manufacturing companies in Nigeria. Institutional investment is the percentage of major shareholding (from 5% upwards) to total shares of the selected companies. Corporate governance structure and institutional investment are independent variables. Corporate performance which is the dependent variable was represented by Net Asset per Share and Earnings per Share. Data were collected from 25 manufacturing companies in Nigeria from 2010 to 2015, giving us a sum of 150 observations. The technique employed in analysing the collated data is multiple regression analysis using OLS method. All analyses were carried out using E-views software. The result of the regression analyses and most of the previous empirical findings indicates that there is a positive and significant effect of corporate governance structure on corporate performance. The outcome of the analysis of the effect of institutional investment on corporate performance shows that institutional investment has a positive but insignificant influence on corporate performance. The work was concluded by advocating that companies should imbibe good corporate governance in line with the circumstances surrounding each corporation according to changing circumstances. Also institutional investors should use their monitoring capabilities to positively influence the activities of their companies and hence enhance good performance. It further suggests that the performance of the Board, its Committees, individual Directors and key Executives should be reviewed regularly and the process for performance evaluation should be disclosed.
TABLE OF CONTENTS
Title
Page i
Declaration ii
Certification
iii
Dedication iv
Acknowledgements v
List
of Tables ix
Abstract xi
CHAPTER 1: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objectives
of the Study 6
1.4 Research
Questions 6
1.5 Research
Hypotheses 7
1.6 Significance of the Study 8
1.7 Scope of the Study 9
1.8 Operational Definition of Terms 9
CHAPTER 2: REVIEW OF RELATED
LITERATURE
2.1 Conceptual Framework 12
2.1.1
Corporate governance 12
2.1.2
Principles of corporate governance 12
2.1.3
Pillars of corporate governance 16
2.1.4
Development of corporate governance 17
2.1.5
Corporate governance and performance of
Nigerian firms 20
2.1.6
Different metrics of corporate
governance and their impact on
financial performance 22
2.1.7
The need for corporate governance 28
2.1.8
Challenges/ weaknesses of corporate
governance in companies in Nigeria 29
2.1.9
Institutional investors and firm
performance 30
2.2 Theoretical Framework 31
2.2.1
Theories of corporate governance 31
2.3 Empirical Review 32
2.3.1 Corporate governance and organizational
performance 33
2.3.2 Institutional investors and corporate
performance 38
2.3.3 Institutional investments and corporate
performance 42
2.3.4 Summary of literature review 44
CHAPTER 3: METHODOLOGY
3.1 Research Design 45
3.2 Area of the Study 45
3.3 Population of the Study 46
3.4 Sample Size for Sampling Technique 46
3.5 Data Collection 46
3.6 Description of Study Variables 47
3.7 Model Specification 49
3.8 Data Analysis Techniques 52
CHAPTER 4: RESULTS AND DISCUSSION
4.1 Introduction 53
4.2 Descriptive Statistics 53
4.3 Test of Hypotheses 54
4.3.1
Hypothesis 1: Board size has no significant effect on
NAPS of listed manufacturing
companies in Nigeria stock exchange 56
4.3.2
Hypothesis 2: CEO duality has no
significant effect on
NAPS
of listed manufacturing companies in Nigeria stock exchange 56
4.3.3
Hypothesis 3: Size of audit committee has no significant effect on
EPS
of listed manufacturing companies in Nigeria stock exchange 57
4.3.4 Hypothesis
4: Shareholders’ representation in audit committee has no significant
effect
on EPS of listed manufacturing companies in Nigeria stock exchange 58
4.3.5 Hypothesis 5: Institutional investments has
no significant effect on
NAPS of listed manufacturing
companies in Nigeria stock exchange 59
4.3.6 Hypothesis 6: Corporate governance
structure and institutional investment have no
significant effect on financial performance.
