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nes the extent to which corporate governance mechanism (proxied by board size,

Description

CHAPTER ONE INTRODUCTION 1

and WorldCom have placed the credibility of corporate financial reports under suspicion,

eroding investors’ confidence

the issue of corporate governance has become paramount and centre of the agenda for both business leaders and regulators all over the world following the global financial crisis which has provided many illustrations of the collapse of corporate governance,

the international regulators are hard at work to influence appropriate regulatory controls (Jegede,

Akinlabi and Soyebo,

As a follow up to this,

the Sarbanes-Oxley Act was enacted in 2002 to enhance corporate government mechanism which is

expectation that governance mechanism may be reinforced,

accuracy and reliability of financial information assured (Ming-Cheng,

Hsin-chaing,

I-cheng & Chunfeng,

Corporate governance is about putting in place the structure,

processes and mechanisms that insure that the firm is being directed and managed in a way that enhances long term shareholder value through accountability of managers and enhancing firm performance (Jegede,

Akinlabi and Soyebo,

In other words,

the well- known agency problem (which results from the separation of ownership from management and leads to conflict of interests within the firm) may be addressed such that the interest of managers can be aligned with those of the shareholders

In Nigeria,

It was discovered by the Securities and Exchange Commission (SEC) (a regulatory organ responsible for the supervision of corporations in Nigeria) in 2003 states that,

poor corporate governance was one of the major factors in virtually all known instances of financial institutions’ distress in the Nigerian financial sector

It was also found that only about 40%

had recognized codes of corporate governance in place (Ahmad & Kwanbo,

Consequently,

SEC in collaboration with the Corporate Affairs Commission released a code of corporate governance

Banks were expected to comply with the provisions of the code

In addition to that,

banks were further directed to comply with the Code of Corporate Governance for Banks and Other Financial Institutions approved earlier in the same year by the Bankers’ Committee

However,

the consolidation of the banking industry necessitated a review of the existing code for the Nigerian Banks

A new code was therefore,

developed to compliment the earlier ones and enhance their effectiveness for the Nigerian banking industry

Compliance with the provisions of the Code was mandatory

The reforms carried out by the CBN in the banking sector as well as the code issued by the SEC were to bring about optimized corporate governance practices in the industry (Ahmad & Kwanbo,

However,

the CBN and the Nigerian Deposit Insurance Company (NDIC) carried out a stress test in the banking industry

The stress test revealed some

unwholesome developments in the banking industry which were as a result of noncompliance with the corporate governance code by some banks (Ahmad & Kwanbo,

This study therefore

governance mechanism on the performance of banks

especially after high-profile accounting scandals involving once well-respected companies such as Enron,

WorldCom and Xerox (Zhou & Chen,

This has thus

rekindle the interest of researchers in recent years to examine the impact of corporate governance on the performance of firms (e

Macey and O’Hara,

Levine,

Adams and Mehran,

Larcker,

Caprio et al

Taiwo & Okorie,

Mohammed,

Akpan & Riman,

Amuda and Arulogun,

Ocheni,

Concerned about the dwindling loss of confidence by investors in commercial banks due to absence of good corporate

the CBN in 2004 made it compulsory for all commercial banks to have sound corporate governance in their respective banks

However,

there are absence of consensus amongst empirical studies

corporate governance and firm’s performance especially as regards the Nigerian banking sector

This could be explained by the use of different corporate governance measures by different researchers

therefore need to examine relationship between corporate governance and performance of firms in a typical economic environment in Nigeria

In the light of the forgoing,

this present seeks to empirically examine

performance of commercial banks in Nigeria

This study

To examine the relationship between board size and the return on equity (ROE) of commercial banks in Nigeria

To examine the relationship between audit committee independence

To examine the relationship

(ROE) of

committee and the return on equity (ROE) of commercial banks in Nigeria

To what extent is the relationship between board size and the return on equity (ROE) of commercial banks in Nigeria

To what extent is the relationship between audit committee independence and the return on equity (ROE) of commercial banks in Nigeria

To what extent is the relationship between size of audit committee and the return on equity (ROE) of commercial banks in Nigeria

Ho1: There is no significant relationship between Board size the return on equity (ROE) of commercial banks in Nigeria

committee and the return on equity (ROE) of commercial banks in Nigeria

committee and the return on equity (ROE) of commercial banks in Nigeria

Significance of the Study research

shareholders and other stake holders with valuable information to reach a better understanding on the extent to which corporate governance impact on banks’ performance

