Governance mechanisms, debt structure and bank performance in Nigeria
List of Authors
  • Muhammad Malami Maishanu , Yakubu Shaba

Keyword
  • Governance Mechanisms, Debt Structure, Bank Performance, GMM, Nigeria

Abstract
  • This study examined post-consolidation impacts of corporate governance and debt structure on bank performance in Nigeria. It employed Generalised Methods of Moments (GMM) econometric technique on a panel sample of 12 Deposit Money Banks (DMBs) from 2005 through 2022. In congruence with the views of the agency theory and those of earlier scholars that smaller boards relate with higher levels of performance, our findings provide evidence in support thereof. Our results also support the positive roles of board composition and gender diversity inferring that the more independent and gender diverse a bank’s board, the better the performance. Our findings further argued that foreign diversity is not a value-relevant governance mechanism. The GMM estimates also found significant negative post-consolidation impact of debt-to-equity on ROE implying that the higher this debt variant, the worse the return on owners’ equity. Consequently, the results provide sufficient evidences that offer enough proof to support the Central Bank of Nigeria’s recommendations that DMBs maintain a minimum board size of seven, promote independent and gender inclusive boards, entrench gender quotas, promote policies that will attract foreign investors and encourage the banks to minimise their debt burden in order to maximise shareholders’ wealth, minimise weighted average cost of capital, the exorbitant cost of maintaining large boards as well as the conflicts associated with agency.

Reference
  • 1. Abosede, A. J., & Kajola, S. O. (2011). Ownership Structure and Firm Performance: Evidence from Nigerian Listed Companies. Corporate Ownership & Control, 8(4), 391–400.

    2. Abubakar, A. B. (2014). Corporate Board Gender Diversity and Performance: Evidence from Nigerian Stock Exchange. An Unpublished PhD Thesis, Department of Economics, Usmanu Danfodiyo University, Sokoto.

    3. Adams, R. B., & Ferreira, D. (2009). Women in the Boardroom and Their Impact on Governance and Performance. Journal of Financial Economics,94(2), 291–309.

    4. Adenikinju, O., & Ayorinde, F. (2001). Ownership structure, corporate governance and corporate performance: The case of Nigerian quoted companies. Unpublished Final Report presented at the AERC biannual research workshop, Nairobi, Kenya.

    5. Adesina, J. B., Nwidobie, B. M., & Adesina, O. O. (2015). Capital Structure and Financial Performance in Nigeria. International Journal of Business and Social Research, 5(2), 21–31.

    6. Adewumi, S. B., Acca, Y. A., & Afolayan, O. (2018). Ownership Structure and Financial Performance of Quoted Building Materials Firms in Nigeria. International Journal of Research and Innovation in Social Science, 2(7), 476–484.

    7. Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31, 377–397.

    8. AlSagr, N., Belkhaoui, S., & Aldosari, A. (2018). The Effect of Corporate Governance Mechanisms on Bank Performance: Evidence from Saudi Banking Sector. Asian Economic and Financial Review, 8(8), 1111–1125.

    9. Al-Saidi, M., & Al-Shammari, B. (2013). Board composition and bank performance in Kuwait: An empirical study. Managerial Auditing Journal, 28(6), 472–494.

    10. Awunyo-Vitor, D., & Badu, J. (2012). Capital Structure and Performance of Listed Banks in Ghana. Global Journal of Human Social Science, 12(5), 56-62.

    11. Ayako, A., & Wamalwa, F. (2015). Determinants of Firm Value in Kenya: Case of Commercial Banks Listed at the Nairobi Securities Exchange. Applied Finance and Accounting, 1(2), 129–142.

    12. Bebeji, A., Mohammed, A., & Tanko, M. (2015). The effect of board size and composition on the financial performance of banks in Nigeria. African Journal of Business Management, 9(16), 590-598.

    13. Bhagat, S. and Bolton, B. (2008) Corporate Governance and Firm Performance. Journal of Corporate Finance, 14, 257-273. https://doi.org/10.1016/j.jcorpfin.2008.03.006.

    14. Central Bank of Nigeria, CBN (2005). Banking Sector Consolidation: Special Incentives to Encourage Weaker Banks. Press Release, April 11.

    15. Central Bank of Nigeria, CBN (2023). Corporate Governance Guidelines for Commercial, Merchant, Non-Interest and Payment Service Banks in Nigeria.