61
4.4
Discussion of Findings 63
CHAPTER
5: SUMMARY OF FINDINGS, CONCLUSION, RECOMMENDATIONS
5.1 Summary of Findings 66
5.2 Conclusion 67
5.3 Recommendations
68
5.4 Contribution to knowledge 70
5.5 Suggestion for Further Research 70
References 72
Appendices 84
LIST
OF TABLES
1: Descriptive
analysis of the variables 53
2: Hausman test of
the random or fixed effect of board size and
CEO duality on NAPS
54
3: Regression of
board size and CEO duality on net asset per share (NAPS) 55
4:
Hausman test of the random or fixed effect of the size of audit
committee
on EPS 57
5:
Regression of the size of audit committee (SAC) and shareholders’ 57
representation
in audit committee (SRIAC) on earnings per share 57
6: Hausman test of
the random or fixed effect of INST INV on NAPS 59
7: Regression of institutional
investment on net asset per share (NAPS)
60
8: Correlation
results of CGSII and FP 61
9: Regression result of CGSII on FP with
firm size as moderating variable 62
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND
TO THE STUDY
The
spate of corporate scandals in recent times all over the world has raised
questions about the effectiveness of corporate governance in different
organisations. In order to counter this disturbing and re-occurring trend, the
strengthening of corporate governance has been a key focus in many countries.
Recent acts, reforms and corporate governance codes such as Sarbanes-Oxley Act
2002, OECD and ICGN principles and the UK Corporate Governance Code, focus on the
effectiveness of monitoring and controlling of management decisions to ensure
good corporate governance and improve overall corporate performance.
Some
of the incidences of corporate failure include the collapse of the Enron in
2001 in US, WorldCom, Global Crossing, Rank Xerox, etc, most of which filed for
bankruptcy after adjusting their accounts. Between 2002 and 2005, several
international non-life insurers and re-insurers failed, including Mutual Risk
Management Ltd. Equitable Life Assurance Society, UK, collapsed in year 2000
because Directors of the company unlawfully used money meant for guaranteed
annuity rate policies. Skandia, Sweden’s largest insurance company and a world
leader in providing variable annuities and other savings products shook its
reputation in 2003 when three of its top executives came under investigation
for misusing corporate assets. Lion of Africa Insurance, Nigeria was also
liquidated because of board crisis. Its liabilities outweighed the assets and
could not recapitalize in 2007 (Momoh & Ukpong, 2013).
In
the global context, all countries have their own set of rules and regulations
in their particular region according to their social, political and religious
needs. Some take the form of laws, some as guidelines while some are social
norms (Yasser, Entebang & Mansor, 2011). According to Black, Jang and Kim
(2006), these rules are pre-defined in black and white to guarantee that all
the entities adhere to the same set of rules and regulations to ensure a level
playing field for all and protecting the rights of all stakeholders.
Beyond
the initial excitement and vision of setting up business entities, corporate
governance, which refers to the principles and values that guide a company in
the conduct of its day-to-day business and how stakeholders interrelate among
one another, remains key to the survival of any business.
According
to Momoh and Ukpong (2013), effective corporate governance is essential for
long-term corporate success. It is an important concept that relates to the way
and manner in which financial resources available to an organization are
judiciously used to achieve the overall corporate objective of an organization;
it keeps the organization in business and creates a greater prospect for future
opportunities.
There
are many causalities of increasing failures of going concerns in Nigeria. The
factors mostly canvassed are infrastructural challenges. The recent survey
conducted by Financial Intelligence (2013) revealed that while the harsh operating
conditions in the country may be a contributory factor to the untimely death of
many businesses, one of the major banes of indigenous businesses and indeed
some foreign ones is the absence of Best Practice Corporate Governance.
Further
evidence from Financial Intelligence (2013) confirms that corporate governance
lapses were significantly responsible for the collapse of over 70% of defunct
companies in Nigeria over the last two decades. It was found that market share;
volume of turnover and asset size were less potent relative to sound corporate
governance for the survival of a business. This perhaps informed the renewed
interest in corporate governance practices globally and the clamour is on record,
given the spate and high profile corporate failures that preceded the global
economic and financial crisis between 2008 and 2011.
One
of the most important corporate governance mechanisms is the emergence of
institutional investors. They seek to own large proportion of equities: as a
result, they have become influential on the performance of companies in which
they invest. “Institutional investors can take long term decisions that account
for the welfare of the stakeholders of companies; hence, they are being
increasingly linked to good corporate performance”. (Namazi & Salehi,
2010). Institutional investors have become increasingly willing to use their
ownership right to pressure managers to act in the best interest of
shareholders. As these investors have increased their ownership share in firms,
there has been an increased focus by regulators and researchers alike on their
role in monitoring, disciplining and influencing of corporate managers.