This study will also be of benefit to the regulatory bodies like the Security and exchange commission (SEC) and the central bank of Nigeria (CBN) in a way that it will avail them with 7

mechanism could turn to impact performance of firms in Nigeria thus

In addition,

the government will also be made to understand the need to strengthen regulatory agencies saddled with the responsibility of issuing sound corporate governance in Nigeria

More so,

the study will also be of immense important in the sense that it will add more statistical data to prior studies

this will help to serve as a reference point to students,

researchers and the academia who desired to carry out further research on related topics

The scope in relation to time covers a period of 8 years (i

The choice of this period is due to the researcher’s belief that the period will provide findings that reflect current realities in the banking sector

CHAPTER TWO LITERATURE REVIEW 2

The chapter will focus on conceptual frame work,

an over view of corporate governance,

importance of corporate governance in the Nigerian baking industry review of empirical works and summary of review

According to Anthony,

Stakeholders theory,

Stewardship theory and Resource dependency theory

These theories are succinctly examined below:

According to this thesis,

the fundamental agency problem in modern firms is primarily due to the separation between finance and management

Modern firms are seen to suffer from separation of ownership and control and therefore 10

are run by professional managers (agents) who cannot be held accountable by dispersed shareholders

In this regard,

the fundamental question is how to ensure that managers follow the interest of shareholders in order to reduce cost associated with principal agent theory

? The principals are confronted with two main problems

Apart from facing an adverse selection problem in that they are faced with selecting the most capable managers,

they are also confronted with a moral hazard problem

they must give agents (managers) the right incentive to make decisions aligned with shareholders interest

In further explanation of the agency relationships and cost,

Jensen & Meckling,

which involves delegating some decision making authority to the agent”

In this scenario there exist a conflicting of interests between managers or controlling shareholders,

and outside or minority shareholders leading to the tendency that the former may extract “perquisites” or (perks) out of a firm’s resources and be less interested to 11

monitoring expenditures by the principal such as auditing,

expenditures by the agent and residual loss due to divergence of interests between the principal and the agent

The share price that (principal) pay reflects such agency costs

To increase firm’s value,

one must therefore reduce agency costs

The following

opportunistic behaviour from managers within the agency theory: 2

the stakeholder theory stipulate that a corporate entity invariably seeks to provide a balance between the interest of its diverse stakeholder in order to ensure that each constituency receives some degree of satisfaction (Abrams,

The stakeholder theory therefore appears better in explaining the role of corporate governance than the agency theory by highlighting various constituents of a firm

Thus creditors,

governments and society are regarded as relevant stakeholders

Related to the above discussion,

John and Senbet (1998),

provide a comprehensive review of the stakeholder’s theory of corporate governance which points out the presence of many parties with competing interest in the operations of the firm

They also emphasis the role of non-market mechanism such as size of the board,

committee structure as important to firm performance Stakeholder theory has become more prominent because many researchers have recognize that the activities of a corporate entity

accountability of the organization to a wider audience than simply its shareholders alone but exist within the society and therefore,

has responsibilities to that society

One must however point out that large recognition of this fact has rather been a recent phenomenon

Indeed it has realized that economic value is created by people who voluntarily come together and corporate to improve every one’s position (Freeman et al,

Critique of the stakeholder’s theory criticize it for assuring a single-valued

The argument of Jensen (2001) suggests that the performance of a firm is not and other issues such as flow of information from senior management to lower ranks,

are all critical issues that should be considered

An extension of the theory called an enlightened stakeholder theory was proposed

However,

problems relating to empirical testing of the extension have limited its relevance (Sanda et al,

arguing against the agency theory posits that managerial

(Donaldson

Donaldson,

Choorman and Donaldson,

Muth and Donaldson,

According to the steward theory,

a manager’s objective is primarily to maximize the firm’s performance because a manager’s need of achievement and success are satisfied when 14

One key distinguishing feature of the theory of stewardship is that it replace theory refers with respect for authority and inclination to ethical behaviour

The theory considers the following summary as essential for ensuring effective corporate governance in entity

 Board of Directors: the involvement of non-executive directors (NEDS) is viewed as critical to enhance the effectiveness of the boards activities because executive directors fully enhance decision making and ensure the sustainability of the business

 Leadership: Contrary to agency theory,

the stewardship theory stipulates that the positions of CEO and boards chair should be concentrated in the same individual

The reason being that it affords the CEO the opportunity to carry through decision quickly without the hindrance of undue bureaucracy

We must rather point out that this position has been found to create higher agency costs

The argument effectively

bureaucratic delays in any decision-making

it is argued that small board size should be encouraged to promote effective communication and decision-making

