EFFECT OF CORPORATE GOVERNANCE ATTRIBUTES ON THE EARNINGS OF QUOTED CONSUMER GOODS MANUFACTURING COMPANIES IN NIGERIA

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ABSTRACT

This work examines the effect of the corporate Governance Attributes on earnings of quoted consumer goods of manufacturing companies in Nigeria. Specifically the study set out to achieve the following objective: to examine the effect of  the board size on earnings per share (EPS) of consumer goods manufacturing companies in Nigeria; to investigate the effect of the board independence on Earnings per share (EPS) of consumer goods manufacturing companies in Nigeria; to determine the effect of the Audit Committee Size on earnings per share (EPS) of consumer goods manufacturing companies in Nigeria and to examine the effect of the frequency of board meetings on earnings per share (EPS) of consumer goods manufacturing companies in Nigeria. Data for the study were extracted from the annual reports of the selected quoted manufacturing firms. The Hypotheses were subjected to statistical test using the Hausman Test and Panel Technique of the multiple regression analyses methods. A significant outcome of the study is that corporate Governance attributes have positive and significant relationship with the earnings of quoted consumer goods manufacturing companies in Nigeria. Specifically, Board meetings, Board independence, Board size all have positive relationship with earnings per share of the quoted consumer goods manufacturing companies. However, the relationship of Board independence, though it was positive, it was also insignificant. Furthermore, the size of the audit committee had negative and insignificant relationship with earnings of the quoted consumer goods manufacturing firms. A major implication of these findings is that compliance with code of corporate governance as issued by regulatory authorities will support enhanced the Earnings of Manufacturing companies in Nigeria. Accordingly, the study recommends among other things that Quoted Manufacturing companies in Nigeria should be encouraged to comply with code of corporate governance since it enhances their Earnings. Conclusively, the study has shown that the right application of corporate governance attributes in Nigeria will be of immense benefit to all corporate stakeholders.  





TABLE OF CONTENTS

Title Page                                                                                                                    i

Declaration                                                                                                                 ii

Certification                                                                                                               iii

Dedication                                                                                                                  iv

Acknowledgements                                                                                                    v

Table of Contents                                                                                                       vi
List of Tables                                                                                                              x

Abstract                                                                                                                      xi

 

 

CHAPTER 1: INTRODUCTION                                                                            1

 

1.1       Background to the Study                                                                                1

1.2       Statement of the Problem.                                                                                      3

1.3       Objectives of the Study                                                                                  4

1.4.      Research Questions                                                                                       5

1.5       Research Hypotheses                                                                                      5

1.6       Significance of the Study                                                                               5

1.7       Scope of the Study                                                                                          7

1.8       Limitations of the Study                                                                                 7

1.9       Operational Definition of Terms                                                                    8

 

CHAPTER 2: REVIEW OF RELATED LITERATURE                                     9

2.1       Conceptual Framework                                                                                  9

2.1.1     Concept of corporate governance                                                                                                                              11

2.1.2    History of corporate governance in Nigeria                                                  11

2.1.3    Code of corporate governance for public companies

(manufacturing companies) in Nigeria                                                           13

2.1.3.1 Application of the codes                                                                                 14

2.1.3.2 Responsibilities of the Board of Directors                                                     14

2.1.3.3 Duties of the board                                                                                         15

2.1.3.4 Composition and structure of the board                                                         16

2.1.3.5 Executive directors                                                                                         16

2.1.3.6 Non-executive directors                                                                                 17

2.1.3.7 Independence of directors                                                                              17

2.1.3.8 The audit committee                                                                                       18

2.1.3.9 Code of ethics                                                                                                 20