Shleifer
and Vishny (1997) noted that large shareholders may have a greater incentive to
monitor managers than members of the board of directors, who may have little or
no wealth invested in the firm. Since managers have little or no stake in the
companies they manage, they tend not to bear the interest of other stakeholders
at heart. Based on the above issues and questions raised, this work dwelt on
assessing the effect of corporate governance structure and institutional
investment on financial performance of quoted companies in Nigeria.
Various
gaps were noticed in previous works and the researcher contributed to the body
of knowledge by filling in those gaps. For instance, none of the previous works
used a combination of variables the way they were combined in this work (Board
size, Size of audit committee, CEO Duality and Shareholders’ Representation in
Audit Committee to represent Corporate Governance Structure). Secondly, the
researcher focused her empirical analysis on quoted manufacturing companies in
Nigeria unlike in other works that used either financial sector or a
combination of various sectors. The effect of institutional investment on
financial performance of manufacturing companies in Nigeria which has not been
assessed in Nigeria by previous researchers was also assessed by the
researcher.
1.2 STATEMENT
OF THE PROBLEM
The
repeated occurrences of business and corporate failures, in particular, past
and recent corporate collapses of large, medium and small companies across the
globe has stimulated vast academic inquiry into the efficacy of corporate
governance. Nigeria is not an exception as it records cases of corporate
failures such as Cadbury Nigeria Plc, Johnson Nigeria Limited in Ikwerre,
Afribank, Finbank, Sly Ventures Nigeria, Envoy Pillars Nigeria Ltd and many
others.
Boards of directors are expected to exhibit high
ethical standards, integrity and probity in ensuring that corporate affairs are
in line with the corporate objectives. On the contrary, most corporate
organizations in developing countries, Nigeria inclusive, are characterized by
instability of tenure of office (CEOs), interpersonal disagreements and
hostilities within the board. Board members and top management staff often take
advantage of this scenario to build empires; engage in arbitrage opportunities
and rent seeking activities rather than planning for high financial performance
and survival strategies all of which have systematic band wagon negative effect
on the organization.
Another
problem that plays down the efficacy of corporate governance and reduces sound
financial performance in turn is pressure sensitivity of institutional
investors. Cheng and Warfield (2005) in their work, stated that institutional
investors (e.g. insurance companies or banks through their trust departments)
have either existing or potential business relations with firms, and in order
to protect those relations, might be less willing to challenge management
decisions.
Agency
problem is another issue. Agency problem arises from the relationship between
the person who owns a firm (the principal) and the person who manages or
controls it (the agent). According to Adeusi, Akeke, Aribaba and Adebisi
(2013), agency problems and weak corporate governance, not only lead to poor
firm performance and risky financing patterns, but are also conducive to
macroeconomic crises. Jensen and Meckling (1976) assert that a firm value is
reduced when ownership and control are separated. Also, managers may participate
in activities that may not enhance firm value for the owners because they place
their interests above those of other stakeholders.
Ownership
concentration has also been identified as a problem in corporate governance.
Kuznetsov and Muravyev (2001) noted that concentrated ownership has its cost
when large shareholders, capable to influence corporate decision directly,
maximize value for themselves and deprive small owners of their part of
residual income.
Lack
of proper risk management and internal control has also been identified as one
of the problems hindering the good performance of corporate firms. Kumar (2005)
noted that corporate governance is one of the major factors that cause the
crisis and it is due to failure of different aspects of corporate governance
such as risk management system, transparency and disclosure.
In
addition to the above mentioned problems, Fama and Jensen (1983) detect that
internal directors, by virtue of their positions, possess much more
information, are likely to collude with managers and make decisions against
shareholders. This is a problem of irresponsibility by the board which affects
the wellbeing of the board and the company as a whole.
The
consequences of not finding effective, efficient and lasting solution to the
above corporate problems are expected to have devastating effect on corporate
entities. For instance, due to either familiarity threat or self-interest
threat by the pressure-sensitive institutional investors, they will overlook
serious management flaws they are supposed to raise and seek address to,
thereby leading to bad corporate governance.