However,

the theory does not stipulate a rule for determining the optimal board size and for that matter what constitute small

Resource

Dependency

Theory:

in addition to the separation of ownership and control,

as a critical dimension to the debate on corporate governance

Again the theory points out that organization usually tend to reduce the uncertainty of external influence by ensuring that resources are available for their survival and development

By implication,

this theory seems to suggest that the issue of dichotomy between executive and non-executive directors is actually irrelevant

How then does a firm operate efficiently

the theory indicates that what is relevant is the firm’s presence on the boards of directors of the organizations to establish relationships in order to have access to resources in the form of information which could then be utilized to the firm’s advantage

the strength of a corporate organization lies in the amount of relevant information it has at its disposal

In the height of the foregoing analysis,

it is clear that governance mechanism seeks to protect the interest of all stakeholders of a firm

In recent times,

the structures of laws and accountability issues regarding corporate governance is changing world wide and directors are being held responsible every day for the success and failures of the companies the governance

Corporate boards are responsible for major decisions like changing corporation by laws,

the reason why discussions of corporate governance usually focus on boards

The board of directors is the “apex” of the controlling system in an organization and is there to ensure that the interests of shareholders are protected (Jensen 1993 and Short et al,

It acts as the fulcrum between the owners and controllers of the corporation (Monks and Minow,

The boards of directors are the institution to which 17

managers of a company are accountable before the law for the company’s activities Oxford Analytical Ltd 1992: 7)

Corporate governance is about making certain that the company is directed appropriately for reasonable return on investments (Magdi and Nadereh,

It is considered to be a process in which affairs of the firm are directed and controlled so as to protect the interest of all stakeholders

(Sullivan,

structure specifies the distribution of rights and responsibilities among different participants in the corporation such as,

shareholders and other stakeholders,

and spells out the rules and procedures for making decisions on corporate affairs (Uche,

Corporate

practices and procedures that govern institutions

It is also concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of 18

interest between various corporate claim holders,

corporate governance rules can be seen as the outcome of the contracting

constituencies and the CEO (Becht et al,

There are other perspectives on corporate governance,

the corporation’s perspective and the public policy perspectives

The corporation’s perspective is about maximizing value subject to meeting the corporation’s financial,

This perspective stresses the need for boards of directors to balance the interests of shareholders with those of other stakeholders:

In order to achieve long term sustained value for the corporation

governance is about nurturing enterprises while ensuring accountability in the exercise of power and patronage by firms

The role of public policy is to provide firms with the incentives and discipline to minimize the divergence between private and social returns and to protect the interests of stakeholders

These two perspectives provide a framework for corporate

incentives and external forces that govern the behavior and performance of the firm (Iskander,

Magdi and Chamlou,

which are critical to proper functioning of the banking sector and economy as a whole

Poor corporate governance may contribute to bank failures,

which could lead to a run on the bank,

unemployment and negative impact on the economy

Effective corporate governance is likely to give a bank access to cheaper sources of funding through improving their reputation with rating agencies,

The corporate governance landscape in Nigeria has been dynamic and generating interest from within and outside the country

In 2003,

the Securities and Exchange Commission (SEC) adopted a Code of Best Practices on Corporate Governance for publicly quoted companies in Nigeria

At the end of the consolidation exercise in the banking industry,

to complement and enhance the effectiveness of the SEC code

The three major governance issues that attracted the attention of the regulators are related party transactions,

conflict of interest and creative accounting

Globally,

industry have attracted special attention because of the importance of the industry to most economies

This led to the Organization for Economic Co-operation and Development (OECD) playing active role in defining guidelines for corporate governance

Committee on Banking Supervision

According to the Basel Committee on Banking Supervision (2006),

perspective involves the manner in which the business and affairs of banks are governed by their boards of directors and senior management,

which affects how they:  Set corporate objectives

 Operate the bank’s business on a day-to-day basis

 Meet the obligation of accountability to their shareholders and take into account the interests of other recognized stakeholders

expectation that banks will operate in a safe and sound manner,

and in compliance with applicable laws and regulations

and  Protect the interests of depositors

The Basel Committee on Banking Supervision came up with the following principles,

which are viewed as important elements of an effective corporate governance process

Principle 1 – Board members should be qualified for their positions,

have a clear understanding of their role in corporate governance and be able to exercise sound judgment about the affairs of the bank

This is because the board of directors is ultimately responsible for the operations and financial soundness of the bank

In addition the board and individual directors can strengthen the corporate governance of a ban when they do the following: 22

