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.
TABLE OF CONTENTS
Declaration- – – – – – – – – – i
Certification- – – – – – – – – – ii
Dedication – – – – – – – – – – iii
Acknowledgement- – – – – – – – – v
Abstract- – – – – – – – – – – vii
Table of Content – – – – – – – – – viii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study – – – – – – – 1
1.2 Statement of the Problem – – – — – – – 6
1.3 Objective of the Study – – – – – – – 8
1.4 Hypotheses of the Study – – – – – – – 9
1.5 Scope of the Study – – – – – – – – 9
1.6 Significant of the Study – – – – – – – 9
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction – – – – – – – – – 11
2.2 Concept of Corporate Governance – – – – – 11
2.3 Concept of Capital Structure – – – – – – 15
2.4 Empirical Studies on Corporate Governance and Capital Structure – 23
2.5 Corporate Governance in Nigeria – – – – – – 39
2.6 Right of Shareholders of Food & Beverages firms in Nigeria – 43
2.7 Theoretical Framework – – – – – – – 48
CHAPTER THREE: RESEACH METHODOLOGY
3.1 Introduction – – – – – – – – 51
3.2 Research Design – – – – – – – – 51
3.3 Population of the Study – – – – – – – 51
3.4 Sample size and Sampling Technique – – – – – 52
3.5 Sources and Method of Data Collection – – – – 52
3.6 Technique of Data Analysis – – – – – – 53
3.7 Model Specification – – – – – – – 54
3.8 Variables Definition and Measurement – – – – 56
3.9 Summary – – – – – – – – – 56
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction – – – – – – – – 58
4.2 Descriptive Statistics – – – – – – – 58
4.3 Correlation Result – – – – – – – 62
4.4 Regression Results – – – – – – – 65
4.5 Hypothesis Testing for Model One – – – – – 67
4.6 Hypothesis Testing for Model One – – – – – 70
4.7 Discussion of Findings- – – – – – – – 73
4.8 Policy Implications of the Findings- – – – – – 74
CHAPTER FIVE: SUMMARY, CONCLUSIONS & RECOMMENDATIONS
5.1 Summary – – – – – – – – – 76
5.2 Conclusions – – – – – – – – – 77
5.3 Recommendations – – – – – – – – 78
5.4 Suggestion for further Research- – – – – – 79
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.
1.2 Statement of the Problem
Agency problems arise as a result of the relationships between shareholders and managers and are based on conflicts of interest within the firms. This problem is concerned with the design of institutions that bring management taking into account the welfare of shareholders in their actions. This inability has a direct relationship with the need for efficient corporate governance strategy in Nigeria for sustainable development.
In addition, Lack of effective control of corporate firms in Nigeria has worked to the detriment of shareholders and creates a class of stakeholders who have lost interest in the system (Quadri 2012). The act of financing decision in Nigerians‟ firms has consistently failed to be accountable to the stakeholders and has no deep-rooted mechanism such as ownership concentration, institutional investors and board composition that can be used to maintain a balance among major players of corporate governance. Thus, corporate Governance indicates the process of supervision and control on firm’s management in order to make sure if the performance of managers is in accordance with the interests of shareholders.
In spite of numerous researches on corporate governance, agency problem still exists in Nigerian firms to date (Ahmadpour 2012). This may affect the firms financing decisions thereby reducing their performance. The most important elements of this system consist of shareholders and the manner of their ownership, institutional investors and the members of the board. The management runs the firms through its day to day operations and setting its business strategy. In the structure-conduct-performance, management perceptions of the market structure and firm‟s strengths and weakness jointly determine its choice of debt.
Effective corporate governance in Nigerians firms reduces control rights that shareholders and creditors confer on managers and increase the probability that managers invest in positive net present value projects. Jensen & Meckling (1976) opined that the relationship of the board and management should be characterized by transparency and fairness to shareholders.
