CORPORATE GOVERNANCE AND SHARE PRICE

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Researchers over the years have established that the performance of a board is influenced by the characteristics of the board. These characteristics include board size, CEO duality (leadership) board composition (Independence), board committees and diversity (Gender) (Christopher, 2012).

However, interest in board characteristics has grown tremendously in the past decade with the general feeling that sound financial performance excuses poor board. Corporate scandals, environmental concerns and globalization have all played their part in raising shareholders and public awareness on how companies should be governed.

The call for increased and more restrictive corporate governance mechanism in Nigeria have stemmed after the World Bank (2008) issued a report on the observance of standards and codes regarding the country’s compliance with the corporate governance regulations by the Organization for Economic Cooperation and Development (OECD) in the report, majority  of the guidelines set by  the OECD have been partially observed in Nigeria, which triggers the need to intensify the implementation of corporate governance in the country. As a result, in 2001 the Securities and Exchange Commission of Nigeria set up a committee that came up with a Code of Best Practices for public Companies in Nigeria (“The Code”) that became operational in 2003. The review of the code began in 2010 and finally became operational in March 2011.

The Code of Corporate Governance (CCG) has stated that “the essence of corporate governance is transparency disclosure”. Such transparency must be evident in the timely disclosure of information which may adversely affect the viability and interests of the shareholders. This requirement aims to strengthen the regulatory framework for Nigeria institutions wherein strict monitoring, board independence, surveillance, transparency, and accountability are of great importance.

Despite numerous research efforts on corporate governance and company performance in Nigeria, little has been done to finding out the effects of the corporate governance practices of listed Nigerian companies on one of the most obvious aspects of company affairs i.e. share price (Uwuigbe, 2013).

The recent international disasters in financial reporting including Enron and WorldCom in the US, Parmalat in Italy, the Maxwell Saga in the UK, Daewoo in Korea, Leisurenet and Regal Bank in South Africa, CADBURY and Oceanic Bank in Nigeria confirmed the growing  need for transparency in governing companies.

It was observed that good board characteristics has been evident to be associated with greater firm performance (Carcello & Neal 2003; Attiya & Robina, 2007). As seen in these studies, in any organization, the share price is the first brief pinpoint when one thinks about an indicator for the performance of a listed company. If it is on an increase, the default reaction is that things are going well in that corporation and people do buy the shares. However, if it is a decline, one may not be so sure about way the business is shaping up its operations. As observed by Klein (1998), implementing a better corporate governance practice is anticipated to improve the monitoring of management and reduces information asymmetry problems. This invariably will increase share price of the firm. 

Moreover, Samontaray (2008) prognosticated that transparency in business organizations influence, which is eventually reflected in the company’s share prices.

It is against this backdrop that this study therefore aims to find out the relationship between corporate governance mechanisms and share price among listed firms in Nigeria.

1.2   Statement of Problem

Given the circumstance mentioned above and the need to further explore the impact of board characteristics and firm performance; measured in terms of share prices, among publicly – listed holding companies in Nigeria.

1.3   Research Questions

This study attempts to find answers to the following research questions;

1.     Does the size of the board positively related to share price?

2.     Is the independence of the board related to share price?

3.     Is the CEO duality negatively related to share price?

4.    Is the board committee negatively related to share price?

5.     Is the board diversity negatively related to share price?

1.4   Objective of the Study

The following are the objectives of the study:

1.     Find out if the size of the board is positively related to share price.

2.     Ascertain if the independence of the board is related to share price.

3.     Find out if the CEO duality is negatively related to share price.

4.    Examine if the board committee negatively relate to share price.

5.     Examine if the board diversity negatively relate to share price.

1.5   Statement of Hypotheses

The following hypothesis shall be tested in the course of this study:

Hypothesis One

H_O:   The size of the board is negatively related to share price

H_I:    The size of the board is positively related to share price.

Hypothesis Two

H_O:   The independence of the board is negatively related to share price.

H_I:    The independence of the board is positively related to share price.

Hypothesis Three    

H_O:   The CEO duality is negatively related to share price

H_I:    The CEO duality is positively related to share price.

Hypothesis Four

H_O:   The Board Committee is negatively related to share price

H_I:    The Board Committee is positively related to share price.

Hypothesis Five

H_O:   The board diversity is negatively related to share price

H_I:    The board diversity is negatively related to share price

1.6   Significance of the Study

The following individuals/bodies will benefit from this study;

i.      Literature: It is expected that this study would contributes to existing literature, by providing empirical evidence on the relationship between the board characteristics and  share prices in Nigeria (Edem & Noor, 2013). The study would also facilitate or influence the examination of the effect of board characteristics and share prices behaviour and thus boosting the empirical evidence from Nigeria.

ii.     Policy makers: Given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected valuables examined in the study.

iii.    Investment analysts/investors: The result of the study would benefit investment analysts, investors and corporations in examining the influence of board characteristics and share prices behaviour. It will also be useful in stimulating public discourse given the depth of the empirical researches in this area from emerging economy like Nigeria.

1.7   Scope of the Study

This study covers all listed companies on the Nigerian Stock Exchange, in other to investigate the effect of corporate governance on firm share prices. The annual report of the selected firms for three years period between 2013 and 2015 was studied.

1.8   Limitations of the Study

The study has some limitations for firms’ auditors, investors and regulators. All these parties play an important role in improving the transparency and disclosure practices of corporations (Ali, Merve & Nizamattin, 2013). These limitations vary in different stages and form;

1.     The study was conducted solely on listed companies. The results may not be generalisable to non-listed companies (Ali, Merve & Nizamattin, 2013).

2.     The study is limited by time and data. Due to time constraint, the data and information used is not the product of primary research but are published information obtained from articles, journals and financial statements.

3.     The ability to obtain a completely random sample.

4.     Imprecise measurement of variables.

1.9   Definition of Terms

1.     Corporation: A corporation is a company or group of people authorized to act as a single entity and recognized as such in law.

2.     Corporate Governance: Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed.

3.     Governance: Refers to "all processes of governing, whether undertaken by a government, market or network, whether over a family, tribe, formal or informal organization or territory and whether through laws, norms, power or language

4.     Share: In financial markets, a share is a unit of account for various investments. It often means the stock of a corporation, but is also used for collective investments such as mutual funds, limited partnerships, and real estate investment trusts.

5.     Price: Price is the quantity of payment or compensation given by one party to another in return for goods or services.

6.     Share Price: A share price is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.

7.     Audit Committee: This is a committee that works closely with the external audit firm and generally influences the company’s control environment.