OWNERSHIP STRUCTURE AND FINANCIAL PERFORMANCE OF LISTED FIRMS IN NIGERIA
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Financial performance relates to how a company uses its available resources to generate money (Leah 2008). The long-term viability of every business is determined by its financial status. Investors, stakeholders, and the economy as a whole rely heavily on business performance. Investors value the return on their investments, and a well-performing corporation can provide significant and long-term returns to its investors. Furthermore, a company’s financial profitability will increase its employees’ wages, provide higher-quality products to its clients, and have more environmentally friendly production facilities. As a result, more earnings will lead to greater future investments, which will create jobs and raise citizens’ incomes. The firm’s financial performance is evaluated using Return on Asset (ROA), Return on Equity (ROE), Return on Investment (ROI), Earnings per Share (EPS), Operating Profit (OP), Tobin’s Q, and Dividend Yield (DY). Accounting-based measurements are frequently preferred over market-based measurements when researching the relationship between Corporate Governance and firm success since they reflect the effect of management actions. In this study, however, two accounting-based indicators were utilized as proxies for financial performance: return on assets (ROA) and return on equity (ROE).The ownership structure is defined by the distribution of equity in terms of votes and capital, as well as the identification of the equity owners. Thomsen and Conyon (2012) define ownership structure in the context of publicly traded firms as consisting of two distinct features: ownership concentration, which refers to whether a firm is owned by one or a few large owners (concentrated) or by multiple smaller owners (dispersed/difused), and ownership identity, which refers to the type of owner, such as individuals/families, institutions, or other firms. Furthermore, the terms ownership diffusion and ownership dispersion are used interchangeably, and a firm with diffused ownership is defined following Ragazzi (as cited in Madiwe,2014) as “one whose shares are owned by a large number of individuals, none of whom is in a position to obtain direct or indirect benefits per share greater than those available to other shareholders and whose top managers do not receive either direct or indirect benefits other than a market salar.”These structures are critical in corporate governance because they influence managers’ incentives and, as a result, the economic efficiency of the firms they manage (Jensen and Meckling, 1976). Corroborating the preceding definition, Ang, Cole, and Lin (2000) viewed ownership structure through the lens of identity and concentration, positing that ownership identity is associated with the principal shareholder or the stake held by insiders, whereas ownership concentration represents shares of the largest owners influenced by insiders. Management, family, government, foreign, and institutions are all components of ownership structure. According to Kangai (2019), institutional and managerial stakeholders have greater influence over the firm’s policies than other types. Elvin and Hamid, (2016) in their study revealed that, a plethora of strategic management and finance literatures such as (Proftt, 2000; Cuevas-Rodríguezet al., 2012) showed that agency theory plays an important link between the ownership structure and firm performance. According to Shleifer and Vishny in Pandey and Sahu, (2019), agency cost is one of the critical factors that affects a firm’s financial performance. Berger and Patti (2000) stated the ownership structure of a firm should be considered when examining empirically financing issues. This is because differences in ownership structures impact on efficiencyof aligning the objectives of insiders (manager) with those of providers of finance (shareholders). Firm performance is very essential to a firm’s ownership structure and corporate governance practice as it is an outcome which has been achieved by an individual or a group of individuals in an organization related to its authority and responsibility in achieving the goal legally, not against the law, and conforming to the morale and ethic (Maury, 2006)There is a concern amongst companies, investors, policy makers and economists as to the causal link between ownership structure and financial performance of listed entities in Nigeria. The connection between ownership structure and firms financial performance has been the subject of an important and ongoing debate in the corporate finance literature. Long ago, Berle and Means (1932) had identifies inverse correlation between the diffuseness of shareholdings and firm performance. This view was later challenged by Demsetz, (1983), who argues that the ownership structure of a corporation should be thought of as an endogenous outcome of decisions that reject the impudence of shareholders and of trading on the market for shares. The foregoing argument has been recognized as a dominant issue of controversy and debate in the corporate finance literature(Nnabuife et al, 2017).Ownership structure is an important corporate governance mechanism (Denis& McConnell 2002) and has been studied in a number of disciplines including economics, finance and corporate management. Ownership structure, being a system within corporate governance in order to accomplish improved perfor-mance of a firm has been considered to influence firm performance for many years (Nahila, & Amarjeet 2016). For instance, Adam Smith in Fleckner (2016)highlights that joint-stock companies tend to be less effective compared to private co-partner firms considering that the directors would not watch around‘other people’s money’ with ‘the similar anxious vigilance’ as their own. This dissertation measured ownership structure from the perspective of Manage-rial Ownership (MO), Institutional Ownership (IO), Ownership Concentration(OC) and Foreign Ownership (FO).Firm size is the quantity and range of production capacity and potential of a10
