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ABSTRACT
This study investigated corporate governance practices and return on assets employed of listed firms in Nigeria. Specific objectives include to find out the relationship between the components of corporate governance and return on Assets, and to ascertain the relationship between components of corporate governance and stock returns. Secondary data collected from companies listed in Nigerian Stock Exchange in a 7-year period from 2000 to 2007. In order to evaluate each hypothesis, multivariate regression models have been used in this study. Evidence emanating from the study shows some level of concurrence in the response of different measures of profitability to selected proxies for corporate governance. The result shows significant negative impact of capital adequacy ratio (CAR) and liquidity ratio (LQR), at 10 per cent and 5 per cent significant levels respectively, on return on assets (ROA). These results do not conform to a priori expectations and are indications of lax corporate governance. They indicate maintenance of sub-optimal (inadequate or excess) levels of liquidity which impairs profit performance. Therefore it was recommended that the regulatory authorities (CBN, NDIC, SEC) should diligently exercise their oversight functions to ensure strict compliance with extant regulations on corporate governance so as to consolidate, or possibly, improve on the gains of the initiative.
TABLE OF CONTENTS
TITLE PAGE – – – – – – – – – i
DECLARATION – – – – – – – – – ii
CERTIFICATION – – – – – – – – – iii
DEDICATION – – – – – – – – – iv
ACKNOWLEDGEMENT – – – – – – – – v
ABSTRACT – – – – – – – – – – vi
TABLE OF CONTENTS – – – – – – – – vii
CHAPTER ONE
INTEODUCTION
1.1 BACKGROUND OF THE STUDY – – – – – 1
1.2 STATEMENT OF RESEARCH PROBLEM – – – – 5
1.3 PURPOSE OF THE STUDY – – – – – 7
1.4 RESEARCH QUESTIONS – – – – – 7
1.5 RESEARCH HYPOTHESES – – – – – 8
1.6 SIGNIFICANCE OF THE STUDY – – – – 8
1.7 SCOPE OF THE STUDY – – – – – – 9
1.8 LIMITATIONS OF THE STUDY – – – – – 9
1.9 DEFINITION OF TERM – – – – – – 10
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 CONCEPTUAL FRAMEWORK – – – – – 13
2.1.1 CONCEPTUAL ISSUES IN CORPORATE GOVERNANCE – 13
2.1.2 PILLARS OF CORPORATE GOVERNANCE – – – 15
2.1.3 ADVANTAGES OF CORPORATE GOVERNANCE – – 21
2.1.4 RETURN ON ASSETS (ROA) – – – – – 23
2.2 THEORETICAL FRAMEWORK – – – – – 24
2.2.1 AGENCY THEORY OF BUSINESS ESPOUSED BY JENSEN &
MECKLING (1976) – – – – – – – 24
2.3 EMPIRICAL EVIDENCE – – – – – – 25
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN – – – – – – 29
3.2 POPULATION OF THE STUDY – – – – – 29
3.3 SAMPLE/SAMPLING TECHNIQUES – – – – 29
3.4 INSTRUMENT OF DATA COLLECTION – – – – 30
3.5 MODEL SPECIFICATION – – – – – – 30
3.6 DATA ANALYSIS AND TECHNIQUES – – – – 32
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 INTRODUCTION – – – – – – – 33
4.2 DATA PRESENTATION – – – – – – 33
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY OF FINDINGS – – – – – – 39
5.2 CONCLUSION – – – – – – – – 39
5.3 RECOMMENDATION – – – – – – 40
BIBLIOGRAPHY – – – – – – – 41
CHAPTER ONE
INTRODUCTION
1.2 BACKGROUND OF THE STUDY
Corporate governance is a system that improves agency problems between managers and shareholders.According to the survey stock crash of companies such as Adalfa. Enron, Tyco and worldcom was largely due to weak governance (Deakin and Knolzelmann, 2004). The establishment of an effective governance system makes the interest of managers and owners to be in the same line (Fama andJensen, 1983) operational performance to be improves and firms to grow and spread(Shleifer and Vishny 1997)
Corporate governance refers to the control of corporate policy through the power legally vested in a group or groups of people to chart a course of action to be followed by an organization in areas of fundamental importance to its survival, prosperity and proper functioning
It encompasses the move of structure, the power that determines the rights and responsibilities of the various groups involved in running the organization, the legitimate expectation of the business, the method ofoperating and the overall accountability of management and of the directors.