2.1.4    Principles of corporate governance                                                                22

2.1.5    Corporate governance attributes and earnings.                                              23

2.1.6    Board size and earnings of firms                                                                    25

2.1.7    Board independence and the earnings of firms                                              28

2.1.8    Frequency of board meetings and the earnings of firms                                30

2.1.9    Audit committee size and earnings of firms                                                   31

2.1.10  The concept of firm`s earnings and its measurement                                    32

2.2       Theoretical Framework                                                                                  33

2.2.1    Agency theory                                                                                                34

2.2.2    Stakeholder theory                                                                                          35

2.2.3    The shareholder and stakeholders models of governance                              37

2.2.3.1 The shareholder model                                                                                   39

2.2.3.2 The stakeholder model                                                                                   42

2.2.4    Stewardship theory                                                                                         44

2.2.5    Resources dependency theory                                                                        45

2.3       Empirical Studies                                                                                           46

2.4       Summary and Gap in Literature                                                                     58


CHAPTER 3: METHODOLOGY                                                                         60

3.1       Research Design                                                                                 60

3.2       Population of the Study                                                                                 60

3.3     Study Area                                                                                          60

3.4       Sample Size Determination                                                                            61

3.5       Sources of Data                                                                                               61

3.6       Measures of Operational Variables                                                                62

3.6.1    Dependent variables                                                                                       62

3.6.2    Independent variables                                                                                    62

3.7       Conceptual Module                                                                                        62

3.8       Model Specification                                                                                       60

3.9        Apriori Expectation                                                                                       63

3.10     Data Analysis Method                                                                                                63

 

CHAPTER 4: DATA PRESENTATION AND ANALYSIS                                 65

4.1       Descriptive Data Analysis                                                                              65

4.2       Panel Unit Root Test                                                                                      67

4.3       Panel Co-integration Analysis                                                                        69

4.4       Test of Hypotheses                                                                                         71

4.4.1    Hypothesis I                                                                                                    73

4.4.2    Hypothesis II                                                                                                  75

4.4.3    Hypothesis III                                                                                                 76

4.4.4    Hypothesis IV                                                                                                 77

4.5       Discussion of Results                                                                                     74


 

CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS     82

5.1       Summary                                                                                                        82

5.2       Conclusions                                                                                                    83

5.3       Recommendations                                                                                          87

5.4       Contribution to Knowledge                                                                            88

5.5       Suggestions for Further Research Work                                                        89        References                                                                                                      90

            Appendix                                                                                                        101

 

 

 

 

 


 

 

 

LIST OF TABLES

1          Results of Descriptive Analysis                                                                      65

2          Panel Unit Root Result at Level                                                                     67

3          Panel Unit Root at First Differencing                                                             68

4          Panel Co-integration Test Result                                                                    69

5          Hausman Test Result                                                                                      73

6          Multiple regression of corporate governance indicators on

earning per share of selected companies                                                        74                   

           

 

 


 

CHAPTER 1

 

INTRODUCTION

 

 

1.1       BACKGROUND TO THE STUDY

Business firms all over the world exist to optimize profit by producing and making their products available to consumers. In achieving this profit maximization objective, the various activities, task, functions and responsibilities of the component elements of the organization must be planned and controlled. A very important feature of modern business enterprise is that of the business entity concept whereby the owners of the business are separated from the managers of the business. The owners of the business are the shareholders who constitute the Board of Directors (BOD).

 

The planning and controlling of the operations and activities of business firms revolve around what is referred to as corporate governance. Corporate governance is the call to duty on the part of the BOD who makes decisions, formulate and implement policies that guide the operations of the enterprises to safeguard the interests of the owners through transparency and accountability. The shareholders are the owners of the business based on their investments and interest in the business. In earnest, the shareholders expect satisfying yield on their investments as well as increase in their wealth overtime. As such, two important objectives are pursued by managers of business enterprises. These objectives include profit maximization and shareholders wealth maximization.

 

Following from the above, it should be noted that the attainment of these two objectives is contingent upon corporate governance effectiveness and efficiency in monitoring and controlling the operations and activities of the firm. Specifically, the corporate governance process and strategies in monitoring and controlling firms’ operations are enshrined in the internal control system, audit committee, risk management frame work, performance appraisal, board membership, rewards and compensation, and replacement of board members and management team. These including the provision of financial incentive schemes to managers, adoption of appropriate governance structure and implementation of policies to enforce sanctions for breaches of laid down rules and regulations promote the attainment of the profit and shareholders wealth maximization objectives.    

 

To a very large extent, every step and strategy adopted in the process of implementation and adherence to corporate governance principles and tenets has significant implications on corporate profitability and shareholder wealth maximization. The wealth of the shareholders comes from the profit made by the firms. For instance, dividend paid to shareholders comes from net profit and also the earnings accruable to the investors such as earnings per shares are based on the profit after tax (PAT). Hence, corporate governance efforts and strategies are geared towards cost reduction and profit maximization. When profits are optimised earnings are consequently catalysed to increase.

