EFFECT OF CORPORATE GOVERNANCE ON PERFORMANCE OF LISTED FIRMS IN NIGERIA
Abstract
This research analyzed the effect of corporate governance on performance of listed firms in Nigeria. The study used the total sample of 70 Nigerian corporations, 50 corporations were sampled from Nigerian Stock Exchange listed corporations. Linear regression analysis was used to analyze the relationships between corporate governance internal mechanisms which constitute of board size, board independence, board gender diversity, CEO duality, board committees and ownership concentration, with financial performance. T-test was used to analyze the existence and the extent of significant differences between the mechanisms used in the Nigerian listed corporations. The findings revealed that there is a statistically significant positive relationship between corporate governance committee and financial performance of corporations. Additionally, the presence of female independent directors has a negative but minor relationship with the financial performance of corporations. All other mechanisms used in this research have a positive but weak relationship with the financial performance of the corporations. Besides, at country level it is found that the application of the mechanisms differed between Nigeria.
TABLE OF CONTENTS
TITLE PAGE - - - - - - - ii
DECLARATION - - - - - - - - iii
CERTIFICATION - - - - - - - - iv
DEDICATION - - - - - - - - v
ACKNOWLEDGEMENTS - - - - - - vi
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study - - - - - - 1
1.2 Statement of Problem - - - - - - 4
1.3 Objective of the Study - - - - - - 4
1.4 Research Questions- - - - - - - 5
1.5 Statement of the Hypothesis - - - - 5
1.6 Significance of Study - - - - - - 6
1.7 Scope of the Study - - - - - - 6
1.8 Definition of Key Terms - - - - - - 7
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction - - - - - - - - 8
2.2 Conceptual Framework - - - - - - 10
2.3 Theoretical Framework - - - - - - 18
2.4 Empirical Review - - - - - - - 31
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design - - - - - - 32
3.2 Population of the Study - - - - - - 33
3.3 Sample Size - - - - - - - - 33
3.4 Sampling Technique - - - - - - - 34
3.5 Method of Data Collection - - - - - - 34
3.6 Technique for Data Analysis - - - - - 35
3.7 Model Specification and Variable Definition - - - 35
3.8 Measurement of Variables - - - - - - 35
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation of Data - - - - - - 36
4.2 Discussion of Findings - - - - - - 39
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary - - - - - - - - 41
5.2 Conclusion - - - - - - - 45
5.3 Recommendations - - - - - - - 46
References - - - - - - - - 47
Appendix - - - - - - - - 51
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The concept of corporate governance has been in existence since time immemorial. Historical records show that corporate governance has a long trace of history from antiquity. It was documented that there exist specific corporate bodies that were established specifically to manage the activities of public affairs with a full transparency for common good in the Roman Empire (Oso and Semiu, 2021). Also the evolution of the two major religious eras in the Middle East played a role in the history of governance and religion. In 16th century, England became the most powerful trading nation with a variety of rules and regulations via regulatory authorities such as joint stock companies and Bank of England in order to govern all trading transactions with transparency, accountability, efficiency and effectiveness, and stakeholders’ satisfaction (Oso and Semiu, 2021).
Many organizations in Nigeria are driven by the need to make and move profits to the detriment of all the stakeholders. Some do not adequately respond to the need to host communities, employees welfare, environment protection and community development. (Osemene, 2021). There is now a growing need for originations to shift form the norms and begin to incorporate public interest. Companies are scrambling to find the balance between responding to consumer pressure, government mandates, and employee demands, while at the same time satisfying their investors and shareholders (Pax, 2019).
