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Corporate Governance and Share Price
This study investigates the relationship between share price and corporate governance of selected Nigeria quoted companies. The broad objective of the study is to find out if the size of the board is positively related to share price and also to ascertain if the independence of the board is related to share price. This study used a sample of 30 quoted companies in Nigeria between 2013 and 2015. In analyzing the data, the unbalanced panel multiple regression was adopted to identify the possible effects of board characteristics on share price in selected Nigerian quoted companies. The findings revealed that share price random effect panel regression results shows that all our board characteristics variables such as Board Size, board independence, CEO duality, board gender diversity and board members representation in committees had not significant influence on share prices of quoted companies in Nigeria. This study therefore, recommended that better share price improvement targets and cost efficiency be given top priority in the practice of good corporate governance in Nigeria.
TABLE OF CONTENTS
Title Page i
Table of Contents vi
Chapter One: Introduction
1.1 Background to the Study 1
1.2 Statement of Problem 4
1.3 Research Questions 4
1.4 Objectives of the Study 5
1.5 Statement of Hypotheses 5
1.6 Significance of the Study 6
1.7 Scope of the Study 7
1.8 Limitations of the Study 8
1.9 Definition of Terms 8
Chapter Two: Review of Related Literature
2.1 Introduction 11
2.2 Concept of Share Price 14
2.3 Board Size 19
2.3.1 Board Composition (Independence) 20
2.3.2 Board Duality (Leadership) 24
2.3.3 Board Committee 26
2.3.4 Board Diversity (Gender) 30
126.96.36.199 Gender Diversity 31
188.8.131.52 Age Diversity 32
2.4 Empirical Literature 33
2.4.1 Board Size 33
2.4.2 Board Independence 34
2.4.3 CEO Duality 37
2.4.4 Board Committee 38
2.4.5 Board Diversity (Gender) 39
Chapter Three: Research Methods and Design
3.1 Introduction 43
3.2 Research design 43
3.3 Description of the Population of the Study 43
3.4 Sample Size 43
3.5 Sampling Techniques 43
3.6 Sources of Data Collection 44
3.7 Method of Data Presentation 45
3.8 Method of Data Analysis 45
Chapter Four: Data Presentation, Analysis and Hypothesis Testing
4.1 Introduction 47
4.2 Presentation of Data 47
4.3 Data Analysis 51
4.4 Hypothesis Testing 57
Chapter Five: Summary of Findings, Conclusion
5.1 Introduction 63
5.2 Summary of Findings 63
5.3 Conclusion 64
5.4 Recommendations 64
1.1 Background to the Study
Researchers over the years have established that the performance of a board is influenced by the characteristics of the board. These characteristics include board size, CEO duality (leadership) board composition (Independence), board committees and diversity (Gender) (Christopher, 2012).
However, interest in board characteristics has grown tremendously in the past decade with the general feeling that sound financial performance excuses poor board. Corporate scandals, environmental concerns and globalization have all played their part in raising shareholders and public awareness on how companies should be governed.
The call for increased and more restrictive corporate governance mechanism in Nigeria have stemmed after the World Bank (2008) issued a report on the observance of standards and codes regarding the country’s compliance with the corporate governance regulations by the Organization for Economic Cooperation and Development (OECD) in the report, majority of the guidelines set by the OECD have been partially observed in Nigeria, which triggers the need to intensify the implementation of corporate governance in the country. As a result, in 2001 the Securities and Exchange Commission of Nigeria set up a committee that came up with a Code of Best Practices for public Companies in Nigeria (“The Code”) that became operational in 2003. The review of the code began in 2010 and finally became operational in March 2011.
The Code of Corporate Governance (CCG) has stated that “the essence of corporate governance is transparency disclosure”. Such transparency must be evident in the timely disclosure of information which may adversely affect the viability and interests of the shareholders. This requirement aims to strengthen the regulatory framework for Nigeria institutions wherein strict monitoring, board independence, surveillance, transparency, and accountability are of great importance.
Despite numerous research efforts on corporate governance and company performance in Nigeria, little has been done to finding out the effects of the corporate governance practices of listed Nigerian companies on one of the most obvious aspects of company affairs i.e. share price (Uwuigbe, 2013).
The recent international disasters in financial reporting including Enron and WorldCom in the US, Parmalat in Italy, the Maxwell Saga in the UK, Daewoo in Korea, Leisurenet and Regal Bank in South Africa, CADBURY and Oceanic Bank in Nigeria confirmed the growing need for transparency in governing companies.
