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
1.0 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.
1.2 Statement of the Problem
In Nigeria, several bank crises,
inefficiencies, and eventual distress are linked to the ownership
structure of such banks. This is mainly the consequence of management
shareholder conflict or agency conflict. Specifically while shareholders
want long term Maximization, managers self interest is in the
maximization of their compensation and power (larger enterprises).
Furthermore, the agency problem in bank governance arises because of
considerable information asymmetry between shareholders and managers and
uncertainty about strategic decisions. In respect of the former,
managers have a lot more information than shareholders have about the
organisation, which makes it difficult for the shareholders to determine
if the organisation is being governed in their interests.
Distinct indices of agency problems
include executive pay that is not related to performance, decisions that
might increase the power of executives but which disregard the
long-term interests of the company, excessive diversification where no
value is added, and paying too high a price for acquisitions, Gupta, et
al (2007). Despite the volume of empirical evidence, there has been no
unanimity on how to resolve the problem. The lack of consensus has led
to a variety of mechanisms on how to deal with the problem of agency.
These include promoting managerial share ownership, encouraging
ownership concentration, and discouraging government ownership. The
government and regulatory authorities have continuously encouraged the
restructuring of ownership structure of banks to enhance efficiency and
profitability as one way of dealing with the problem. The uncertainty
surrounding the outcome of these options may have further made banks
vulnerable to decline in profits, due to existing uncompetitive
ownership structure. The plan by the CBN in its reform agenda to limit
government’s ownership in any bank to a maximum of 10 percent may not be
unconnected with the Apex banks’ belief that ownership of financial
institutions matter. Besides, the possible impact of initial public
offers, conversion to Plc, and mergers on ownership structure and the
subsequent impact on the operating performance of companies, is an issue
which has not received sufficient conclusive empirical attention in
Nigeria. The consequences of these ownership restructuring exercises on
the ownership structure and its impact on bank profitability are the
major issues addressed by this thesis.
1.3 Objectives of the Study
The overall objective of this study is to
evaluate the effect of equity ownership structure on the operating
performance of commercial banks. Specifically the objectives of the
study are:
- To determine the nature of the relationship between Managerial ownership structure and operating performance of Nigerian commercial banks.
- To find out the influence of concentration of shareholding on the Operating performance of Nigerian commercial banks.
- To determine the impact of ownership mix on the operating performance of Nigerian commercial banks.
In addition to the above, the study
considered the influence of other bank specific determinants of
performance such as banks’ capitalization, the size of banks, the age of
Nigerian commercial banks and the number of bank branches, and
financial leverage.
1.4 Research Questions
The following research questions provided robust guides for solving the problems under investigation.
- What is the nature of the relationship between Managerial Ownership Structure and operating performance of Nigerian banks?
- In what ways does concentration of shareholding affect operating performance of Nigerian banks?
- What is the impact of ownership mix on the operating performance of Nigerian Commercial Banks?
- The influence of bank capitalization, the size of banks, and the age of Nigerian commercial banks on the operating performance of Banks in Nigeria, were considered as control and explanatory variables.
1.5 Research Hypotheses
The following hypotheses were tested in this study.
- There is no positive and significant relationship between Managerial ownership structure and bank operating performance.
- Concentration of shareholding does not result to positive and significant impact on bank operating performance.
- Ownership mix has no positive and significant impact on bank performance.
The variables included and the
relationship indicated, were chosen on the basis of their role in
explaining operating performance of banks , their role in banking
theory, their use in previous studies, and the availability of relevant
and usable data.
1.6 Significance of the Study
The banking sector is currently
undergoing phenomenal structural changes as a result of the ongoing
reforms in the banking sector. The first phase of this reforms demanded
that banks shore up their capital base to a minimum of 25billion Naira
on or before 31st December 2005. According to the CBN, the
new capitalization level would foster consolidation of the banking
industry through mergers and acquisitions.
The recapitalisation requirement
compelled most of the banks to seek fresh capital through the capital
market. The capital market has since then been inundated by banks quest
to outgrow each other.
Accordingly, the significance of this study includes:
- The advantage that this study will provide to bank owners regarding the impact of public issues on shareholding mix and concentration, which in turn will assist them, consider alternative finance options.
- Regulatory and oversight bodies like the Securities and Exchange Commission, Nigerian Stock Exchange, etc will profit from this work in the sense that the outcome will assist them create a better regulatory framework that will protect the interest of capital market stakeholders, especially minority interests.
- This work will also provide an empirical evaluation of claims by the monetary authorities that bank distress is connected to an uneven ownership structure,which according to the proponents promotes weak corporate governance.