 Understand and execute their oversight role

 Approve the overall business strategy of the bank

 Avoid conflict of interest in their activities

 Commit sufficient time and energy to fulfilling their responsibilities

 Avoid participation as the board of directors in day-to-day management of the bank

For effective corporate governance boards are expected to function with specialized committees which include Audit committee,

Compensation

and Nomination/corporate governance committee

Principle 2 – The board of directors should approve and oversee the bank’s strategic objectives and corporate values that are communicated throughout the banking organization

This implies that the board must set the “tone at the top” and build a corporate culture that will drive good corporate 23

The board of directors should ensure that senior management implements the agreed strategy of the bank and strategic

professional behavior and integrity in the bank

Principle 3 – The board of directors should set and enforce clear lines of responsibility and accountability throughout the bank

This means that the authorities and key responsibilities of the board and senior management are very clear to avoid confusion

Principle 4 – The board should ensure that there is appropriate oversight by senior management consistent with board policy

Principle 5 – The board should ensure that compensation policies and practices are consistent with the bank’s corporate culture,

Principle 6 – The bank should be governed in a transparent manner since transparency is essential for sound and effective corporate governance

The Basel Committee recognizes that primary responsibility for good corporate governance rests with the board of directors and senior management of banks

Corporate

Governance

Mechanism

Performance Measures Prior studies on the relationship between corporate governance mechanisms and corporate performance are seen to include various internal and external mechanisms,

CEO’s positionduality,

CEO’s incentives and ownership interest,

ownership concentration of insiders and outsiders,

However,

this section of the chapter reviews only mechanism relevant to the scope of this study

These include: Board size,

CEO duality,

Audit committee independent,

company size and debt financing 1

Board Size Board size refers to the total number of directors on the board of any corporate organization

While a number of authors have

there are others who believe that a small board size is the ideal thing for any firm that wants to sustain improved performance

Determining the ideal board size for organizations is very important because the number and quality of directors in a firm determines and influences the board functioning and hence corporate performance

There is a convergence of agreement on the argument that board size is associated with firm performance

However,

conflicting results emerge on whether it is a large,

For instance,

while Yermack (1996) had found that Tobin’s Q declines with board size,

and this finding was corroborated by those of Mak and Kusnadi (2005) and Sanda,

Mikailu and Garba (2005) which showed that small boards were more positively associated with high firm performance

However,

results of the study of KyereboahColeman (2007) rather indicated that large boards enhanced shareholders’ wealth more positively than smaller ones

Ogbechie,

with the smallest having 8 directors and the largest 20 directors

A board size of 16 26

The Central bank of Nigeria (CBN) corporate governance code for banks operating in Nigeria recommend a maximum board size of 20 directors

All the banks are compliant

However,

United Bank for Africa Plc has applied to the CBN for approval to increase their board size to 24

CEO Duality Separation of office of board chair and CEO Separation of office of board chair from that of CEO generally seeks to reduce agency costs for a firm

Kajola (2008) found a positive and statistically significant relationship between performance and separation of the office of board chair and CEO

Yermack (1996) equally found that firms are more valuable when different persons occupy the offices of board chair and CEO

KyereboahColeman (2007) proved that large and independent boards enhance firm value,

and the fusion of the two offices negatively affects a firm’s performance,

as the firm has less access to debt finance

The results of the study of Klein (2002) suggest that boards that are structured to be more independent of the CEO are more effective in monitoring the corporate financial 27

accounting process and therefore more valuable

Fosberg (2004) found that firms that separated the functions of board chair and CEO had smaller debt ratios (financial debt/equity capital)

The amount of debt in a firms’ capital structure had an inverse relationship with the percentage of the firm’s common stock held by the CEO and other officers and directors

This finding was corroborated by Abor and Biekpe (2005),

who demonstrated that duality of the both functions constitute a factor that influences the financing decisions of the firm

They found that firms with a structure separating these two functions are more able to maintain the optimal amount of debt in their capital structure than firms with duality

Accordingly,

they argued that a positive relationship exists between the duality of these two functions and financial leverage

Audit Committee Consistent with the agency theory,

shareholders’ interests are being safeguarded

In consistent with the Cadbury proposal as to formation of audit committee,

Central Bank of Nigeria and SEC have made it compulsory for all 28

banks to constitute a board’ audit committee consisting of a minimum of seven (7) members and it will hold at least three meetings in a year

The committee will review the financial reporting process,

the internal control system and management of financial risks,

audit committee works as another internal control mechanism in the board structure,