The concept of corporate governance looks at the best approach to solve the problem of adverse selection and moral hazard attendant on principal-agent issues. According to Senbet and John (1998) corporate governance involves how all stakeholders in the from attempt to ensure that managers and other insiders adopt mechanism that safeguard the interests of the stakeholder.
In recent times, the terms stakeholder has been accorded a broader perspective; it goes beyond its traditional treatment as shareholders to include employees; creditors; government and others, for instance; environmental.
Corporate governance is the system by which organization are directed and controlled. It’s a set of relationship between company directors, shareholders and other stakeholder (Murithi2009) corporate governanceis also defined as an internal system encompassing policies, processes and people, which serve the needs of shareholders and other stakeholders by directing and controlling management activities with good business savvy, objectivity, accountability and integrity(Mangunyi 2011) corporate governance has, in more recent years, become one of the most commonly used terms in the modern corporation.
The practices of good corporate governance has therefore be a necessary prerequisite for any corporation to be manage effectively in the globalize market.
The term ”corporate governance” is relatively new terminology used in both public and academic debates although the issues it addresses have been around for much longer in the last the decades. However a corporate governance issue has become important not only in the academic literature, but also in public policy debates. During this period, corporate governance has been identified with takeovers, financial restructuring and institutional investors activism Ross, Shleifer and Vishny (1973)define corporate governance by stating that it deals with the ways in which supplies of finance to corporations assure themselves of getting a return on their investment.
Return on Assets (ROA) is an indicator of how profitable a computer is relative to its total assets ROA gives a manager, investor, or analyze an idea as to how efficient a company’s management at using its assets to generate earning. Return on assets is displayed as a percentage and it’s calculatedas:ROA+Net Incone/ Total Assets.
In basic terms, ROA tells you what earnings were generated from invested capital (assets) ROA tor public companies can vary substantially and will be highly dependent on the industry.This is why when using ROAas a comparative measure, it is best to compare it against a company’s previous ROA number or against a similar company’s ROA.
Remember that a company’s total assets are the sum of its total liabilities and shareholders equality bothof these types of financing the used in find the operations of the company. Since a company’s assets are either funded by debt or equity, some analysis and investors disregard the cost of acquiring the asset by adding back interest expense in the formula for ROA.
Return on assets gives an individual of the capital intensity of the company, which will depend on the industry; companies that require large initial investments will generally have lower return on assets ROA over 5%are generally considered good.
Without doubt,we can say that proper management of the company allows achieving high levels of performing increase return on assets) for the entity. The structure of the board, as the most important aspect of corporate governance, has a great impact on the performance of the board and thus firm performance (fama & Jensen, 19983). It is worth nothing that the situation in hand, as a developing countries that their current laws and practices provides less protection of shareholder and creditors and the range in the classification of Laporta etal (1998).
Corporate-governance mechanisms assure investors in corporations that they will receive adequate returns on their investments Shleifer and Visny 1997). If these mechanisms did not exist or did not function properly. Outside investors would not lend to firm or buy their equity share securities. As thus, business would be forced to rely entirely on their own internally generated cash flows and accumulated financial resources to finance ongoing operation as well as profitable investment opportunities. Therefore the overall economic performance likely would suffer because many good business opportunities would missed and financial distress at individual firms would spread quickly to other firm’s employees and consumers.
1.2 STATEMENT OF RESEARCH PROBLEM
Generally, well-governed firm are expected to have higher profits, less bankrupting risk, higher valuations and pay out more cash into their shareholder while reverse holds for poorly-governed firm (Kyereboah=Coleman and Btekpe, 2016) several studies have established the importance of good corporate governance to enhanced firm performance(Sanda etal. 2005; Adenikinju and Ayanrinde 2001, Adelegan, 2007; Magbagbeola; 2006 Brown and Caylor, 2005; Core Rusticus 2005 etc) Conversely, several others have established the impotency of some corporate governance precepts (Demset 2 and Lehn, 1985, core etal 2005, Adenikinju 2005 and Chidambaran et al 2007) hence yielding conflicting observations. This ` notwithstanding works on corporate governance are still few in Nigeria.
It is a fact that the objectives pursued by shareholders and corporate managers tend be differing and contributing with regards to their own interests; consequently this has nurtured the conception of a wide spectrum of approaches and processes ensuring that conflicting interest spill over one minimized. One of the compromises that have been given birth to address. This divergence is corporate governance.