Secondly,
agents of the company (BODs) may not be concerned about the long-term financial
prospects of the company and therefore, will seek to make decisions that will
achieve short-term goals so as to receive annual bonuses.
Thirdly,
when ownership is concentrated on few people that own majority voting rights,
they may only work towards their interests, neglecting the interests of
minority shareholders.
The
need to proffer solution to the above problems is the main trigger for this
research.
1.3 OBJECTIVES OF THE STUDY
The
main objective of this study is to determine the effect of corporate governance
structure and institutional investment on the financial performance of quoted
manufacturing companies in Nigeria.
Specifically, the work intends to achieve the following objectives;
1.
To determine the effect of Board Size
(BSize) on Net Asset per Share (NAPS) of listed manufacturing companies in
Nigeria.
2.
To evaluate the effect of Chief Executive
Officer Duality (CEO duality) on Net Asset per Share of listed manufacturing
companies in Nigeria.
3.
To ascertain the effect of Size of Audit
Committee (SAC) on Earnings per Share of listed manufacturing companies in
Nigeria.
4.
To evaluate the effect of Shareholders’
Representation in Audit Committee (SRIAC) on Earnings per Share (EPS) of listed
manufacturing companies in Nigeria.
5.
To evaluate the effect of Institutional
Investment on Net Asset per Share (NAPS) of listed manufacturing companies in
Nigeria.
6.
To determine the effects of Corporate
Governance Structure and Institutional Investment on the Financial Performance
of listed manufacturing companies in Nigeria.
1.4 RESEARCH QUESTIONS
In
order to make an in-depth, systematic and scientific study of our topic of
interest, the following research questions were addressed.
1.
To what extent does Board Size affect Net
Assets per Share of listed manufacturing companies in Nigeria?
2.
To what extent does Chief Executive
Officer Duality (CEO duality) affect Net Assets per Share of listed
manufacturing companies in Nigeria?
3.
What is the effect of the Size of Audit
Committee (SAC) on Earnings per Share of listed manufacturing companies in
Nigeria?
4.
To what extent does Shareholders’ Representation
in Audit Committee (SRIAC) affect Earnings per Share of listed manufacturing
companies in Nigeria?
5.
What is the effect of Institutional
Investment on Net Asset per Share of listed manufacturing companies in Nigeria?
6.
To what extent do Corporate Governance
Structure and Institutional Investment affect the Financial Performance of listed
manufacturing companies in Nigeria?
1.5 RESEARCH HYPOTHESES
This
study will test the following hypotheses.
H01: Board Size does not significantly affect the
Net Asset per Share of listed manufacturing companies in Nigeria.
H02: CEO Duality has no significant effect on Net
Asset per Share of listed manufacturing companies in Nigeria.
H03: Size of Audit Committee does not have any
significant effect on Earnings per Share of listed manufacturing companies in
Nigeria.
H04: Shareholders’ Representation in Audit Committee has no
significant effect on Earnings per Share of listed manufacturing companies in Nigeria.
H05: Institutional Investment Structure has no
significant effect on Net Asset per Share of listed manufacturing companies in
Nigeria.
H06: Corporate Governance Structure and Institutional Investment do
not have any significant effect on the Financial Performance of listed
manufacturing companies in Nigeria.
1.6 SIGNIFICANCE
OF THE STUDY
This
research work is quite significant and resourceful to a wide spectrum of
beneficiaries. Some of them are as stated herein with the form of benefit they
are likely to gain.
Members
of boards of different companies that come across this work will gain more
insight on how to effectively discharge their duties to enhance the efficient
running of their companies. They will be able to bridge the gap between owners
and managers, protect shareholders’ interests, make important decisions and
employ management team to obey relevant laws and statutes.
Government
institutions that invest in companies will learn how to use their block or
major shareholdings to influence and monitor the companies positively in such a
way that owners of few shareholdings will have their wealth maximized.
Major
shareholders, mainly institutional investors, having greater incentive to
monitor managers than members of the board will be informed on how to use their
opportunity and resources to monitor, discipline and influence managers.