‘the impact of which should be to improve the quality of the financial management of the company and hence its performance’ (Weir et al,

Although results of Klein (2002) and Anderson,

Mansi and Reeb (2004) showed a strong association between audit committee and firm performance,

Kajola (2008) found no significant relationship between both variables

This lack of consensus presents scope for deeper research on the impact of this corporate governance variable

Size of the Audit Committee 29

This means the total number of directors on the audit committee board

Bedard et al (2004) argue that it is important to increase the number of members of the audit committee to ensure more effective control of accounting and financial processes

Similarly Pincus et al (1989) show that firms with larger audit committees are expected to devote greater resources to monitor the process of “reporting” accounting and finance

In the same furrow,

Anderson et al (2004) found that large size audit committees can protect and control the process of accounting and finance with respect to small committees by introducing greater transparency with respect shareholders and creditors

The Independence of Audit Committee Members The report of the Blue Ribbon Committee (BRC) considers independence as an essential quality of the audit committee in order to fulfill its oversight role

Indeed,

this report argues that several recent studies have identified a correlation between the independence of the audit committee,

the level of supervision and the level of fraud in the financial statements Several

previous studies use the percentage of outside directors to measure independence like Marrakchi et al (2001) and Bradbury et al (2006)

In effect,

these studies note that audit committees composed mostly or exclusively by outside directors are more independent than other committees

Similarly,

Klein (2002) shows that following the publication of the

requirements concerning the audit committee

Indeed these amendments concern the obligation to establish at least three independent directors on the audit committee for listed companies

Bryan et al (2004) find that the independence of the audit committee has a positive influence on the quality of earnings

In addition,

in a study on the main characteristics of audit committees,

Keasey et al (1993) show that the independence of the members of the audit committee is the most important criterion with effect on the reliability of financial statements

Company Size The size of company (proxied by total assets) is considered in this study as control variable to have a relationship with other 31

‘there is a strong relationship between firm size and CEO compensation’ (e

Murphy,

The literature is in harmony with this tendency

On average,

larger companies are better performers as they are able to diversify their risk (Ghosh,

Furthermore,

larger company has larger market share and market

Larger firms have larger investor’s bases than smaller ones

company size may be measured in different ways such as sales turnover,

In this study,

total assets have been used as the measure of company size

Actually,

to measure the magnitude of a company,

total assets is such a determinant that may preferably be used than other measures as the accounting measure because sometimes a medium firm may have larger sales volume,

due to increase in assets turnover

Debt Financing

Debt financing or leverage may play a significant role in governance mechanisms especially in the banking sector for two unique characteristics of banks: Opacity and strong regulations

Due to opacity,

depositors do not know the true value of a bank’s loan portfolio as such information is incommunicable and very costly to reveal,

implying that a bank’s loan portfolio is highly fungible (Bhattacharya et al

As a consequence of this asymmetric information problem,

bank managers have an incentive each period to invest in riskier assets than they promised they would ex ante (Arun and Turner,

The opaqueness of banks also makes it very costly for depositors to constrain managerial discretion through debt covenants (Capiro and Levine,

Referring different studies Haniffa and Hudaib (2006) assert that ‘debt forces managers to consume fewer perks and become more efficient to avoid bankruptcy,

the loss of control as well as loss of reputation (Grossman and Hart,

Debt contracting may also result in improved managerial performance and reduced cost of external capital (John and Senbet,

In short,

debt may help yield a positive disciplinary effect on performance

On the other hand,

debt can increase conflicts of interest over risk and return between creditors and equity holders

relationship of gearing ratio with performance shows conflicting results in different studies

Dowen (1995),

McConnell and Servaes (1995),

Short and Keasey (1999) and Weir et al

(2002) found a significant negative

However,

Hurdle (1974) found gearing to affect profitability positively

Studies show that then concept of company’s performance is multidimensional

But the fact is that the company’s investors,

shareholders and other stakeholders find

its successfulness in the financial performance

The financial performance measures can be divided into two major types: 1

Accounting- based measures (e

Return on Assets,

Return on Equity,

Market- based measures (e

Tobin’s Q ratio)

There has been extensive empirical research using different performance measures for examining the relationship between corporate governance and firms’ performance

There are some researches where either accounting-based measure or marketbased measure has been used but some researchers have used both the measures

When both the measures have been used,

almost all the researchers have found significant relationship with one measure but no relationship with other measures

This may be attributed for using different type of numerators and denominators used for calculating financial performance

Different researchers argue differently in favour of their using measurement base