Firm, or the quantity and variety of services that a firm may make available simultaneously to its clients (Emmanuel et al., 2019). The size of an organization is very significant in today’s world due to the trend of economies of scale. Emmanuel et al., (2019) further opined that bigger companies, as opposed to smaller firms, may produce products at much lower costs. Firms of the modern era are seeking to expand their scale in order to give their rivals a competitive advantage by reducing their cost of production and growing their market share (Muange & Kiptoo, 2020). Kassi et al., (2019) noted that the nature of the relationship between firm size and financial performance is a key issue which may shed some light on the factors that increase profits. Firm size is a primary factor in assessing the competitiveness of a company due to the idea of economies of scale in the neoclassical view of the company (Niresh & Velnampy,2014). John and Adebayo (2013) have shown that firm size in today’s world is very germane to financial success due to the phenomenon of economies of scale. Essentially, this ensures that larger companies can achieve cost leader-ship compared to smaller firms. The size of the company is seen by businesses as a way of achieving a sustainable competitive advantage in terms of income and market share. Furthermore, Onuonga, (2014) stated that bank size can bean indication of the ability of the bank to venture into large scale banking. In the same vein, firms in the non-financial sector can also venture into large scale businesses when they have the capacity in size. Therefore, ownership of assets is important since assets are those resources that earn income. In line with this discussion, firms with more assets are expected to exhibit higher financial performance. The benefit of economies of scale outlined in the study theoretical literature is relevant in that a large firm is capable of operating efficiently, recruit experience management who can help in making wise investment decisions, thus enhancing financial performance of the firm. Gurbuz et al., (2010) found that size of the firm is an important factor affecting the firms’ performance. Firm size is therefore seen as a determinant of the success of any company. Firms aimat increasing their size in order to escape the liabilities often associated with smallness and to have operating advantage over their competitors; the postulated positive relationship between size and efficiency is more logically clarified by economies of scale enjoyed by big firms. Economies of scale posits that when a firm begins to grow and expand, its marginal cost reduces and then improves its profits thus, there are benefits with an increase in firm size (Terraza, 2015)whilst diseconomies of scale posits that when a firm grows beyond a certain point, its efficiency begins to fall (Kasman, 2010; Terraza, 2015). Authors in favour of economies of scale associated lower operational cost, market power, brand vitalization and consumer perception as the main attributes (Terraza,2015) Firm size (FS) was used to test the moderating effect in the relationship between ownership structure and financial performance of listed firms in Nigeria. Firm size is measured by natural logarithm of total assets. According to Jogiyanto in Saraswati & Bernawati, (2020), the measurement is based on thefact that it will have a better stability level than by applying other proxies and is more likely to sustain continuously between periods. Firms’ funding structures with preponderance of debt capital have inherent financial risks which such entities are bound to leverage on. Thus, investigations on the causal links between ownership structure components and financial performance proxies are bound to be affected by leverage, and the interplay of this control variable in the above nexus is further speculated to be moderated by the size of the firm. Financial leverage is the degree to which a company uses fixed-income securities, such as debt and preferred equity (Mutunga & Owino, 2017). Financial leverage is one of the very important external financing modes. It is associated with ahigh degree of interest payments. There is a trade-of between agency costs of debt and equity. Jensen & Meckling, (1986) suggest that leverage opens up opportunities for rivalry predation in concentrated product markets, thus conditioning the performance erect of leverage on the degree of competition in the life insurance industry. Finance is very important for any business however a business is new and ongoing, financial or non-financial institute need funds to operate its daily activities(Iqbal & Usman, 2018). In the book of accounting and finance leverage can be defined as the amount of debts or credit that is used to purchase assets, enhance the operational activities or acquiring a new firm. Generally, the cost of borrowed money (leverage) is less than the amount of equity. Using the financial leverage like debts to equity ratio, debts to total assets ratio we can easily identify the financial position of the firm or the amount of leverage that is used in a firm. In this study, financial leverage was used as a control variable.
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