- The outcome of this study will grant bank stakeholders to evaluate the impact of various corporate governance mechanisms on profitability.
- Next to these are potential investors who will be better armed to invest in IPO’s, public offers, or seasoned equity offerings.
- The study will be beneficial to the original owners, who will now be armed with the information on the consequences of dilution of ownership structure on operating performance.
- The academic community and researchers at large will also benefit since this study is perhaps the first attempt, at correlating ownership structure and performance, after the conclusion of the first phase of banking reforms in Nigeria.
1.7 Scope of the Study
This study covers a period of ten years,
from 1998 to 2007. The choice of the time frame requires an explanation.
The new civilian regime came on board by the middle of 1999.
The first full financial year after the
new government was in year 2000. Following section 9 of the Banks and
Other Financial Institutions Act (BOFIA) 1991 as amended, which requires
the Central Bank of Nigeria (CBN) to determine from time to time the
minimum paid-up capital of banks, two different capitalisation
thresholds were set for banks. Banks licensed with effect from 2001 were
required to provide a minimum paid up capital of two billion Naira
while the banks existing before then were expected to shore up their
capital base to ten billion Naira by the end of 2002. Efforts were made
by banks to satisfy these requirements. As at December 2004, six (6)
banks had not met that requirement. Other significant developments took
place in the banking sector of the economy which includes bank distress,
its resolution, introduction of code of corporate governance for banks
and the recapitalisation directive issued by the Central bank of
Nigeria. The study focused on banks that are currently quoted on the
Nigerian stock exchange provided that their two year post quotation
operating performance were available latest by 2007. This is to enable
us to fully study the impact of ownership structure on the operating
performance of the concerned banks. These reasons explain the cut-off
point used in this study. A total of eighteen banks out of the presently
quoted twenty one banks met the study requirements and were included in
the study.
1.8 Limitations of the Study
The major limitation of this research was
financial constraints. A considerable fortune was committed to this
work especially with regard to data gathering and assembling of
literature review materials via the internet. Access to some secure
internet sites, like Elsevier and Science Direct could not be obtained
due to prohibitive access charges.
Connected to this is the time limitation,
as the work had to be completed within a specified time frame.
Nevertheless, research visits were made to Lagos, Abuja, and Onitsha to
gather available data in respect of the sampled banks. Another research
constraint is that complete data could not be obtained in respect of
variables for the entire period of the study, even when efforts were
made to access vital data from regulatory authorities like the
Securities and Exchange Commission and the Nigerian Stock Exchange.
1.9 Definition of Terms
Active/Efficient Monitoring Hypothesis
This hypothesis suggests that block
shareholders have incentives to monitor and influence management
appropriately in order to safeguard their considerable investment.
This monitoring role of the external
block investor(s) lower direct agency conflicts with the management by
reducing the scope of managerial opportunism.
Alignment of Interest Hypothesis
This hypothesis was coined by Jensen and
Meckling (1976) to portray the synergy that would result from the
convergence of the interests of agents and principals in a public
corporation. The hypothesis proposes that an organisation’s corporate
goals would be advanced, as reflected by enhanced performance, where
there is alignment or convergence of interests. The hypothesis further
argues that managerial share ownership can reduce managerial incentives
to consume perquisites, expropriate shareholders wealth and to engage in
other non-maximizing behavior.
Autocorrelation
Auto correlation exists in multiple
regression analysis, when the economic data generating process is such
that errors in a linear regression model are correlated.
Corporate Governance
The OECD (1999) defines corporate
governance as “the system by which business corporations are directed
and controlled. The corporate governance structure specifies the
distribution of rights and responsibilities among different participants
in the corporation, such as, the board, managers, shareholders and
other stakeholders, and as well spells out the rules and procedures for
making decisions on corporate affairs. By doing this, it also provides
the structure through which the company objectives are set, and the
means of attaining those objectives and monitoring performance.” Some
academic researchers, such as Shleifer and Vishny (1997), define
corporate governance more broadly as “… ways in which suppliers of
finance to corporations assure themselves of getting a return on their
investment,” whereas the Financial Times advances a more
practical definition by stating that it “[…] can be defined narrowly as
the relationship of a company to its shareholders or, more broadly, as
its relationship to society.
Dummy Variable
These are explanatory variables that take
one of two values, usually 0 or 1. They are used to capture qualitative
characteristics of firms, gender, etc.
Emerging Stock Market
This is a stock market located in a
developing country that is included in the current major database of the
International Financial Corporation (IFC) of the World Bank. The
criterion for inclusion is related to an increase in market
capitalisation which must have reached a minimum threshold. The time of
emergence is defined as the first date at which an index is computed.
