OWNERSHIP STRUCTURE AND FINANCIAL PERFORMANCE OF QUOTED BUILDING MATERIALS FIRMS IN NIGERIA

MSC Project Topics in Accounting and Finance

ABSTRACT

Various studies on Ownership structure and firm’s financial performance have been conducted in different parts of the globe with different findings that are mixed and inconclusive. In Nigeria, studies conducted in this area are mostly focused on the financial sector which is a gap that needs to be filled. This study fills the gap by examining the impact of ownership structure on financial performance of quoted building materials firms in Nigeria. The population of the study consists of six (6) cement firms quoted on the Nigerian stock exchange as at 31st December 2013. Four (4) firms were selected using two criteria. Cement companies that made available their annual report of eight years and cement companies quoted on the Nigerian stock exchange before 2004. The study uses multiple regression as a tool for analysis and tested for fixed and random effect. The study reveals that institutional ownership and managerial ownership showed a positive significant impact on the financial performance of quoted building materials firms in Nigeria, while ownership concentration showed no significant impact on the financial performance of quoted building material firms in Nigeria. The study concludes that ownership structure affects financial performance of building materials firms in Nigeria and therefore recommends that Security and Exchange Commission should encourage more potential managers and Institutional shareholders to invest long term in building materials industry as both managers and Institutional shareholders enhances financial performance of quoted building materials firms in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Ownership structure and firm’s financial performance has been a subject of importance in corporate finance literature. The effects of ownership forms on financial performance of firms has been of particular research interest in the literature of corporate finance. Often times, the interest of managers and shareholders are usually not aligned, which results to problems that reduces firm’s value as well as financial performance (Tatiana & Stela, 2013). Shareholders are always regarded as the corporate owners, while directors are agents or representatives of shareholders who are supposed to allocate business resources in a way to increase their wealth (Benjamin, Love & Kabiru 2014). Beni & Alexander (1999) found that owner-managers firms are more efficient than non-owner managers firms because owner-managers have stakes in the firm while non-owner managed firms are less efficient because the non-owner managers seek after their own personal interests at the expense of other shareholders and the organization at large. To the issues of managerial ownership there are two opposing views: incentive and entrenchment effect as stated by Beyer, Czarnitzki & Kraft, (2011). From the point of view of incentive effect, managerial ownership is supposed to have a positive relationship with firm financial performance because of the remuneration attached to managers performance. On the other hand, entrenchment effect is a situation where the manger is powerful enough to use his discretion, which usually leads to protecting his own interests rather than pursuing the goals of institutional owners and concentration owners. (Beyer et al 2011). There are three determinants of firms’ financial performance. The first is associated with external factors that are beyond the control of the firms. The second refers to factors that are internal and under the direct purview of the firms. These constitute managerial efficiency, governance structure and ownership structure among others that affect the ability of the firms to cope with external factors. Lastly, the other factors that affect firms’ financial performance are firm size, leverage, and the type of industry (Kechi, 2011). The relationship between managerial ownership and firm financial performance can be described in two ways. First, managers who own shares in the company will perform better than non-manager owners who will seek after their personal benefits without taking into consideration the concentration and institutional owners. Secondly as managers’, equity ownership further increases the efficiency of the managers because they are involved in the day to day activities of the company and this involvement will in turn increase the financial performance of the company. The relationship between institutional ownership and firm financial performance is that institutional owners have greater incentive to monitor managers because of the substantial amount of shares invested by them in the company. Also, large institutional owners have the opportunity, resources and ability to monitor, discipline and influence managers. This corporate monitoring by institutional owners can result in managers focusing more on corporate performance and less on opportunistic or self-serving behavior (Edmans & Manso 2010).

Hence, ownership concentration is related to firm financial performance due to the fact that traditional theories argued that when ownership of a firm is concentrated in the hand of large shareholders, they have incentive to monitor the managers’ action through direct intervention to reduce agency problem (Chen & Swan, 2010). In addition, in the studies of diversification strategy, it was found that ownership concentration enhance corporate diversification and performance of a firm because it constitute the largest investment in a corporate firm (Genc & Angelo 2012). Based on previous literatures, it is observed that various forms of ownership structure have impacted on the financial performance of firms. However, the study chooses to focus on whether the form of ownership structures have significant impact on financial performance of quoted building materials firms and to consider how desirable such impacts are, if they exist.

1.2 Statement of the Problem

There are several studies conducted on ownership structure and firms financial performance in developed economies like the United States, Taiwan, Russia, and France. Some of the studies are Harold and Belen (2001), Wang (2003), Pavel and Alexander (2001) and Eric (2011). Harold and Belen (2001) found no statistically significant relation between ownership structure and firm financial performance. Wang (2003) showed that managerial ownership had a negative relationship with financial performance of firms and a positive relationship exist between institutional ownership and financial performance of firms. Pavel and Alexander (2001) found out that the association between ownership by different groups of owners’ ownership concentration, state ownership and firm’s financial performance was relatively weak. Eric (2011) found out that there was no significant difference between type of ownership and financial performance. The results in the above studies have shown mixed findings and these differences could be attributed to difference in economic structure of the countries studied as well as firms characteristics. In addition, most of these foreign studies used different industries as their domain. For instance, Pavel and Alexander (2001) used blue chips firms as their domain and Eric (2011) used firms in the financial sector as their domain. This could influence the results and the conclusions arrived at because every industry in the economy has its own inherent attributes, which could have a significant impact on the results and conclusions. However, this study focuses on the manufacturing sector specifically the quoted building material industry in Nigeria to get a better picture of the relationship between dependent variable (Return on Equity) and independent variables (managerial ownership, institutional ownership and ownership concentration).

In Nigeria, there are studies that have been conducted on ownership structure and firm performance which include studies of Ogbulu & Francis (2007), Ioraver & Wilson (2011) and Uwalomwa & Olamide (2012). Ogbulu and Francis (2007) used all the firms quoted on the Nigerian Stock Exchange as the population. Purposive sampling technique was used to select the sample size using survey research design. Ioraver & Wilson (2011) on the other hand, used all listed financial firms as their population. Uwalomwa & Olamide (2012) used all firms in the financial sectors as their population. The two out of the three studies which are the studies of Ioraver and Wilson (2011) and Uwalomwa and Olamide (2012) used firms in service sector as their domain. The findings of studies that used firms in the service sector as their domain cannot be the same with the findings of studies that use firms in the manufacturing sector as their domain because of the nature of operation of business. The service firms are customer satisfaction oriented while the manufacturing firms are production oriented. This is the gap the study wants to fill. To this point, the study addressed the gap by looking at the manufacturing sector specifically the building material firms to see if its findings are different from the financial sector. Also, studies of Ogbulu & Francis (2007), Ioraver & Wilson (2011) and Uwalomwa & Olamide (2012) in Nigeria have not taken into consideration multicollinearity and fixed and random effect. However, this study took into consideration multicollinearity and fixed and random effect. This is also a gap that the study wants to address. This study to this end basically, seeks to investigate precisely whether or not ownership structure impact on financial performance of Quoted Building Materials firms in Nigeria.

MSC Project Topics in Accounting and Finance