    16. Chen, L. (2012). The Effect of Ownership Structure on Firm Performance: Evidence from Non-financial Listed Companies in Scandinavia. An Unpublished MSc Dissertation, Aarhus School of Business, Aarhus University, Denmark.

    17. Constantatos, A. (2019). Corporate governance mechanisms in Greece and their effect on earnings management and firm performance. A Published PhD Thesis, Stirling Management School, University of Stirling, Greece.

    18. Desai, A. (2007). Corporate Tax Avoidance and Firm Value. Harvard University and NBER.

    19. Donaldson, L., & Davis, J. H. (1991). Stewardship Theory or Agency Theory:CEO Governance and Shareholder Returns. Australian Journal of Management, 16(1), 50-65.

    20. Eelderink, G. J. (2014). Effect of ownership structure on firm performance. An Unpublished MSc Dissertation, Department of Business Administration, Faculty of Management and Governance, University of Twente, Enschede, The Netherlands.

    21. Eisenhardt, K. M. (1989). Agency Theory: An Assessment and Review. Academy of Management Review. 14, 57-74.

    22. Fama, E. F. (1980). Agency problem and theory of the firm. Journal of Political Economy, 88, 288-307.

    23. Fanta, A. B., Kemal, K. S., & Waka, Y. K. (2013). Corporate Governance and Impact on Bank Performance. Journal of Finance and Accounting, 1(1), 19–26.

    24. Garba, T., & Abubakar, A. B. (2014). Corporate Board Diversity and Financial Performance of Insurance Companies in Nigeria: An Application of Panel Data Approach. Asian Economic and Financial Review, 4(2), 257–277.

    25. Graham, J. & Harvey, C. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60, 187-243.

    26. Grossman, S. J., & Hart, O. D. (1986). Takeover Bids, the Free Rider Problem, and the Theory of the Corporation. Bell Journal of Economics,11, 42–64.

    27. Handa, R. (2018). Does Corporate Governance Affect Financial Performance: A Study of Select Indian Banks. Asian Economic and Financial Review, 8(4), 478–486.

    28. Ibrahim, A. (2011). Impact of Corporate Governance on the Performance of Insurance Firms in Nigeria, An Unpublished MSc Thesis, Department of Accounting, Ahmadu Bello University, Zaria, Kaduna State-Nigeria.

    29. Ibrahim, A., Daniel, A. A., Oladipo, O. N., & Rildwan, O. B. (2023). Corporate Governance and Firm Performance. Evidence from Deposit Money Bank in Nigeria. EuroEconomica, 1(42), 138–151.

    30. Jackling, B., & Johl, S. (2009). Board Structure and Firm Performance: Evidence from India’s Top Companies. Corporate Governance: An International Review, 17(4), 492-509. https://doi.org/10.1111/j.1467-8683.2009.00760.x

    31. Jansson, E. (2005). The Stakeholder Model: The Influence of the Ownership and Governance Structure. Journal of Business Ethics, 56, 1-13.

    32. Javed, Y., & Iqbal, R. (2007). Relationship between Corporate Governance Indicators and Firm Value: A Case Study of Karachi Stock Exchange, Http://mpra.ub.uni-muenchen.de/225.

    33. Jensen, M. C. (1986). Agency Costs of free cash flow, corporate finance and takeovers. American Economic Review,76(2), 323-329.

    34. Jensen, M. C. (2001). Value Maximization, Stakeholder Theory, and the Corporate Objective Function. European Financial Management, 7(3), 297-317.

    35. Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics,3(4), 305-360.

    36. Jeroh, E. (2018). The Effect of Board and Ownership Structure on the Financial Performance of Listed Firms. Nigerian Journal of Management Sciences, 6(2), 193-202.

    37. Kim, E. (1978). A mean-variance theory of optimal capital structure and corporate debt capacity. Journal of Finance, 33, 45-63.

    38. Kraus, A. & Litzenberger, R. H. (1973). A state-preference model of optimal financial leverage. Journal of Finance, 28, 911-922.

    39. Kyereboah-Coleman, A. (2007). Corporate Governance and Shareholder Value Maximization: An African Perspective. African Development Review, 19(2), 350-367.

    40. Kyereboah-Coleman, A., & Biekpe, N. (2006a). Do Boards and CEOs Matter for Bank Performance? A Comparative Analysis of Banks in Ghana. Journal of Corporate Ownership and Control, 4(1), 119–126.