Some argue that if the capital market is unstructured and much volatile,

Tobin’s Q ratios of different companies give misleading results

Accounting measures have been criticized on the grounds that they are subject to 35

that they may systematically undervalue assets as a consequence of accounting conservatism and that they may create other distortions as well (Sanchez-Ballesta and Garcia-Meca,

Joh (2003) argues that accounting profitability is a better performance measure than stock market measures for at least three

impediment to all available information being reflected in the stock price

Second,

a firm’s accounting profitability is more directly related to its financial survivability than is its stock market value

Finally,

accounting measures allow users to evaluate the performance of privately held firms as well as that of publicly traded firms

This section of the chapter examines some of these studies

Babalola

structure decisions of Nigerian firms

Panel data methodology 36

was employed to analyse the data for the selected foods and beverages companies and the results show that corporate governance

They concluded that corporate governance can greatly assist the food and beverages sector by infusing better management

effective regulatory mechanism and efficient utilization of firms’ resources resulting to improved performance if it is properly and efficiently practice

Abdul-Qadir and Kwanbo,

The study employed the use of t-test and ANOVA to test the three hypotheses formulated for the study

Findings revealed a significant impact of dispersed equity on the profitability of banks and an insignificant impact of board size on profitability

Mohammad,

Islam and Ahmed,

Estimated results demonstrate that the

committee meetings are positively and significantly associated with return on assets (ROA),

return on equity (ROE) and Tobin’s Q while Directors’ ownership and independent directors have significant positive effects on bank performance measured by Tobin’s Q

Mohammed,

The study made use of secondary data obtained from the financial reports of nine (9) banks selected for a period of ten (10) years (2001- 2010)

Data were analyzed using multiple regression analysis

Finding revealed that corporate governance positively affects performance of banks

The findings of the study further show that poor asset quality (defined as the ratio of nonperforming loans to credit) and loan deposit ratios negatively affect financial performance and vice visa

Ogbechie,

The study also attempted to identify the level of compliance of

Nigerian banks to the Central Bank of Nigeria (CBN) code of corporate governance for banks operating in Nigeria

Empirical findings indicate that boards of Nigerian banks frequently undertake evaluation of their activities as a means of improving performance

It was also revealed that almost all the banks have been compliant with nearly all the Central Bank of Nigeria (CBN) corporate governance guidelines

Cheng Wu,

Chiang Lin,

Cheng Lin and Chun-Feng,

Return on assets,

stock return and Tobin’s Q were the variables used in the regression model to measure firm’s performance

The empirical results indicate that firm performance has negative and significant relation to board size,

CEO duality,

stock pledge ratio and deviation between voting right and cash flow right

On the other hand,

firm performance has a positive and significant relation to board independence and insider ownership

governance on banking performance in Pakistan

The study measured efficiency of banks using Cobb-Douglas cost function

It is evident from the results that on average,

throughout the period of analysis

However,

it is observed that public ownership show lowest efficiency among all the groups i

which emphasizes on a competitive environment in the banking sector that may improve the efficiency of these institutions

Similarly,

market share also affects the performance of banks negatively,

suggesting that banks in a less competitive environment might feel less pressure to control their costs

Moreover,

concentration have significant impact on banking efficiency

Omankhanlen et al (2013) investigated the role of corporate governance in the growth of Nigerian Banks

A multiple linear regression

employed to test the hypotheses

The statistical significance of the variables was first determined using ANOVA statistics

The findings reveal that the problems of corporate governance in the Nigerian banking sector include: instability of board tenures,

high level of insider dealings

While the weaknesses of corporate governance have been identified to include ineffective board oversight functions,

disagreement between boards and management giving rise to board squabbles,

lack of experience on the part of the Board of director’s members and weak internal control

Adeyemi and Ajewole (2004) examine corporate governance issues and challenges in the Nigerian banking sector

Both primary and secondary sources of data were made use of

The primary data collected through the use of questionnaire were analyzed using simple descriptive statistics

Findings from the study showed that the Nigerian banking sector is yet to learn from the sad consequences of poor corporate governance of the period between 1994-2003 in particular

Akpan and Riman (2012) examined the relationship between corporate governance and banks profitability in Nigeria

The study discovered that good corporate governance and not assets value determine the profitability of banks in Nigeria

Ayorinde et al (2012) examined the effects of corporate governance on the performance of Nigerian banking sector

The secondary source of data was sought from published annual

The Person Correlation and the regression analysis were used to find out whether there is a relationship between the corporate governance variables and firms performance

