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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Item Type: Project Material | Size: 205 pages | Chapters: 1-5
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