ABSTRACT
The problem of how firms choose
and adjust their strategic mix of financing securities and the impact such mix
has on corporate performance has called for attention and debate among
corporate financial experts. This is so because the choice made should
ordinarily aim at improving firm value. This is however not always so, as existing
literature show that the owners of firm and managers of such firm might have
different objectives. Most observers have the belief that the difficulty facing
firms in Nigeria has much to do with financing and management issues; that is
choosing the appropriate mix of debt and equity and then who manages what.
These issues are quite important to the survival of firms and as such require
further empirical investigation. Notably also, Nigerian stock market is still
developing, and so are the standards and practices of corporate governance, so
it is of interest to assess whether the agency and information problems usually
studied and found in more active markets have also a bearing on the functioning
of a much thinner one, like ours. It was against this background that we
decided to examine the impact of capital structure, ownership and corporate
governance on firm performance, using a sample of fifty five non-financial
quoted companies from five sectors only, operating in Nigeria from 1994 to
2013. The study adopted ex-post facto design and time series data analysis. The
target population of the study was all the non-financial quoted companies in
the Nigerian Stock Exchange, and then a stratified non-probability sampling
technique was used to identify firms. Panel data for the selected firms were
generated and analysed using descriptive and multivariate regression, as method
of estimation. The result obtained indicates that leverage level of quoted
firms in Nigeria has a significant positive or negative impact on performance,
depending on the measure of leverage adopted. Ownership structure also has a
significant impact on firm performance in Nigeria, though the individual effect
of the various explanatory and control variables are generally mixed. Moreover,
corporate governance variables measured by firm board size and firm board
composition was found to have significant positive impact on firm performance,
whereas CEO-Chair duality has negative but not significant impact on
performance. The study concludes then, that the position of the Chief executive
officer of a company in Nigeria and that of the Board chairman should be
separated and occupied by different persons, to reduce agency problem. Nigeria
should also encourage diverse ownership of shares, as concentrated ownership,
contrary to free-riders notion may negatively impact on performance, due to
their undue influence on the managers of firms.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY:
Capital structure, sometimes known as financial
plan, represents the proportionate relationship between the various long-term
form of financing, such as debentures, long-term debt, preference capital and
common share capital, including reserves and surpluses (retained earnings). In
other words, capital structure in financial term means the way a firm finances
its assets through the combination of equity, debt, or hybrid securities (Saad,
2010). How an organisation is financed is of paramount importance to both the
managers of firms and the providers of funds. This is because if a wrong mix of
finance is employed, the performance and survival of the business enterprise
may be seriously affected. Consequently, it is being increasingly realized that
a company should plan its capital structure to maximize the use of the funds,
improve performance and to be able to adapt more easily to changing conditions
(Hovakimian et al, 2004; Margaritis and Psillaki, 2010).
From the extant literature, corporate financing decisions are quite
complex processes and existing theories can at best explain only certain facets
of the diversity and complexity of financing choices. It has been emphasized in
some literature for instance that the separation of ownership and control in a
professionally managed firm may result in managers exerting insufficient work
effort, indulging in perquisites, choosing inputs or outputs that suit their
own preferences or otherwise failing to maximize firm value (Fama and Jensen,
1983; Demsetz and Villalonga, 2001 and Frijns et al, 2008). There is however, a
general consensus that the structure of corporate ownership matters because it
determines the incentives and motivation of shareholders related to all
activities and decisions occurring in the firm. Ownership structure is also an
important internal mechanism of corporate governance. In economic terminology,
the ownership structure affects the agency costs, and hence the firm’s value
(Jensen and Meckling, 1976; Davies et al, 2005 and Wahla et al, 2012). In the
same perspective, corporate governance is important concept that relates to the
way and manner in which financial resources available to an
organization are judiciously used to achieve the overall corporate objective of
an organization. Corporate governance exists to provide checks and balances
between shareholders and management and thus to lessen agency problems. In
other words, it represents an important effort to ensure accountability and
responsibility in an organisation (Imam and Malik, 2007; and Uwalomwa, 2012).