The study revealed that a negative but significant relationship exists between board size and the financial performance of these banks while a positive and significant relationship was also observed between directors’ equity interest,

level of corporate governance disclosure index and performance of the sampled banks

Onakoya (2011) examines the impact of corporate governance on bank performance in Nigeria during the period 2005 to 2009 based on a sample of six selected banks listed on Nigerian Stock Exchange market making use of pooled time series data

Findings from the study revealed that corporate governance have been on the low side and have impacted negatively on bank performance

The study therefore contends that strategic training for board members and senior bank managers should be embarked or improved upon,

especially on courses that promote corporate governance and banking ethics

Ganiyu and Abiodun (2012) examined the interaction between corporate

decisions of Nigerian firms by testing the corporate governance and capital structure theories using sample of ten selected firms in the food and beverage sector listed on the Nigeria Stock Exchange during the periods of 2000 – 2009

Panel data methodology was employed to analyse the data for the selected foods and beverages companies and the results show that corporate governance has important implications on

Corporate governance can greatly assist the food and beverages sector by infusing better management practices,

effective control and accounting systems,

utilization of firms’ resources resulting in improved performance if it is properly and efficiently practiced

Hoque et al (2012) empirically investigated the influence of corporate governance mechanisms on financial performance of 25 listed banking companies in Bangladesh over the period 2003-2011

Estimated results demonstrate that the general public ownership and the frequencies of audit committee 43

meetings are positively and significantly associated with return on assets (ROA),

return on equity (ROE) and Tobin’s Q

Directors’ ownership and independent directors have significant positive effects on bank performance measured by Tobin’s Q

Chiang (2005) argues that as the independent directors are more specialized to monitor the board than the inside directors to run the business successfully by reducing the concentrated power of the CEO,

it helps the company to prevent misuse of resources and enhance performance

Krivogorsky

relationship between independent directors and performance of 81

European

unrelated to the firm may lack the knowledge or information to be effective monitors

Yermack (1996),

Agrawal and Knoeber (1996) and Bhagat and Black (1998) find a negative relationship between

In conclusion,

the review of prior studies has identified ten corporate governance characteristics that impact on firms’ performance,

albeit with mixed evidence as to the direction of the relation

Nevertheless,

almost all this body of literature examined the relationship

performance during economically healthy periods without any financial distress

As expected,

the researchers differ on the extent to which corporate governance influences the performance of firms

Furthermore,

each research study considered different set of factors and used variety of measurements to assess the performance of firms under investigation

Also most of these study focus on advance countries of Asia,

Europe and America with Africa and Nigeria in particular receiving less research attention

This study therefore seeks to fill this gap that has hitherto existed in literature by empirically examining the impact of corporate governance mechanism on performance of commercial banks in Nigeria

CHAPTER THREE RESEARCH METHODOLOGY 3

This chapter will mainly focus on the research design,

the population and sample of the study,

Sources of data collection,

Techniques of

definition of variable/model specification and weaknesses of the methodology

This research design is adopted for this study because of its strengths as the most appropriate design to use when it is impossible to select,

control and manipulate all or any of the independent variables or when laboratory control will be impracticable,

costly or ethically questionable (Akpa and Angahar,

The population of this study in view of the above definition covers all the 21 banks quoted on the Nigerian stock exchange as at 19th August 2014

The sample is a subset of the population selected for the study or

commercial banks namely Zenith Bank Plc,

Guarantee Trust Bank (GTB) Plc,

First Bank Plc,

Fidelity Bank Plc,

Union Bank Plc,

United Bank for Africa (UBA) Plc from the existing 21 banks to constitute the sample size of the study

The following criteria were taken into cognizance in the selection process

 The commercial banks selected were only those that survived the 2005 recapitalization exercise of the CBN without changing their identity

 The commercial banks selected for the study must be from the list of commercial banks that the CBN’s and World Bank’s ranking were adjudged to be the best performing banks in terms of strong and vibrant banks (Vanguard 3,

July 2011)

The financial statement of the six (6) sampled commercial banks from the period 2005-

Descriptive

regression using the ordinary least squares (OLS) method was adopted for the analysis

The OLS method was preferred because it minimizes the errors between the points on the line and the actual observed points of the regression line by giving the best fit

 Return on equity (ROE): This is an accounting based performance indicator of companies

It measures the returns accruable to shareholders’ from their equity holdings

It is given by net profit /Shareholders’ equity

 Board size (BS): Board size refers to the total number of directors on the board of a bank

 Independence of the Audit Committee (IAC): This refers to the proportion of independent directors on the audit committee

