ABSTRACT
The study investigated the impact of shareholders’ value creation on performance of the Nigeria banking industry. The study was carried out for the period 1997 to 2016 and multiple regression analysis was used for data analysis. Return on assets (ROA) was used to measure bank performance. Based on the results, it was found that shareholders’ value has a negative and significant impact on bank performance in Nigeria. Stock market ratio had a negative and in insignificant impact on bank performance while the impact of leverage ratio was found to be insignificant. Hence, the need to monitor overall banking operations, protecting the assets of the firm, and holding executive directors and managers accountable to the firms’ key stakeholders to ensure the survival, sustainability, and growth of Nigerian banks was recommended.
Table of contents
Title page i
Dedication ii
Acknowledgements iii
Declaration iv
Certification v
Table of contents vi
Abstract ix
CHAPTER ONE
INTRODUCTION 1
1.1
Background to the Study 1
1.2
Statement of Research
Problem 4
1.3
Objectives of the Study 5
1.4
Research Questions 5
1.5
Research hypotheses 6
1.6
Significance of the Study 6
1.7
Scope of the Study 7
1.8
Limitation of the study 7
1.9
Operational definition of
terms 8
CHAPTER TWO
REVIEW OF RELATED
LITERATURE 9
2.1 conceptual framework 9
2.1.1 Concept of value creation (VC) 10
2.1.2 Value creation and corporate restructuring 12
2.1.3 Rationale
of banking sector restructuring in Nigeria 16
2.1.4 Determinants
of value creation 17
2.1.5 The
significance of value 18
2.1.6
Profitability as a determinant of value creation 20
2.1.7
Dividend policy as a determinant of
value creation 20
2.1.8 Financial policy as a determinant of value
creation 21
2.2 Theoretical
framework 23
2.2.1 The value-increasing theory 23
2.2.2 Consolidation models 25
2.3 Empirical literature 27
CHAPTER THREE
RESEARCH METHODOLOGY 34
3.1 Research Design 34
3.2 Area of study 34
3.3 Source of data collection 34
3.4 Method of data analysis 35
3.5 Model Specification 36
CHAPTER FOUR
PRESENTATION OF DATA, ANALYSIS AND DISCUSSION 38
4.1 Presentation
of Data 38
4.2 Descriptive statistics 39
4.3 Presentation of results and discussion of
findings 39
4.3.1 Regression analysis 39
4.3.2 Correlation analysis 41
4.3.3 Test of hypotheses 41
4.3.4 Discussion of
findings 42
CHAPTER FIVE
SUMMARY OF
FINDINGS 43
5.1 Summary of Findings 43
5.2 Conclusion 43
5.3 Recommendations 43
References 45
Appendices 48
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The banking sector in any nation,
play a very important role. They are the bedrock of the economy of a country.
The economies of all market-oriented nations depend on the efficient operation
of complex and delicately balance systems of money and credit. Banks are an
indispensable element in the socio-economic growth of any nation. They provide
the bulk of the money supply as well as the primary means of facilitating the
flow of credit. Consequently, it is submitted that the economic well being of a
nation is a function of advancement and development of her banking industry (Iyoha,
Ojeka & Ogundana, 2017).
In recent
times, especially after the bank consolidation exercise of 2004-2005, the
intensity of competition in the Nigeria banking market has increased
tremendously. The focus of competition appears to have gradually shifted from
the pursuit of deposits (in the money market) to the pursuit of equity (in the
capital market). In 2007, the banking sector alone floated 25 new issues out of
the total 76 for all sector of in the capital market in that year. Besides, between
2006 and 2008, Nigerian banking stocks have been the most actively traded in
the daily market. With 21 out of the existing 24 banks publicly listed, the
market has become more competitive and the banks are increasingly interested in
creating shareholder value (that is, supplying a satisfactory remuneration to
shareholders) so as to succeed in their pursuit of equity capital. Between 2006 and 2007, there has been a huge
increase in the market price of shares and market capitalization rate of most
banks. What is not yet clear are: the factors that drive this increase in market
prices of shares holder value.