At its very root, according to some researchers Harris and Raviv 2008; Larcker, Richardson and Tuna,(2007). The theoretical platform on which foundations of corporate governance is built, is Neale and as such finds itself deprived of any theoretical base. Previous researchers have been only concentrating on Banking and other services industries thereby ignoring other sector. Therefore, the need to examine corporate governance practices and return on assets employed of a listed firm in Nigeria
1.3 PURPOSE OF THE STUDY
The main aim of this study is to examine corporate governance practices and return on assets employed of a listed firm in Nigeria specific objectives includes.
1. To find out the relationship between the components of corporate governance and return on Assets.
2. To ascertain the relationship between components of corporate governance and stock returns.
1.4 RESEARCH QUESTIONS
In order to achieve the above objectives, the following questions will be answered:
1. To what extent does the component of corporate governance affects the return on assets employed by Nigeria forms.
2. How does the components of corporate governance affects stock return of Nigeria firms
1.5 RESEARCH HYPOTHESES
Based on the theoretical foundation and literature, the hypotheses have been proposal as follows.
Ho1: There is no significant relationship between the components of corporate governance and return on assets.
Ho2: There is no significant relationship between the components of corporate governance and stock returns.
1.6 SIGNIFICANCE OF THE STUDY
The treasury would identify how various aspects of corporate governance practices affect the operations of various firms in Nigeria as well as determine the extent to which this and other factors affect operations of firms. They would also identify the impediments that face firms in approaching various corporate governance practices that affects their return assets.
The policy makers would obtain knowledge of the various, from dynamics and the responses that are appropriate; they will therefore obtain guidance from this study in designing appropriate practices that would regulate the shareholders participation in affecting the financial performance of the firms in Nigeria. The study will enable the future researchers and academicians to identify gaps, which have never been covered by the previous researchers, as well as serve as a source reference material l for further studies.
1.7 SCOPE OF THE STUDY
The focus of this study is to employed panel data methodology to provide evidence on the relationship between corporate governance practices and return on assets employed of a listed from in Nigeria. The study observes the most recent financial period of some of the non-financial companies listed on the Nigeria stock exchange in a 7-years period from 2006 to 2012
1.8 LIMITATIONS OF THE STUDY
There is no research work without limitations, despite the explicit and brilliant work intent for this research work, certain factor however, limits the original aims intended.
There are lots of constraints in the gathering of information of this research work but the major constraints are as follows:
TIME: In report to the theoretical and practical work the time allowed for project was limited besides there was carried out with other academic assessments.
FINANCE: Due to high rate of academic fees, I could not be able to carry out research with easy as I was planned.
1.9 DEFINITION OF TERM
ACCOUNTING SCANDAL: An event of an accounting nature that causes public outrage or censure such as the understatement of profit, overstatement of assets.
AQENCY: Fiduciary relationship between two parties in which one the (“agent”) is obligated to the other (the “principal”)
AUDIT COMMITTEE: It is a body formed by a company’s board of directors to oversee audit operations and circumstance besides evaluating external audits reports, the committee may evaluate internal audit reports as well.
BEARISH: A stock market situation characterizes by falling stock-method prices.
BOARD OF DIRECTORS: A board of director is a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of trustees, board of governors, board of managers, or executive board.
BULLISH: A stock market situation characterized by using stock market prices.
CONPORATE GOVERNANCE: Is the set of process, customs, policies, laws, and institutions affecting the way of company is directed, administered or controlled.
FINANCIAL REPORTING: The presentation of financial information about an entity to potential users of such information. The term usually refers to reporting to users outside of the entity.
INSOLVENCY: the situation where entities cannot raise enough cash to meet its obligations or to pay its debt as they become due for payment.
PROFIT MARGIN: it is a measure of operating efficiency and pricing strategy, the ratio is usually computed using net profit before extraordinary items and Taxes that is net sales less cost of goods sold and selling, general and administrative (SG and A) expenses. It is expressed as a percentage and calculated as Net profit divided by Sales.
RETURN ON ASSETS (ROA): Gives an idea as to how efficient management is at using its assets to generate earnings. It is displayed as a percentage and calculated as PROFIT AFTER TAX/ TOTAL ASSETS.
RETURN ON EQUITY: return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have I invested. ROE is expressed as a percentage and calculated as PROFIT AFTER TAX/ SHAREHOLDER’S EQUITY.
SHAREHOLDER: An individual or group who holds one or more shows in an organization and in whose name the share certificate is issued.
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