 Size of Audit Committee: This is the total number of auditors that constitute the audit committee of a bank

 CEO Duality: This is a situation where one individual occupies the positions of CEO and at the same time the board chairperson of a company,

thus increasing the concentration of power in one individual and undue influence of particular management and board members

CEO duality exists in a situation where the owner of the company in question still doubles as the chief executive officer (CEO) of the company

ROE = α + β1 BS + β2IDA+ β3 SAC +u Where,

ROE = Return on Equity BS = Board Size IDA = independence of the Audit Committee Members SAC = Size of the audit committee α = alpha,

which represents the model constant β1 – β4 =Beta,

representing the coefficients of variables used in the model

u = is the stochastic variable representing the error term in the model

It is usually estimated at 5% (0

Decision Rule This study shall accept and reject the null and alternative hypotheses using the following set criteria

 Accept the null hypothesis if the critical value of t at 0

 Reject the null hypothesis if the critical value of t at 0

It is only left for the researcher to minimize them

The weakness of this study’s methodology is briefly discussed in subsequent paragraphs

Over reliance on secondary data is another weakness of the methodology

Financial statements published do not have 100 %accuracy,

so its reliability is not assured

The occurrence of inflation as well affects the secondary data

Also as a weakness of the methodology is the erroneous assumption of the ability of linear and multiple regressions to validly project into the future past relationship whereas the relationship between the dependent and independent variables established is only valid across the relevant range

Furthermore the model equations are only estimations of the independent value,

the researcher cannot possibly account for 52

every factor that goes into each independent value,

and there will always be some error (either pure error or lack of fit error) in a regression model

The above weaknesses notwithstanding,

the intent of the research may not be deterred as the error term included in the models

asymmetry either caused by inflation or reporting misfeasance

The researcher also made use of SPSS version 20 for windows application software to run the regression model for a more reliable result that reflect current realities in the banking sector and findings to meet all academic standards

Also the secondary data used in this study will be sourced from reliable source and human subjectivity will be suppressed to the barest minimum so as to enable the researcher have a result devoid of manipulation

CHAPTER FOUR 53

DATA PRESENTATION,

ANALYSIS AND FINDINGS 4

In this regard,

this chapter therefore presents findings from data analysis using the research method earlier explained in chapter three

This chapter will first present and analyse the data,

test the hypotheses and interpret and discuss the findings of the study

commercial banks sampled for the study (see appendix I for the raw data)

Data analysis here was done with the aid of the statistical package for social science (SPSS version 20)

As a reminder,

this study has only one dependent variable: Return on equity (ROE),

three independent variables: board size (BS),

independence of audit committee (IDA),

and size of the audit committee (SAC)

The analysis of data is presented in the subsequent sections

variance inflation factor (VIF) and Tolerance statistics in order to ensure that the results of this study are robust

This is shown in table 4

The Durbin Watson statistics is estimated at 2

This thus indicates the absence of autocorrelation

The Durbin Watson statistics ensures that the residuals of the proceeding and succeeding sets of data do not affect each other to cause the problem of auto-correlation

Variance

Inflation

independent variables consistently fall below 2 (see table 4

This indicates the absence of multicollinearity problems among the variables under investigation (see Berenson and Levine,

This statistics ensures that the independent variables are not so correlated to the point of distorting the results and assists in filtering out those ones which are likely to impede the 55

There is no formal VIF value for determining presence of multicollinearity

Values of VIF that exceed 10 are often regarded as indicating multicollinearity,

but in weaker models values above 2

this model exhibit low risk of potential multicollinearity problems as all the independent variables have a variance inflation factor (VIF) below 10 (Myers,

This shows the appropriateness of fitting of the model of the study with the three (3) independent variables

In addition,

the tolerance values consistently lies between 0

945 and 0

Menard (1995) suggested that a tolerance value of less than 0

In this study,

the tolerance values are more than 0

this further substantiates the absence of multicollinearity problems among the explanatory variables

This section of the chapter presents in the table below the results of the correlation results between the dependent and explanatory variables

Table 4

N Pearson Correlation

(2-tailed) N Pearson Correlation

732 49 1

(2-tailed) N Pearson Correlation

861 49 1

Correlation is significant at the 0

Source: SPSS Version 20 output Table 4

Correlations result here is used as further check for data validity

These types of checks are necessary because high correlation cause problems about the relative contribution of each predictor to the success of the model (Guajariti,

The correlation matrix above shows the

absence of multicollinearity among the explanatory variables as all the variables are very low with the highest correlation estimated at 0

This is less than 0

Berenson and Levine,