Value can simply be defined as the quality
that renders something desirable or valuable or useful; the amount of money
needed to purchase something; or what must be given or done or undergone to
obtain something. Consequently, the creation of value by a firm translates to
increase or enhancement of the worth of its stakeholders. To the stakeholder,
this may mean greater appreciation, more power or stronger political
relationship, improvement in social standing or greater contentment. In this
study, however, the focus is on the factors, which determine the creation of
value for the shareholders of a firm. Based on this foregoing argument, value
creation can, therefore, be defined as the increase in the financial worth of
shareholders, as measured by ratio of market value of shares to the book value
of shares, engendered by the performance of an organization (Pandey, 2002).
Organizations seek to improve performance
and create value in terms of additional wealth for their shareholders and
increased satisfaction to their customers and other stakeholders. To achieve
this objective, they employ different types of performance management systems.
As a result, recent decades have seen a plethora of new management approaches
for improving organizational performance. Koller (2004) however observes that
while many of these performance management systems have succeeded, many others
have not. He argues further that “the cause of failure was often performance
targets that were unclear or not properly aligned with the ultimate goal of
creating value”.
In their own opinion, Echebarria and
Barrutia (2009) describe the unsuccessful performance management systems as “fractional
approaches to business realities”. That is why they are no longer effective in
a world where the organizational environment has become progressively more complex.
Therefore, in order to approach business realities with more appropriate and
realistic measures, organizations must take the concept of Value Creation (VC)
very importantly. Value creation is a renewed approach to business management
which pursues the creation of shareholder value through the delivery of value
to customers and business associates (Echebarria and Barrutia, 2009).
In order to create value, therefore,
the management of the organization needs to know how to identify, select and
segment the markets in which to compete; define the kind of value to be
proposed on the market; and create and supply such value (Echebarria and
Barrutia, 2009). The implication of this is that the firm seeking to create
value must generate return in excess of the cost of capital over a period of
time (Favaro, 2008). In other words, the firm must earn a positive economic
profit such that when expenses and a capital charge are deducted from the
revenue generated, the balance will be greater than zero. In summary, value
creation occurs when the company generates more wealth for their shareholders
that they could not have been able to generate for themselves (Van, 2002).
1.2 Statement of the
Problem
The rate of business failure in
Nigeria as a result of bankruptcy is worrisome considering their socio-economic
effect on the nation. The causes of such failure, according to Krehmeyer
(2006), are excessive short-term strategies which undermine market credibility
and discourage long term value creation and investment. The consequences of
institutional failure on economic growth and sustainable development are unbearable
to a developing country like Nigeria. This affect the level of confidence the
public has in various corporate establishments. The consequences of ineffective
corporate governance will not only affect the shareholders but also, the
employees, suppliers, consumers and the nation as a whole. Thus, a governance
system that will promote ethical value, professionalism and sound management
practice is desirable.
The civilian government inaugurated
in 1999 inherited a fragile and vulnerable banking system, which was
characterized, by low capitalization and inability to effectively support the
real sector and stimulate economic growth (Obadan, 2007). The banks, in fact,
became risky, with many having suffered financial distress and bank failure as
a result of non-performing loans. The post consolidation assessment of the
Nigerian banking industry has also shown that as at October, 2008, some of the
consolidated banks had begun to show serious signs of liquidity strain and had
to be given some level of financial support in the form of expanded discount window
(EDW) by the Central Bank of Nigeria (CBN). This suggests that the
consolidation exercise of 2005 may not have yielded the expected results as
most of the problems, which existed in the industry before the consolidation
exercise, are still there. The existence of all these problems could only mean
that Nigerian banks have been operating below the anticipation of stakeholders
(shareholders, customers, employees, etc.). In other words, they have not been
creating any significant value for their shareholders.
It is
against this background that this study is anchored to investigate the impact of
value creation on the performance of the Nigeria banking industry.
