ABSTRACT
The study examines corporate governance mechanisms on capital structure of listed food and beverages in Nigeria. The sole objective is to explore the impact of corporate governance mechanisms on capital structure for a period of ten years, from 2004 to 2013. The study employed secondary data from the annual reports and the Nigeria Stock Exchange (NSE) fact books within the period of the study. Generalized Least Square Regression Technique for data analysis was employed to investigate relationship that exists between capital structure and various independent variables in the model. The study reveals that ownership concentration and board composition of the explanatory variables are statistically and significantly influencing the explained variable proxied by debt to total capital and debt total asset. On the other hand, institutional ownership of our explanatory variables is not significantly influencing the capital structure. Ownership concentration, board composition and firm size have significant impact on debt to total capital at 1% level, while institutional ownership has insignificant impact on the leverage. It is concluded that corporate governance mechanisms are good variables that impact on capital structure. The study therefore, recommends among others that the management of listed food and beverages firms in Nigeria should recognize and include the corporate governance mechanisms when embarking on external financing decision to enable them to arrive at an optimum financing decision.
CORPORATE GOVERNANCE MECHANISMS AND CAPITAL STRUCTURE OF LISTED FOODS AND BEVERAGES FIRMS IN NIGERIA
Department: Accounting and Finance (M.Sc)
The study examines corporate governance mechanisms on capital structure of listed food and beverages in Nigeria. The sole objective is to explore the impact of corporate governance mechanisms on capital structure for a period of ten years, from 2004 to 2013. The study employed secondary data from the annual reports and the Nigeria Stock Exchange (NSE) fact books within the period of the study. Generalized Least Square Regression Technique for data analysis was employed to investigate relationship that exists between capital structure and various independent variables in the model. The study reveals that ownership concentration and board composition of the explanatory variables are statistically and significantly influencing the explained variable proxied by debt to total capital and debt total asset. On the other hand, institutional ownership of our explanatory variables is not significantly influencing the capital structure. Ownership concentration, board composition and firm size have significant impact on debt to total capital at 1% level, while institutional ownership has insignificant impact on the leverage. It is concluded that corporate governance mechanisms are good variables that impact on capital structure. The study therefore, recommends among others that the management of listed food and beverages firms in Nigeria should recognize and include the corporate governance mechanisms when embarking on external financing decision to enable them to arrive at an optimum financing decision.
CHAPTER ONE
INTRODUCTION
1.1 Background to the
study
Sound
corporate governance principles are the foundation upon which the trust of
investors and lenders is built. Basically, the fundamental perception and
understanding of the field of corporate governance originated from the fact
that there are potential problems associated with separation of ownership and
control. This is inherent in the modern corporate form of organization with a
set of institutional and market mechanisms that induce self-interested managers
(controllers) to maximize the value of the residual cash-flow of the firm on
behalf of its shareholders (the owners).This conflict within the firms leads to
distortion in corporate policy choices and lower corporate performance. The
knowledge of how firm is being financed has succeeded in attracting a good deal
of public interest because it is a tool for socio-economic development and
efficient practice in the administration of business entities. This has led to
reduction in the incidence of corporate failures, poor internal control system,
poor corporate structure, indiscipline both on the part of management and
workers. Poorly governed corporations may not only pose a risk to themselves,
they could indeed negatively impact the capital market. For instance, the poor
governance of a firm would pose a threat to the economy. Irrespective of how
sound macroeconomic policies are, if entities are not well governed, the
macro-economic objectives may not be attained.
A
survey by the Nigerian Securities and Exchange Commission (2007) showed that
corporate governance was at a rudimentary stage in Nigeria, as only about 40%
of quoted companies and recognized codes of corporate governance are in place.
(Amao & Amaechi 2008, Olusa 2007). Poor corporate governance may be
identified as one of the major factors in virtually all known instances of
firm‟s distress in the country. Awoyemi (2009) also opined that financial
scandals around the world and the recent collapse of major corporate
institutions in the USA, South East Asia, Europe and Nigeria such as Adelphia,
Enron, World Com and recently XL Holidays have shaken investors‟ faith in the
capital market and the efficacy of existing corporate governance practices in
promoting transparency and accountability.
Corporate
governance is the broad term that has to do with the manner in which right and
responsibility are shared amongst owners and managers of a given institution
(Awoyemi 2009). In essence, the exact structure of the corporate governance of
any given institutions will determine what right, responsibility and privileges
that are extended to each of the corporate stakeholders and to what degree each
stakeholder may enjoy or exercise his/her right.