 

However, in many business firms in Nigeria, including manufacturing companies, profits tend to decline on yearly bases. The decline in profits therefore exerts negative influences on earnings accruable to the shareholders. Consequently, further investment, expansion and stability of these companies and the sector as a whole are threatened. A good number of research findings including Azubuike, Madugba and Okpe (2015), Golmohammadi, Ranjadoost and Cherati (2012) and Obiyo and Lenee (2011) identified poor macroeconomic policies and recession as the major causes of poor profit position of firms. However, scanty and non-concrete efforts are being carried out to evaluate the impact or implications of corporate governance on earnings capacity of manufacturing firms in Nigeria to determine how corporate governance attributes have contributed to the poor profits related by companies. This work is therefore designed to assess the effects of corporate governance on the performance of manufacturing firms in Nigeria.     

 

1.2       STATEMENT OF THE PROBLEM                                                                          

As noted in the introductory section above, the Board of Directors formulates and implements policies to guide the operations and also provide control machinery of the firms.  These constitute the elements of corporate governance. Recent trends and evidences of poor corporate performance across various economic and industrial sectors in Nigeria point to weak corporate governance in many business enterprises including manufacturing firms in Nigeria. This has exposed the fact that most corporate organizations only pay lip service to application and implementation of corporate governance principles.

 

The increasing disregard of corporate governance principles by these companies have been caused by increasing level of corruption in the private sector, unhealthy competition, weak management and capitalist syndrome. Based on these, weak corporate governance is occasioned by insider abuses, fraud cases, bloated Board Sizes, Board crisis, inability to enforce compliance to established rules as well as sanctions for breaches, among others.

 

Cases as observed here lead to distortions, instability and management inefficiencies. These are evidenced in increasing cost of operations, declining profitability and erosion of shareholders’ funds, among others. Consequently, earnings are affected. This is mainly in view of the increasing cost of operation and the difficulties of raising additional capital to fund the firms as a result of loss of investors’ confidence in the enterprises. Furthermore, previous empirical studies on the effect of corporate governance focused on the profitability and were devoted to financial institutions especially banks and other companies which were not consumer goods firms in Nigeria. These studies also covered only three to five year periods and were also conducted using simple or multiple regression technique. This creates a gap in literature on corporate governance practices by consumer goods manufacturing companies in Nigeria.

Following from the above, it therefore became pertinent to examine the effect of corporate governance on earnings of consumer goods firms in Nigeria with focus on how corporate governance affects earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria covering a ten year period (2006-2015) using modified random effects panel multiple regression technique.

 

1.3       OBJECTIVES OF THE STUDY

 

The main objective of the study is to examine the effect of corporate governance attributes on earnings of quoted consumer goods manufacturing firms in Nigeria. Specifically, the study seeks to achieve the following objectives:

      i.         To examine the effect of board size on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria.

     ii.         To investigate the effect of board independence on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria.

   iii.         To determine the effect of Audit Committee size on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria.

iv.    To examine the effect of frequency of board meetings on Earnings per share          (EPS) of quoted consumer goods manufacturing companies in Nigeria.

 

1.4.      RESEARCH QUESTIONS

            The following research questions were developed to guide this study:

      i.         To what extent does board size affect Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria?

     ii.         To what extent does board independence affect Earnings per Share (EPS) of quoted consumer goods manufacturing companies in Nigeria?

   iii.         To what extent does Audit committee size affect Earnings per share (EPS) of quoted consumer goods manufacturing firms in Nigeria?                                                 

   iv.         How does frequency of board meetings affect Earnings per share (EPS) of quoted consumer goods manufacturing companies?

 

1.5       RESEARCH HYPOTHESES

To proffer useful answers to the research questions and realize the study objectives, the following hypotheses stated in their null form were formulated:

i.                  The effect of board size on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria is not significant.

ii.              The effect of Board independence on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria is not significant.

iii.            The effect of Audit Committee size on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria is not significant.

iv.            The effect of the frequency of board meetings on Earnings per share (EPS) of quoted consumer goods manufacturing companies in Nigeria is not significant.