One of the primary objectives of financial reporting is to offer high quality financial information about economic entities that is useful for economic decision making. The concept of financial reporting quality has involved several researchers over the years given its significance to the accountancy profession generally and corporate reporting in particular (Ebiaghan 2020, Nelson & Shukeri, 2021; Abbott, Parker & Peters, 2021; Ika & Ghazali, 2021; and Sultana, Singh & Van der Zahn, 2015). According to International Accounting Standard Board (IASB), (2018), high quality financial reporting is critical to investors and other stakeholders in making investment, credit and similar decision. Accounting earnings is a significant and important variable of financial reporting which is usually used as a yardstick of financial reporting quality. As enshrined in the revised conceptual framework for financial reporting quality, which enhancing qualitative characteristics involving accounting information suggests that companies’ financial statements and their relevant audit reports is expected to provide a reliable input to potential investors, shareholders, creditors, employees, management, financial analysts, regulators and other stakeholders such that they do not lose their potentials of influencing the decisions of financial statements’ users. Financial reporting in general has been acknowledged as an essential area in accounting. Recognized as a very important area in accounting, the trustworthiness of financial reporting is seen to have influenced and provide reasonable assurance to a generality of users especially when financial statements (outcome of financial reporting) are audited (Hillison Watkins & Morecroft, 2021).
Financial reporting communicates aggregate methods for estimating assets, revenues, liabilities, and expenses. One of the most difficult aspects of financial report preparation is deciding which method of estimation to utilize (Aliyu, 2019). The International Accounting Standard Board (IASB) and the Financial Accounting Standard Board (FASB) frameworks, which are heavily reliant on estimates, guide fair value disclosure (IFRS 13) on asset and liability measures. These estimations are based on the market model approach managerial assumptions and are used in the reporting process. As a result, the measurement of fair value might be exploited. Fair value measurement, according to Daifei et al. (2015), allows for creative manipulation of data, such as increased asset valuations, undervaluing liabilities, and provision for losses. Corporate executives are in charge of the firm's activities, which includes wealth creation and, most crucially, the drafting of financial reports. The board's structure is critical for ensuring that investors receive the desired value, which has an impact on the objective application of the fair value measurement approach (Ian, 2020). Corporate governance is a set of financial and legal tools aimed at reducing conflicts of interest among top executives and other stakeholders (Vafeas, 2019). As a result, it is intended to protect shareholders from managers' opportunistic actions (Kyereboah et. al., 2022). Corporate governance also refers to the methods and structures used to manage and direct the affairs of institutions to increase shareholder value by improving corporate accountability and performance while also addressing the interests of other stakeholders.
In order to improve the quality of financial reports of corporate entities, audit committee monitors the preparation and presentation of such financial reports. The audit committee is a committee which comprises of members of the board of directors saddled with the responsibility to assist their respective boards in fulfilling their oversight responsibility to stockholders, potential stakeholders, the investment community and others relating to the entity’s financial statements. Obviously it is the responsibility of audit committees to maintain free and open communication between the audit committee, the independent auditors, the internal auditors and the management of Companies (Salehi & Shirazi 2016). Audit committees are recognized as an effective and efficient means through which the certainty for a fraudulent financial report could be reduced. Audit committee can also be very effective not only in carrying out their objective oversight on the financial reports on the organization, but it also gives helping hands in order to set an ethical “tone at the top” (Locatelli, 2022; Stein, 2023) for corporate entities. Traditionally, the major role of audit committees has been to examine and evaluate the integrity of the financials that are produced by the management. In recent times, this major role has extended beyond the annual financials to encompass the quarterly financial reports. Owing to this, audit committees are becoming more concerned on matters regarding to corporate reporting as contrasted with financial reporting.
According to Owolabi and Dada (2021), considering the total numbers of corporate collapses and failures, it is very important that audit committees is taken with more seriousness among corporate organizations. The audit committee serves as an intermediary between the external auditor and the board of directors; also it aids and facilitates the monitoring process by reducing information asymmetry between the external auditor and the board. In addition, Blue Ribbon Committee (2019) noted that as an important mechanism of corporate governance audit committee is responsible for the appointment of external auditors and oversees the audit process to ensure quality financial reporting. Therefore, an auditor’s independence and the quality of the financials are usually determined by the proper functionality of the audit committee.