Capital Structure, in general is largely attributed to the early work of
Modigliani and Miller (1958). In their seminal paper, Modigliani and Miller
postulate the irrelevance of capital structure for corporate value, based on
certain assumptions. These include: absence of taxes, absence of bankruptcy
risk, efficient and integrated capital markets. For them, under perfect market
assumptions, it is not the source of capital that increases the firm value, but
the assets that the capital finances. The cost of different capital sources
varies in a non-independent manner. Hence, there is no reason for an
opportunistically switch between equity and debt.
This restrictive hypothesis of Modigliani and Miller, has however, been
punctured by numerous consequent studies aimed at showing an existing
dependence between financial choices and corporate value. In other words, the
conditions making one capital structure better than the other hence optimal are
successively debated. Thus, corporate financing decisions are analysed in the
presence of corporate tax (Modigliani and Miller, 1963), income tax (Miller, 1977),
bankruptcy costs (Titman, 1984), agency costs (Jensen and Meckling, 1976;
Myers, 1977), and Information asymmetry (Myers, 1984). From these perspectives,
the external financing has costs and advantages whose consideration is
necessary.
In Nigeria, financial constraints and insider abuse have been the major
factors affecting corporate firms’ performance. According to Salawu and Agboola
(2008), the move towards a free market, coupled with what they called widening
and deepening of various financial markets has provided the basis for the
corporate sectors to optimally determine their capital structure. The overall
target of this is to improve corporate performance for the benefit of the
stakeholders. Firm performance generally is an important concept that relates
to the way and manner in which financial resources available to an organization are judiciously used to
achieve the overall corporate objective. It aims at keeping the organization in
business and creates a greater prospect for future opportunities.
Most Nigerians as noted by Ogebe et al, (2013) are of the opinion that
corporate decisions are mostly dictated by managers and board of directors.
Equity issues are often favoured over debt in spite of debt being a cheaper
source of fund; and when debts are employed, it is usually on the short term
basis, which tends to have a mixed effect on firm performance. This action
could be attributed to the manager’s tendency to protect his job and avoid the
pressure associated with debt commitment. This entire scenario and the like
require further investigation through empirical study, to establish the fact.
In line with this, the main focus of this study is to examine the impact
of capital structure, ownership and corporate governance on performance across
different industrial sectors of quoted companies operating in Nigeria. In other
words, we shall examine the theories that emphasize the importance of leverage
in agency conflicts, as well as the importance of ownership and corporate
governance in the determination of the firm’s capital structure policy and
their effect on firm performance (as in Jensen and Meckling, 1976; Champion,
1999; Myers and Majluf, 1984; Faulkender and Petersen, 2006; Ganiyu and
Babalola, 2012; Agyei and Owusu, 2014).
The issue of corporate performance has of
late attracted more attention in the corporate world more than ever before as
can been seen both in the print and electronic media. Reasons for this renewed
interest are however not farfetched. In the first instance, corporate scandals,
coupled with economic downtown around the world in recent years, contributed
mostly in raising awareness among stakeholders, investors and regulators, on
the need to ensure better and sustained performance of corporate
organisataions. In order to achieve this feat, efforts are under way in many
countries, including Nigeria to produce better empirical measures and or review
strategies on corporate investment, ownership and governance and to estimate
their impact on the value and decision-making process of firms. Along this
line, subsequent researchers such as Hassan and Butt (2009); Warokka et al
(2011); and Uwuigbe (2013) had thus called for an intensified focus on the existing
corporate governance structures, and how they ensure accountability and
responsibility.