1.3 Objectives of the
Study
The main objective of this study was to examine the impact of shareholder value creation on the
performance of the Nigeria banking industry.
The specific objectives are:
i.
To ascertain the impact
of shareholders’ value on the performance of banks
ii. To
determine the impact of stock market ratio on the performance of banks.
iii.
To ascertain the impact
of leverage ratio on the performance of banks
1.4 Research Questions
The
following research questions guided the study:
i.
To what extent does shareholders’
value impact on the performance of banks?
ii. To
what extent does stock market ratio impact on the performance of banks?
iii. To
what extent does leverage ratio impact on the performance of banks?
1.5 Research Hypotheses
This
study was anchored on the following hypotheses, (stated in null form),
generated from the objectives and research questions:
H01: Shareholders’
value has no significant impact on the performance of banks
H02: Stock
market ratio has no significant impact on the performance of banks
H03: Leverage
ratio has no significant impact on the performance of banks
1.6
Significance of the Study
This study would be important and useful
to the following:
1. This
research will be of immense benefit to Nigerian banking and industrial sectors.
This study is invaluable for the following reasons: firstly, the study will
enable strategic managers in the banking industry to understand the status and
trend of the competitive business environment and better strategies to adopt
for added value creation.
2. The
small and medium scale enterprises (SMEs) will equally find the outcome of this
study as a veritable tool for successful business prowess and give them a
competitive edge in the market.
3. Also,
this study will serve as a structure for future researchers and people who will
have interest in this subject and who will wish to use it as reference to their
study.
1.7 Scope of the Study
The
research work was carried out in
Nigeria banking industry from 1997 to 2016. The
basis for 1997 is to cover the pre-merger and post merger banking era in
Nigeria. The study was limited to the use of data collected from CBN
statistical bulletin.
1.8 Limitations of the Study
This study was
limited by both limited time and the stress of sourcing for relevant data for
the study. However, the researcher will work very hard to project a result that
can be relied upon.
1.9 Operational Definition of Terms
1. Value can simply be defined as
the quality that renders something desirable or valuable or useful; the amount
of money needed to purchase something; or what must be given or done or
undergone to obtain something.
2. Shareholders’
value (SV)
is the value delivered to shareholders because of management's ability to grow
earnings, dividends and share price. In other words, shareholder
value is the sum of all strategic decisions that affect the firm's ability to
efficiently increase the amount of free cash flow
over time. Shareholder value is measured by the ratio of the market value of
shares to the book value of shares:
SV
= Market Value of Shares
Book Value of Shares
3. Price-Earnings Ratio (PER) is
the ratio for valuing a company that measures its current share
price relative to its per-share earnings.
The
price-earnings ratio can be calculated as:
Market Value per Share
/ Earnings per Share
For
example, suppose that a company is currently trading at $43 a share and its earnings
over the last 12 months were $1.95 per share. The P/E ratio for the stock could
then be calculated as 43/1.95, or 22.05.
4. Stock market ratio
(SMR): These ratios give an indication of how investors perceive
the company; it’s past performance, future prospects, etc. The performance of
the company's shares in the stock market is crucial from shareholders’ point of
view and management as well. In some organizations top management bonus are
linked to the share price in the stock market.
5. Book
Value Per Share
This
ratio represents the equity of the firm on a per share basis and is sometimes
used as a benchmark for comparison with the market price per share. The focus
is on how close market value is to book value. If the stock price is very close
to book value or below book value, then the stock is a “buy,” as downside risk
is viewed as negligible.
Thus
book value is viewed as a conservative estimate of the firm’s value.
Book
value of shares = Total Shareholders Equity
Total
No of Ordinary Shares
A leverage ratio
is any one of several financial measurements that look at how much capital
comes in the form of debt (loans), or assesses the ability of a company to meet
financial obligations. The most well known financial leverage ratio is the debt-to-equity
ratio.
It is expressed as: Total
debt / Total Equity
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