Following the agitations to review the structures of corporate governance in Nigeria and in view of the importance attached to the institution of effective corporate governance, the Federal Government of Nigeria, through her regulatory agencies have come up with institutional arrangements to protect investors in Nigeria (Kajola, 2018). In this light, as contained in Company and Allied Matters Act (CAMA) CAP, C20, Law of the Federal Republic of Nigeria (LFN) 2021 Sec was the first attempt to provide for audit committee effectiveness. While, the second attempt was contained in the Code of Corporate Governance best practices issued by the Securities and Exchange Commission (SEC) in November, 2021. The two provisions listed above failed to help address the issue of audit committees in terms of financial expertise and hence failed to ensure quality of the financials. The failure was as a result of constant reports that surrounded the misappropriations of the financials which led to the removal of CEOs in some Nigerian banks (Ojeka, Owolabi and Kanu 2013). As at 2019 a new corporate governance code was issued with the hope of filling the gaps identified with previous codes. It is on this ground that this study sets out to ascertain the link between measures of audit committee characteristics and the financial reporting quality of companies.
1.2 Statement of Problem
There has been an increasing interest from academia as well as amongst policy makers in industrial, domestic and international government agencies, in the surge to reinforce corporate governance mechanisms to ensure that executives and directors take good measures to safeguard the interest of stakeholders of corporations (Sanda, Mikailu and Garba, 2022). Corporate governance mechanisms are very crucial to firm performance; however, to what extent the mechanisms vary from one country to another is still unclear (Filatotchev, Lien and Piesse, 2022). Corporate governance mechanisms in developing nations and some emerging market nations are the function of large block holdings and bank monitoring. The block holdings mostly resolves the free rider problems, nevertheless it is accompanied with entrenchment of the owner-manager, threat of exposure and liquidity obstacles. These in turn leads to slow improvement in capital markets and causes barriers to progress (Ararat and Orbay, 2019).
No doubt, the credibility of financial information is vital to the growth of any economy. Auditors on their part are expected to be independent and objective in the discharge of their responsibilities (Adelaja, 2019), consequent on the notion that auditors provides key assurance in protecting the varying interests of shareholders (Gallegos, 2021). However, studies have traced one of the most vexing problems in the financial world today to the roles which audit committees of firms could play, to support the work of external auditors (O’Connor, 2019; Beatties & Fearnley, 2022). The oversight function of audit committees is therefore placed under scrutiny when businesses whose financial statements once showed no indication of any failure suddenly become bankrupt.
Prior studies (De Angelo, 2020; Jones, 2019; Dechow, Sloan, & Sweeney, 2020; Ashbaugh, et al., 2023; Semiu & Kehinde, 2021; Semiu & Johnson, 2021; Umar, 2021) have been conducted to examine how audit firm characteristics may possibly affect the quality of financial reporting. Although, these studies are largely based on data from the US and European nations, thereby reflecting trends and patterns in advanced economies; it is pertinent to note that empirical evidence on the effect of audit committee characteristics on financial reporting quality have remained scarce especially as it relates to Nigerian evidence. This situation thus creates an empirical which this current study is designed to fill. In this light, this study used three measures of audit committee characteristics to investigate their effects on the financial reporting quality of listed companies in Nigeria.
1.3 Objectives of the Study
In the light of the foregoing therefore, the overall objective of the study is to examine the empirical assessment on effect of corporate governance on performance of listed firms in Nigeria.
The specific objectives are to:
i. To examine the extent to which corporate governance financial expertise significantly influence fair value disclosures of deposit money banks in Nigeria.
ii. To ascertain the extent to which corporate governance size significantly influence fair value disclosure of deposit money banks in Nigeria.
iii. To ascertain if the frequency of corporate governance committee meetings significantly impact fair value disclosure of deposit money banks in Nigeria.
iv. To investigate if corporate governance committee with more independent board members have a significant influence on Fair value disclosure.