This study builds on this line of research by providing empirical
evidence from Nigerian quoted companies on the impact of capital structure,
ownership and corporate governance on firm performance. Notably also, Nigerian
stock market is still developing, and so are the standards and practices of
corporate governance, so it is of interest to assess whether the agency and
information problems usually studied and found in more active markets have also
a bearing on the functioning of a much thinner one, like ours. Indeed, the
recent crash of Nigerian Stock Market has shaken investors’ faith in the
capital markets and efficacy of corporate governance practices. The Nigerian
stock market for instance, emerged as one of the world’s best performing stock
market in 2007 with a return of 74.73%. However, by 31st December,
2008, it earned a less enviable record as one of the world’s worst performing
stock market in 2008, after losing about N5.7Trillion in market capital and 47%
in the NSE All Share Index (Yahaya et al, 2011).
Equally relevant, is the issue of privatization of public enterprises
and divesture of shares by government. This programme which started in 1987 and
the second phase in 1993/94, deals with strategy for reducing
the size of government and transferring assets and service functions from
public to private ownership. This study will further help to understand the
effect of that programme, especially in relation to ownership, management and
performance of quoted companies involved in the programme.
Notably then, the problem of how firms choose and adjust their strategic
mix of securities and the effect such mix has on corporate performance has of
late called for a great deal of attention and debate among corporate financial
literature. This is so because the choice made should ordinarily aim at
improving firm value. This is however not always so, as existing literature
show that the owners of firm and managers of such firm might have different
objectives. In other words, conflicts of interest between owner’s manager and
outside shareholders, as well as those between controlling and minority
shareholders have been the subject of debate in corporate literature (Driffield
et al, 2006). Most observers have the belief that the difficulty facing firms
in Nigeria has much to do with financing and management issues; that is
choosing the appropriate mix of debt and equity and then who manages what. These
issues are quite important to the survival of firms and as such require further
empirical investigation.
Theoretical evidence exists in the
corporate finance literature, on the interactions between capital structure,
ownership structure and corporate governance on firm value (Mahr-Smith, 2005
and Magaritis et al, (2010). Yet theoretical arguments alone cannot
unequivocally predict these relationships. Moreover, the available empirical
evidence, in the literature was carried out mostly with the data obtained in
other developed and few emerging economies. This necessitates the need to use
data obtained locally to verify their applicability in a developing economy
like Nigeria. Based on the information available to us, the few empirical works
in this area in Nigerian firms that are available centred mainly on capital
structure and firm performance, and not much on the interrelationship between
capital structure, ownership/corporate governance and firm performance. Other
firm-specific factors that affects cross variability of capital structure are
also not given fair treatment in most of these studies. For instance, a similar
work by Onaolapo and Kajola (2010) concentrated only on capital structure and
firm performance without recourse to ownership structure, the same with the
recent work by Lawal et al (2014). Similarly, an
unpublished thesis by Ani Wilson (2009), in Banking and Finance Department,
UNEC focused mainly on firms in financial service sector, specifically on the
Commercial Banks. This study targets at bridging the gap by providing new
evidence on the relationship between capital structure and diverse ownership
and governance structure and corporate performance, using mainly accounting
firm-level data from Nigerian quoted companies. More specifically, we firstly
assess the effect of leverage on firm performance as stipulated by the Jensen
and Meckling, 1976 agency cost model. We consider explicitly the effect of
equity ownership structure and corporate governance on both capital structure
and firm value (Hasan and Butt, 2009). We further consider the effect of
separation of ownership from control and management on firm value/efficiency as
in Bryan et al (2006) and Margaritis and Psillaki (2010). In addition, we shall
consider also the issue of reverse causality from performance to capital
structure, as in Warokka et al, (2011). Moreover, we shall consider the main
source(s) of capital for firms in Nigeria, as well as other factors that
determine their capital structure.
To address this, some of the pertinent
questions we may ask, include: Does the leverage level of a firm have any
significant impact on its performance in an emerging economy such as Nigeria,
secondly would a more concentrated and mix ownership structure lead to better firm
performance, thirdly what influence does ownership structure and corporate
governance have on the firm’s performance, fourthly what effect does
performance of a firm has on capital structure decisions, and lastly, do
firm-specific factors that affect cross-sectional variability of capital
structure in other countries have similar effects on Nigeria firms’ capital
structure?. These questions and the like are addressed empirically in this
research study.....
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