The term emergent market was coined by the IFC in 1981. The IFC defined
it as a market located in a developing country. Using the World bank’s
definition, this includes all countries with a GNP per capita, less than
$8,625 in 1993.The IFC (1995) states that although IFC has no
predetermined criteria for selecting an emerging market for IFC index
coverage, in practice most markets added have had at least 30 to 50
listed companies with market capitalization of US $1billion or more and
an annual trading value of US $100Million or more at the start of IFC
index coverage.
Entrenchment Hypothesis
The entrenchment hypothesis is the
alternate hypothesis to the convergence of interest hypothesis. It
propounds that agent, represented by managers in a public corporation,
as a result of separation of owners and management will indulge in
excess perquisite consumption, which will hurt operating performance. It
further suggests that rather than promote performance, managerial share
ownership may have adverse effects on agency conflict between
management and share ownership. They argue that instead of reducing
managerial incentive problem, managerial share ownership may entrench
the incumbent management team, leading to an increase in managerial
opportunism.
Flippers
Flippers are temporary investors who purchase shares at the IPO and quickly turn around to sell their shares.
Holding Period Return
This is the return measured from the
closing market price on the first day of public trading to the market
price on the 3 year anniversary.
Initial Public Offer
Initial public offering (IPO) is the
first sale of stock by a private company to the public. IPOs are often
issued by smaller, younger companies seeking capital for expansion. It
can also be done by large privately-owned companies expecting to have
their shares publicly traded on the stock exchange market.
Issue by Prospectus
This is a means of raising capital
whereby the company extends an open invitation to the investing public,
through the medium of an issuing house, to subscribe to the issue. The
invitation is usually by means of advertisement in the national dailies
which incorporates detailed prospectus on the issue.
Managerial Self Interest Hypothesis
This hypothesis contends that the
possibility of losing employment if the company should fail places a
responsibility on risk-averse managers to lower unemployment risk by
ensuring continued viability of the firm.
Market Capitalisation
This refers to the value of a firm as determined by the market price of its issued ordinary shares.
Micro minority Controlled Banks
This refers to banks whose substantial
outstanding shares are held by closely knit units like families and
institutional investors. They are otherwise called family owned banks.
Offer for Sale
This is a means of raising capital which
involves an open invitation to the public. The difference here however
is that unlike in an issue by prospectus, the issuing house is the
principal rather than the agent of the issue. The offer for sale is also
incorporated in a prospectus and widely advertised in national
newspapers.
Ownership Concentration
This refers to the distribution of shares
owned by a certain number of individuals, institutions or families.
Ownership concentration measures the influence or power of shareholders
as well as their peculiar incentive mechanisms and preferences.
Ownership Mix
Ownership mix is related to the identity
of the owners. It further refers to the presence of certain institutions
or groups such as government or foreign partners, among the partners.
Ownership mix highlights the identity of shareholders as well as their unique incentive mechanisms and preferences.
Ownership Structure
This refers to the ownership concentration and ownership mix, with respect to majority shareholding.
Private Placing
This is an approach used by unquoted
companies or in supplementary issues to increase their capital base.
Usually institutional investors are contacted to acquire the securities.
The minimal legal formalities and low floatation costs is a major attraction for the use of this avenue.
Stock Exchange Introduction
Stock Exchange introduction is a means of
obtaining quotation of a security as no extra capital is raised in the
process. Once the correct fees are paid and other listing requirements
met then the introduction is normally allowed
REQUEST FOR PROJECT MATERIAL
Good Day Sir/Ma,
WARNINGS!
PLEASE make
sure your project topic or related topic is found on this website and
that you have preview the abstract or chapter one before making payment.
Thanks for your interest in the research
topic. The complete research work will cost you N2000 and we will send
the material to you within 24hours after confirming your payment.
Make the payment of N2000 into any of the account
number below and we will send the complete material to you within
24hours after confirming your payment.
Account Name: Agada Leonard E
Account No: 2070537235
Bank: UBA
Or
Account Name: Agada Leonard E
Account No: 3049262877
Bank: First Bank
Or
Account Name: Agada Leonard
Account No: 0081241151
Bank: Diamond Bank
After payment, send the following information to us through this email
address: enemsly@gmail.com
Topic paid for:
Amount Paid:
Date of Payment:
Teller No or Transaction ID:
Name of Depositor:
Depositor Phone Number:
Email address:
NOTE: The material will be forwarded to the email address you provided
within 24hrs after confirmation of the payment.
Thanks.
Agada Leonard E.
For: Enems Project.
For more information visit our contact page @ CONTACT US
No comments:
Post a Comment