 

1.6       SIGNIFICANCE OF THE STUDY

The findings of this study would be of immense importance to the following groups: Management and other stakeholders of manufacturing and other corporate companies in Nigeria, shareholders of the companies; the government; regulatory agencies; researchers and other students.

 

The management:  To the management of corporate organizations in Nigeria, the findings from this study will expose them to undertake acceptable best practices which would entrench effective and efficient corporate governance towards the attainment of established corporate goals and objectives. Furthermore, it will help to re-focus them towards accountability, transparency and commitment towards their organization.

 

The shareholders: To the shareholders of corporate organization, the findings from this research study would enable them understand the need for corporate governance best practices available and how it affects the shareholders’ wealth maximization as measured by the profitability level and earnings per share (EPS)

 

The government: The government will also benefit from this study. The existing laws and regulations will be enhanced and modified to enhance corporate governance practice in corporate organizations in order to deepen their survival and growth. Obsolete laws, rules and regulations which are known to be inimical to the conduct of effective corporate governance practice would be discarded.

 

The regulatory agencies: The efforts of the government will be complemented by that of relevant regulatory agencies based on the findings of this study. Such regulatory agencies whose activities will be further enhanced by the findings of this study include Standard Organization of Nigeria (SON), Securities and Exchange Commission (SEC), Consumers Protection Council (CPC) and others, who will tap into the findings of this study to strengthen their supervisory role over corporate organization in order to safeguard and enhance best corporate practices.

 

The academic community: The study will have significant theoretical importance for academics, as it will contribute to the body of literature on corporate governance in government-owned organizations, corporate governance concepts, principles and processes, required to make informed decisions in the academic and corporate world. Also to the students, this work will propel them for further investigations, and assist them by providing the needed pedestal for further studies in corporate governance application, regulations and measurement.

 

1.7       SCOPE OF THE STUDY

The study is focused on the effect of corporate governance on the performance of quoted consumer goods manufacturing companies in Nigeria. This study considered consumer goods companies in Nigeria from 2006-2015.

 

This study covered 23 quoted consumer goods manufacturing companies listed on the Nigeria Stock Exchange (NSE) as at December, 2017. The study examines the effect of corporate governance attributes on earnings per share of manufacturing firms in Nigerian. The study focused mainly on four corporate governance variables which include board size (BS), board independence (BI) (ratio of number of non-executive directors to executive directors), audit committee size (ACOM) and  frequency of board meetings (FBM) and earnings of the manufacturing companies was measure in terms of earning per share (EPS).

 

1.8       LIMITATIONS OF THE STUDY

This study faced little or no constraints. The main limitation was insufficient data due to the unavailability of data on corporate governance attributes and earnings per share of the selected consumer goods companies for 2016 due to the unavailability of their annual reports and financial statements. This limited this study to 2015. There was also problem of insufficient funds, as this study required lots of fund in carrying it out. However, the research was able to reach out to friends and family for grants. Despite these limitations, the researcher was able to complete this study successfully.

 

1.9        OPERATIONAL DEFINITION OF TERMS

The following terms were defined in accordance with the context in which they were used in the study:

Earnings:  This typically refers to after tax net income of an organization. It is an important indicator of companies’ health and is the profit generated by company from which the shareholders’ are compensated.

Corporate governance attributes: These refers to measurable variables that represent tools, techniques and instruments through which corporate governance and accountability is expressed and ensured in an organization.

Frequency of board meetings: This is the total number of times the board held meetings in a year.

Board independence:  The ratio or proportion of non-executive directors to aggregate number of directors.

Audit committee: Audit committee represent another internal governance mechanism whose impact is to improve the quality of the financial management of a company and hence its performance. In addition, every public company is required under Section 359 (3) and (4) of the Companies and Allied Matters Act of 1990, to establish an audit committee. It is the responsibility of the Board to ensure that the committee is constituted in the manner stipulated and is able to effectively discharge its statutory duties and responsibilities. At least one board member of the committee should be financially literate (Dalton et al., 1999).

Board size: Board size is defined as the numerical strength of the membership or constitution of the board of directors in a company. It shows the full number of directors both executive and non-executive as well as foreign and indigenous directors on the board.                           



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