Separation
of ownership and control in firms is common in the modern day business environment
as more firms are listed on stock exchanges as public firms. However, this
separation creates serious tension between the owner of a firm and the
managers. Managers who are in power may have the motivation to transfer wealth
in terms of bonus or other benefits at the expense of the owners to get
dividend (Watts & Zimmerman,1986). Also, Managers are positioned to
opportunistically manage capital structure decision to maximize their utility
at the expense of stakeholders. Managerial self-interests in the firm may
entice managers to prefer and opt for equity rather than debt. Because creation
of debt reduces the agency costs of free cash flow by reducing the amount
available to managers since they are bound to repay the interest payments. If
they spend the free cash on more risky action, the probability that the
repayment schedule will be met decreases. In case of default, debt holders may
take the firm to bankruptcy court and get a claim over its assets. Managers
would lose their decision rights and possibly their employment in the firm.
This threat prevents managers from undertaking more risky actions as they aim
to utilize assets efficiently, thereby increasing firm value. The control role
of debt lies in decreasing the amount of free cash flow available to managers
by making them disgorging it to investors (Jensen, 1986). Thus, Shareholders
may incur costs to monitor the management from such unethical behaviour. The
sources of a firm‟s financing are of paramount importance to both the managers
of firms and 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,
there is need for monitoring mechanisms which should be able to serve as active
monitors that management may not be able to adjust debt to their own interests
as freely as if such investors do not exist. These mechanisms will improve the
alignment of management and shareholders‟ interests and mitigate any opportunistic
behavior, resulting from such conflict of interests.
Thus,
corporate governance mechanisms provide the basis for a stable and productive
business environment which protects the interests of internal and external
stakeholders. This has become an important and well debated issue in recent
years. Therefore, good corporate governance practices may have significant
influence on the strategic decisions of a company, e.g. external financing that
are taken at board level. This makes corporate governance variables like,
ownership concentration, institutional investors and board composition to have
direct impact on capital structure decisions of corporate firms. The intention
of managers is to maintain viability in the firm thus reducing the level of
debt since increased debt leads to high bankruptcy cost. Managers pursue their
own interest to reduce the debt level in capital structure at the expense of
the shareholders. Also, the presence of institutional investors in a company
helps it to raise long term finance at an advantageous cost. In the first
place, these institutional investors act as a source of long term debt as they
are willing to provide debt to a company over whose board they enjoy an
influence. Secondly, these institutional investors serve as an effective
monitoring device over the company‟s strategic decisions. They bring down the
company‟s agency costs and also reduce managerial opportunism. This gives
confidence to general public and other lenders – resulting in favorable terms
of borrowing by the company. Institutional investors are large investors such
as, insurance companies, banks and investment companies (Boush 1998). The
presence of non-executive directors means those directors that have no
executive post in firm; thus, their supervisory performance highly helps to
reduce the conflict between shareholders and firms' directors. Also, their
presence on the company‟s board gives signal to the market that company is
being monitored efficiently so lenders consider it credit worthy. In turn, this
makes it easier for the company to raise long term fund through debt financing.
According
to modern corporate finance theories, agency cost is one of the determinants of
capital structure whereas corporate governance is structured to alleviate agency
issues; hence corporate governance and capital structure are linked through
their association with agency costs. In this last decade, corporate governance
serves as one of the main element in improving economic efficiency, growth and
enhanced investors‟ confidence. Also, it provides a proper incentive for the
board and management to pursue objectives that are in the interest of the
company and its shareholder and to enhance effective monitoring. The
availability of an effective corporate governance system with Individual
Corporation and across an economy assists in providing a degree of confidence
that is necessary for proper functioning of the market economy. For this reason
the cost of capital is reduced and firms are encouraged to use resources more
efficiently, thereby underpinning growth.
Given
the fact that corporate governance and capital structure are paramount to the
overall success of a firm, this study therefore examines the impact of
corporate governance mechanisms on capital structure of foods and beverages
firms in Nigeria. The study on the impact of corporate governance mechanisms on
capital structure of foods and beverage firms in Nigeria is an important
research area that needs to be explored. This study is relevant in the Nigerian
context given the important role the private organizations are expected to play
as the engine of growth. It is expected that the findings of this study will
have important policy implications for foods and beverages firms in Nigeria.
This
study, therefore, examines the relationship between corporate governance and
capital structure and whether or not institutional investors, ownership
concentration, board composition and firm size form part of important
mechanisms in determining capital structure of listed foods and beverages firms
in Nigeria.
MSC Project Topics in Accounting and Finance
CORPORATE GOVERNANCE MECHANISMS AND CAPITAL STRUCTURE OF LISTED FOODS AND BEVERAGES FIRMS IN NIGERIA
Department: Accounting and Finance (M.Sc)
Format: MS Word
Chapters: 1 - 5, Preliminary Pages, Abstract, References, Appendix.
Delivery: Email
Delivery: Email
No. of Pages: 114
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