It was observed that good board characteristics has been evident to be associated with greater firm performance (Carcello & Neal 2003; Attiya & Robina, 2007). As seen in these studies, in any organization, the share price is the first brief pinpoint when one thinks about an indicator for the performance of a listed company. If it is on an increase, the default reaction is that things are going well in that corporation and people do buy the shares. However, if it is a decline, one may not be so sure about way the business is shaping up its operations. As observed by Klein (1998), implementing a better corporate governance practice is anticipated to improve the monitoring of management and reduces information asymmetry problems. This invariably will increase share price of the firm.
Moreover, Samontaray (2008) prognosticated that transparency in business organizations influence, which is eventually reflected in the company’s share prices.
It is against this backdrop that this study therefore aims to find out the relationship between corporate governance mechanisms and share price among listed firms in Nigeria.
1.2 Statement of Problem
Given the circumstance mentioned above and the need to further explore the impact of board characteristics and firm performance; measured in terms of share prices, among publicly – listed holding companies in Nigeria.
1.3 Research Questions
This study attempts to find answers to the following research questions;
1. Does the size of the board positively related to share price?
2. Is the independence of the board related to share price?
3. Is the CEO duality negatively related to share price?
4. Is the board committee negatively related to share price?
5. Is the board diversity negatively related to share price?
1.4 Objective of the Study
The following are the objectives of the study:
1. Find out if the size of the board is positively related to share price.
2. Ascertain if the independence of the board is related to share price.
3. Find out if the CEO duality is negatively related to share price.
4. Examine if the board committee negatively relate to share price.
5. Examine if the board diversity negatively relate to share price.
1.5 Statement of Hypotheses
The following hypothesis shall be tested in the course of this study:
HO: The size of the board is negatively related to share price
HI: The size of the board is positively related to share price.
HO: The independence of the board is negatively related to share price.
HI: The independence of the board is positively related to share price.
HO: The CEO duality is negatively related to share price
HI: The CEO duality is positively related to share price.
HO: The Board Committee is negatively related to share price
HI: The Board Committee is positively related to share price.
HO: The board diversity is negatively related to share price
HI: The board diversity is negatively related to share price
1.6 Significance of the Study
The following individuals/bodies will benefit from this study;
i. Literature: It is expected that this study would contributes to existing literature, by providing empirical evidence on the relationship between the board characteristics and share prices in Nigeria (Edem & Noor, 2013). The study would also facilitate or influence the examination of the effect of board characteristics and share prices behaviour and thus boosting the empirical evidence from Nigeria.
ii. Policy makers: Given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected valuables examined in the study.
iii. Investment analysts/investors: The result of the study would benefit investment analysts, investors and corporations in examining the influence of board characteristics and share prices behaviour. It will also be useful in stimulating public discourse given the depth of the empirical researches in this area from emerging economy like Nigeria.
1.7 Scope of the Study
This study covers all listed companies on the Nigerian Stock Exchange, in other to investigate the effect of corporate governance on firm share prices. The annual report of the selected firms for three years period between 2013 and 2015 was studied.
1.8 Limitations of the Study
The study has some limitations for firms’ auditors, investors and regulators. All these parties play an important role in improving the transparency and disclosure practices of corporations (Ali, Merve & Nizamattin, 2013). These limitations vary in different stages and form;
1. The study was conducted solely on listed companies. The results may not be generalisable to non-listed companies (Ali, Merve & Nizamattin, 2013).
2. The study is limited by time and data. Due to time constraint, the data and information used is not the product of primary research but are published information obtained from articles, journals and financial statements.
3. The ability to obtain a completely random sample.
4. Imprecise measurement of variables.
1.9 Definition of Terms
1. Corporation: A corporation is a company or group of people authorized to act as a single entity and recognized as such in law.
2. Corporate Governance: Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed.
3. Governance: Refers to "all processes of governing, whether undertaken by a government, market or network, whether over a family, tribe, formal or informal organization or territory and whether through laws, norms, power or language
4. Share: In financial markets, a share is a unit of account for various investments. It often means the stock of a corporation, but is also used for collective investments such as mutual funds, limited partnerships, and real estate investment trusts.
6. Share Price: A share price is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.
7. Audit Committee: This is a committee that works closely with the external audit firm and generally influences the company’s control environment.