An extensive review of literature reveals that the empirical works (Beger & Dipatti 2003; Chaganti & Damanpour, 1991 & Hassan 2009) mostly focused on the impact of corporate governance on firm‟s performance or examines the influence of ownership structure on firm value. However, relationship between corporate governance and capital structure has not been extensively explored. Only few studies investigated the said relationship such as Brailsford Oliver & Pua (2002); Hussainy. & Aljifri (2010); Wen, Rwegasira & Bilderbeek (2002). Some studies (Wen 2002 & Abor 2007) discuss the influence of corporate governance on capital structure decisions of firms for developed and emerging markets. Otnet (2006) stated that corporate governance as an important issue nowadays due to different financial crises in Asia, Europe and America.
Although, some studies show that corporate governance has a positive impact on capital structure. While some studies concluded that there is positive significant relationship between corporate governance and capital structure (Weill 2003, Rehman et al 2010, Saad 2010, Berger and Diatti 2003) others concluded a negative significant relationship (Abor & Biekpe 2007, Hussaini & Aljifri 2009, Wen, Rwegasira & Bilderbeek 2002), a fact that makes them too generic. The studies are of mixed result. There is a clear gap in the empirical research on the impact of corporate governance on capital structure of Nigerians firms. The researcher also
observes that the aforementioned studies focus on banks, insurance or manufacturing firms but none of the studies concentrates on food and beverages firms in Nigeria.
The managers and users of financing decision may be confused about the proper choice of capital structure decision, and end up making wrong choice of debt and equity financing. In view of the inconclusive nature of the findings above, we hereby intend to find out: What is the actual relationship between corporate governance mechanisms and capital structure? To what extend is the relationship between corporate governance mechanisms and capital structure? And what is the direction of the impact of corporate governance mechanisms on capital structure decision?
1.3 Objectives of the Study
The main objective of the study is to examine the impact of Corporate Governance mechanisms on Capital Structure of listed Food and Beverage firms in Nigeria. Specific objectives of the study are to:
i. examine the effect of institutional ownership on capital structure of listed food and beverages firms in Nigeria.
ii. determine the effect of ownership concentration on capital structure of listed food and beverages firms in Nigeria.
iii. evaluate the effect of board composition on capital structure of listed food and beverages firms in Nigeria.
1.4 Hypotheses of the Study
The following null hypotheses are formulated for this study
HO1 Institutional ownership has no significant impact on capital structure of listed food and beverages firms in Nigeria
HO2 Ownership concentration has no significant impact on capital structure of listed food and beverages firms in Nigeria
HO3 Board composition has no significant impact on capital structure of listed food and beverages firms in Nigeria.
1.5 Scope of the Study
This study examines the impact of Corporate Governance on Capital Structure of listed Food and Beverages firms in Nigeria for a period of ten (10) years, from 2004 – 2013. This is due to the fact that, in 2003 a new code of corporate governance for public companies was issued, and the code was harmonized in 2008 (effective in November, 2011). The depending variables are debt to total capital and debt to total asset and the independent variables include institutional investors, ownership concentration and board composition.
1.6 Significance of the study
The purpose of the study is to examine the impact of corporate governance mechanisms on capital structure of listed food and beverages firms in Nigeria. The study would be of great importance in the following ways.
The regulatory authority (SEC) will benefit from the result of the study. It will enable them examine the effectiveness of their monitoring instruments as well as review and upgrade them where appropriate.
Similarly, other stakeholders like government, employee and creditors will also benefit from the findings of the study by allowing them to make informed decisions about policies, employments and ratings respectively.
The outcome of the research can assist the shareholders of listed food and beverages firms in Nigeria to know whether or not the corporate governance made impact on the capital structure of their investments in firms so as to guide them in taking relevant decision.
The study will also be of great benefit to corporate financial managers who are faced with the challenges of making decisions on an optimal mix of debt and equity that will maximize wealth of shareholders and minimize cost.
The findings will add value to the existing literatures on corporate governance and capital structure and serve as reference for further research.