EQUITY OWNERSHIP STRUCTURE AND OPERATING PERFORMANCE OF COMMERCIAL BANKS IN AN EMERGING MARKET: EVIDENCE FROM THE NIGERIAN BANKING INDUSTRY

ABSTRACT
This study investigates the influence of equity ownership structure on the operating performance of quoted Nigerian banks from 1998 to 2007.
A dataset on bank equity ownership structure and bank profitability, covering one hundred and eighty observations from eighteen out of the presently quoted twenty one banks was used for the study. A non probability sampling method was applied to select the banks used in the study. Overall, the study provided strong empirical validation of the link between equity ownership structure and bank’s operating performance. Using pooled cross sectional regression techniques for the entire sample for the ten-year period with ROA, ROE, and NIM/TA, as alternate measures of performance, the signs of the regression coefficients and their significance levels are almost consistent across the different measures of profit. The results challenge many of the widely held opinion concerning the impact of equity ownership structure on bank profitability. First, there is no discernible or systematic relationship between directors’ equity ownership structure and bank profitability. The results remained robust to alternative measures of operating performance. Further analyses of the sub sample provided limited evidence supporting the alignment or convergence of interest hypothesis propounded by Jensen and Meckling (1983). Secondly, the results are not consistent with the theoretical framework evidenced in the earlier work of Sanda, et. al. (2003), that ownership concentration enhances corporate performance and differed significantly from the empirical work of Adenikinju et. al. (2003). This intriguing result suggests that, though the Nigerian banking industry is highly concentrated, with only five percent of the shareholders controlling two out of every three shares in the industry, it does not result to superior returns on total assets or shareholders equity. This unusual result has been attributed to the events that shaped banks operations during the study period, especially the bank recapitalization exercise. Banks’ total assets and capitalization increased significantly during this period without sufficient commensurate investment windows to enhance their profitability. In addition, the results give confirmation to the fact that mutual and equity investment trusts are not well established in Nigeria. The result of the relationship between ownership mix and bank profitability yielded mixed results. The coefficient of government equity holding is rightly signed, indicating that with government equity holding in Nigerian banks at approximately four per cent,` the theoretical negative expectation is confirmed by this study. Again, this result indicates that there is negative, rather than a positive impact of foreign equity ownership on bank profitability. However, the alternative estimation method used in the study, yielded a rightly signed relationship between equity ownership of foreigners and bank profitability. This confirms generally accepted belief that foreign direct investment has significant and positive impact on the economy.
The result supports the apex bank’s policy of limiting government’s equity interest in any bank to a maximum of ten per cent.

The study recommends policy initiatives that would fast track the growth and development of institutional investors in Nigeria as well as enhancement in corporate governance practices to sustain the financial health of the banking sector.

CHAPTER ONE
INTRODUCTION
1.1 Background of The Study
The relationship between equity ownership structure and firm operating performance has become a vital issue in understanding the effectiveness of alternative corporate governance mechanisms. Since the seminal work of Bearle and Means (1932), the notion that the characteristics of a firm’s ownership can affect operating performance of the firm has received considerable attention in recent literature (Cornett et al, 2008; Barros et al, 2007; Micco et al, 2007; Cornett et al, 2007; Iannotta et al, 2007; Wang, C, 2005; Cho, 1998; Hermalen and Weisbach, 1991; and McConnell and Searves, 1990).

There is consensus these among empiricists that the role of ownership structure in shaping the operating performance of firms is more pronounced in developing countries than in developed countries, as a result of the relatively undeveloped structure of the capital market in emerging economies (Kim, et al, 2004; and Wang, 2005). This submission appears to have informed the continuous efforts by governments in emerging economies to encourage the reorganisation of corporate ownership structure for enhanced efficiency and effectiveness. In Nigeria, this restructuring has taken the form of indigenization, divestiture of government holding, privatisation, conversion to public limited liability company and subsequent quotation on the Nigerian stock Exchange. Ownership structure covers both the ownership mix and ownership concentration. The broad spectrum of ownership encompasses government, institutions, management, individuals, and foreigners. The ownership mix will ultimately have consequence on managerial behaviour and corporate performance.

Ownership concentration refers to the degree to which ownership of a firm revolves around a few closely knit people or otherwise. The implication is that the higher the percentage of shareholding in the hands of one or a few dominant shareholders, the higher the concentration and vice versa. There are realistic reasons for the departure of ownership structure from the small diversified shareholding structure recommended by economic theory, especially where legal protections are weak. Dyck (2000) posits that ownership concentration and ownership structure in general can fill the gap by providing the functions of corporate governance, enhance the fulfilment of promise, management monitoring and lower costs of resolving competing claims.

Claessens et al. (2000), for example examined corporate ownership in East Asian firms and found that owners exert significant control over their firms which is not surprising given that managers and owners are often the same people. This is likely the same scenario in Nigeria, where original owners by arrangement still retain significant control over their firms even after public offers.

Again, as a result of the relatively undeveloped market structure in emerging markets, the degree of information asymmetry among participants is usually high; thus granting influential manager-owners greater latitude to engage in and act upon their desires.

Hence, significant managerial ownership in a developing economy may support both managerial alignment effects and entrenchment effects.

Jensen and Meckling, (1976) posits that agency costs will be mitigated as a result of the existence of significant managerial ownership.

The higher degree of information asymmetry between managers and outside shareholders in an emerging market compels a greater need for alignment of managerial interests with shareholders interest.

Accordingly, the study investigated the relationship between bank equity ownership structure and bank operating performance, using Nigerian commercial banks.

Again, paraphrasing Alchian (1965), how does it happen that millions of individuals are willing to turn over a significant portion of their wealth to organisations run by managers who have so little interest in their own welfare? What is even more astonishing is that they are willing to make these commitments as residual claimants, that is, on the expectation that managers will operate the firm so that there will be earnings which accrue to the shareholders. The residual claimants here connote the income that will come to the shareholders, after other prior claims have been settled.

The emphasis in this thesis is the banking sector. This is because of our firm belief in the critical role of this sector of the economy. The banking sector is strategically important to all sectors of the economy. Consequently, the desired overall development of the country demands that the sector remains healthy. This will translate to good returns to all stakeholders in the industry. Besides, the recent history of the banking industry in Nigeria makes it an attractive laboratory to examine the impact of equity ownership structure on bank operating performance. In particular, the cycle of boom, bust and distress syndrome which necessitated the recent recapitalisation programme readily comes to mind. Another issue that makes a study in this sector relevant is the active and well regulated corporate control mechanism in the banking sector. This has developed to the extent that corporate governance expectations have been codified by the Central Bank of Nigeria. The code, among other things, emphasizes that good corporate governance rests ultimately with the board of directors. A list of practices and omissions considered unethical/unprofessional as well as procedures and sanctions for redressing them are amongst its significant highlights.

Perhaps more importantly, it is worthwhile to note that the banking firm has significant differences with respect to corporations in other economic sectors and this justifies a special academic interest in its governance challenges. For instance, banks face a clear conflict of interest arising from differences between the interests of shareholders and the interest of depositors. While shareholders are willing to encourage stakes in high –risk projects that increase share value at the expense of deposits, the depositors, if anything, are interested in the security of their deposits. This becomes especially important in this study, as IPO’s and other means of ownership restructuring frequently result to significant heterogeneous shareholding structure, which can impact board membership and managerial selection......

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Item Type: Ph.D Material  |  Attribute: 201 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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