1.4 Research Questions
Bearing in mind the aforementioned research problems and the specific objectives of this study the following research questions are raised:
i. Do corporate governance committee financial expertise significantly influence fair value disclosures of deposit money banks in Nigeria?
ii. How does corporate governance committee size significantly influence fair value disclosure of deposit money banks in Nigeria?
iii. How does the frequency of corporate governance committee meetings significantly impact fair value disclosure of deposit money banks in Nigeria?
iv. Do corporate governance committee with more independent board members have a significant influence on Fair value disclosure of deposit money banks in Nigeria?
1.5 Hypothesis of the study
In line with the objectives of this study, the following hypotheses are formulated in null form;
H01: Corporate governance committee financial expertise has no significant influence on fair value disclosures of deposit money banks in Nigeria.
H02: Corporate governance committee size has no significant influence on the fair value disclosure of deposit money banks in Nigeria.
H03: The frequency of corporate governance committee meetings has no significant impact on the fair value disclosure of deposit money banks in Nigeria.
HO4:Corporate governance committee with more independent board members has a significant influence on Fair value disclosure.
1.6 Scope of the study
This study focuses on the empirical assessment on impact of corporate governance on performance of listed firms in Nigeria. Within the context on listed companies in Nigeria. The study covers the period after the issuance of the code of good corporate governance for insurance company, from 2017-2020. This study examines the relationship between audit committee characteristics (expertise, size, frequency of meetings, and independence) and the choice of fair value disclosure among Nigeria's publicly traded deposit money banks. As a result, the goal of this research is to evaluate the relationship between audit committee characteristics (expertise, size, meeting frequency, and composition) and fair value disclosure of Nigerian listed deposit money banks. This study did not extend its scope to 2020 since at the time of gathering data in this study several firms had not made public the financial reports of 2020.
1.7 Significance of the Study
Improved Corporate Governance: This study's findings will provide insights for policymakers, regulators, and corporate leaders to improve corporate governance practices in Nigeria.
Enhanced Firm Performance: By identifying the impact of corporate governance on firm performance, this study will provide guidance for firms to improve their governance practices and ultimately enhance their performance.
Better Investment Decisions: The study's findings will provide valuable information for investors, enabling them to make informed decisions about investing in Nigerian firms.
1.8 Limitation of the Study
This study relied basically on secondary data which was obtained from 26 listed service firms in Nigeria. These companies were purposely selected because their stocks were actively traded on the floor of the Nigerian Stock Exchange during the study period. Also, companies that were not having consistent data set for all variables in the study period 2017-2021 were excluded and not included in this study sample. The generalization made therefore, may not be applicable on all the listed companies in Nigeria.
However, the above does not affect the outcome of this study because the listed companies cut across major industrial categories in the Nigerian Stock Exchange and include firms drawn from sector like conglomerate, consumer’s stables, energy, financial services, industrial goods and materials.
1.9 Operational Definition of Terms
The terms below have been defined in accordance with the context of their usage in this study.
· Audit: This is an independent examination that is carried out by qualified independent persons on financial statements or records of an entity to review the adequacy of internal control in accordance with the rules of the board or commission for the purpose of expressing an opinion on accuracy and completeness of such statements.
· Audit Committee: These are group of persons appointed by the company for the purpose of supervising the accounting and processes of the financials and stands as an intermediary between the board of directors and the external auditors.
· Fair value : Fair value is defined as "the amount for which an asset is exchanged or a liability is settled between informed parties in an arm's length transaction" by International Accounting Standard 39. (Mainoma & Adejola, 2020). As a result, the fair value might be defined as the market price at which another party is willing to buy an asset or settle a liability.
· Financial statement: can be defined as a formal documentation of all financial related activities and position of a business, person or any other entity.
· Performance: This means to carry out or compel on action by an employee or organization.
· Corporate Citizens: This is used to describe a company’s role in or responsibility towards society.
· Unethical: This means an action that is not generally acceptable by the public.
· Corporate Social Responsibility: An organization’s obligation towards the society.
· Management Perceptions; The thought of managers towards the programme of corporate social responsibility.
· Ethics: This refers to a moral principle that organizations are expected to imbibe.
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