Shareholders
generally will understand how to use their shareholdings to manipulate and
influence the affairs of their companies. To achieve wealth maximization among
other interests, they will learn how to make proper use of their voting rights.
Students
and researchers will find this work very useful in broadening their knowledge.
Students can make reference to this work when they need to get more information
about different corporate governance structures and how they can be manipulated
to achieve corporate success for corporate bodies.
Researchers
can seek to delve into other areas as relating this topic after studying this
work as a basis. They can also go ahead to add more flesh to the work and come
out with a better contribution to the existing body of knowledge.
1.7 SCOPE
OF THE STUDY
This
work contains an in-depth study of corporate governance structure and how it relates
and impacts on financial performance. Also, the effect of institutional
investment on performance of corporate bodies has also been assessed in this
work.
This
study was conducted in Nigeria. Data used for analysing the work were collected
from selected manufacturing companies in Nigeria. Manufacturing sector was
selected because only few researchers on related topics have attempted using
the sector as at the time of writing this thesis.
This
work covered the period of 2010 through 2015, i.e., 6years. The selection of
this period was due to more economic and overall stability in the period than
in other periods.
The
major variables selected for this study are corporate governance structure,
institutional investment and financial performance. Corporate governance
structure and institutional investment (% of institutional investment in a
company’s total investment) are independent variables while corporate
performance is a dependent variable.
Under
corporate governance structures, we have the following proxies: Board size
(Bsize), Size of Audit Committee (SAC), Chief Executive Officer Duality (CEO
duality) and Shareholders Representation in Audit Committee (SRIAC). For
Financial Performance, we have Earnings per Share (EPS) and Net Assets per Share
(NAPS).
To
get a vast perspective of the topic of this study, various works from previous
researchers both within and outside Nigeria where studied and referenced.
1.8 OPERATIONAL
DEFINITION OF TERMS
Corporate Governance:
corporate governance implies rules and regulations that ensure that a company
is governed in a transparent and accountable manner such that the enterprise
survives and meets the expectation of its shareholders, creditors and
stakeholders (Osuagwu, 2013). Adekunle and Aghedo (2014) wrote in their work
that corporate governance is all about running an organization in a way that
guarantees that its owners as stakeholders are receiving a fair return on their
investment. It is the process of a virtuous circle that links the shareholders
to the board, to the management, to the staff, to the customer and to the community
at large (Clarkson & Deck, 1997).
Corporate Governance Structure:
A Governance structure identifies the distribution of rights and responsibilities
among different participants in the corporation (such as the board of
directors, managers, shareholders, creditors, auditors, regulators and other
stakeholders) and includes the rules and procedures for making decisions in
corporate affairs.
Financial Performance:
financial performance is the results of a firm’s policies and operations in
monetary terms. These results are reflected in the firm’s return on investment,
earnings per share, price/earnings ratio, etc.
Institutional Investment: This is the act of pooling money together by
an institutional investor to purchase securities, real property and other
investment assets.
Institutional Investors:
Institutional investor is a term used for entities which pool money to purchase
securities, real property and other investment assets or originate loans.
Institutional investors include banks, insurance companies, pensions, hedge
funds, investment advisors, endowments and mutual funds. They can also be
referred to as the big guys on the block- the elephants. They are the pension
funds, money managers, mutual funds, insurance companies, investment banks,
commercial trusts, endowment funds, hedge funds, and some hedge fund investors.
Institutional investors are entities that
specialize in investing, mainly in shares and bonds. There are several types of
institutional investor.
Insurance companies: The
funds of insurance companies come from insurance policy premiums and life
assurance premiums. Until the money is needed for payment to the insurance
policy holders, it is invested.
Mutual funds: Mutual funds are funds of many
individual investors, who invest relatively small amounts of money in the fund.
The investments of the many different individuals are combined and invested
collectively. In the UK for example, the main types of mutual funds are unit
trusts and Open-Ended Investment Companies or OEICs.
Pension funds: These institutions hold funds that will
be used to provide pensions to individuals after their retirement. Pension
funds may be sponsored by an employer, or may be private pension schemes of individuals.
Until the money is needed to pay a pension, it is invested to earn a return.
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