    41. Kyereboah-Coleman, A., & Biekpe, N. (2006d). The relationship between board size, board composition, CEO duality and firm performance: Experience from Ghana. Corporate Ownership and Control, 4(2), 114–122.

    42. Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate governance. Business Lawyer, 48, 59–77.

    43. Mandiri, S. S. D., Rahayu, S. M., & Nuzula, N. F. (2023). The Impact of Corporate Governance towards Capital Structure and Corporate Performance in Banking Industry. Journal Administrasi Bisnis, 17(1), 82–93.

    44. Maxwell, O. O., & Kehinde, E. F. (2012). Corporate governance and bank performance in Nigeria: A correlation analysis. Economics and Finance Review, 2(4), 14–23.

    45. Miller, M. H. (1977). Debt and Taxes. Journal of Finance, 32(2), 261-275.

    46. Miyajima, H., Omi, Y. & Saito, N. (2003). Corporate governance performance in 20th century Japan. Business and Economic History, 1, 1-36.

    47. Myers, S. (1977). Determinants of Corporate Borrowings. Journal of Financial Economics, 5, 147-175.

    48. National Insurance Commission, NAICOM (2009). Code of Good Corporate Governance for

    49. Nigerian Communications Commission, NCC (2016). Code of Corporate Governance for the Telecommunications Industry.

    50. Obembe, O. B., Adebisi, S. A., & Adeleye, O. K. (2010). Corporate Governance, Ownership Structure and Performance of Manufacturing Firms in Nigeria. Corporate Ownership & Control, 8(1), 696–708.

    51. Obi, C. C. (2016). Corporate Governance and Bank Performance in Nigeria. An Unpublished M.Sc. Dissertation, Department of Accounting, Banking and Finance, Delta State University, Asaba, Nigeria.

    52. Ogabo, B., Ogar, G., & Nuipoko, T. (2021). Ownership Structure and Firm Performance: The Role of Managerial and Institutional Ownership: Evidence from the UK. American Journal of Industrial and Business Management, 11, 859-886. https://doi.org/10.4236/ajibm.2021.117053

    53. Ogunmakin, A. A., Fajuyagbe, S. B., & Alayo, R. A. (2020). Corporate Governance and Financial Performance of Deposit Money Banks in Nigeria. EuroEconomica, 39(3), 196-213.

    54. Olokoyo, F. O. (2012). Capital structure and corporate performance of Nigerian quoted firms: A panel data approach, Ph D thesis, Covenant University, Ota, Ogun State-Nigeria.

    55. Opoku, E. F., Adu, J. K., & Anarfi, B. O. (2013). The Impact of Capital Structure and Profitability of Listed Banks on the Ghana Stock Exchange. Social and Basic Sciences Review, 1(2), 74-91.

    56. Organisation for Economic Cooperation and Development, OECD (2023). OECD Corporate Governance Factbook 2023, OECD Publishing, Paris, https://doi.org/10.1787/6d912314-en.

    57. Oriakpono. A. E., & Musiliu, S. B. (2023). Financial Performance of Quoted Banks in Nigeria and Corporate Governance Structure. International Journal of Management Studies and Social Science Research, 5(2), 158–168.

    58. Ronoowah, R. K., & Seetanah, B. (2022). Corporate Governance, Capital Structure, and firm Performance: A Panel VAR Approach. SN Business and Economics, 3(1), 1–30.

    59. Ross, S. (1973). The economic theory of agency: The principal’s problem. American Economic Review, 63(2), 134-139.

    60. Sakai, H., & Asaoka, H. (2004). The Japanese Corporate Governance System and Firm Performance: Toward Sustainable Growth.

    61. Sanda, A. U., Mikailu, A. S., & Garba, T. (2010). Corporate governance mechanisms and firms’ financial performance in Nigeria. Afro-Asian Journal of Finance and Accounting, 2(1), 22-39.

    62. Scott, J. (1977). Bankruptcy, secured debt and optimal capital structure. Journal of Finance, 32, 1-19.

    63. Securities and Exchange Commission, SEC (2018). Nigerian Code of Corporate Governance 2018.

    64. Shaba, Y. (2016). Corporate Governance Mechanisms and Performance of Quoted Firms in Nigeria. An Unpublished PhD Thesis, Department of Business Administration, Usmanu Danfodiyo University, Sokoto, Nigeria.

    65. Shaba, Y., Abubakar, I., & Yaaba, B. N. (2016). Corporate Governance and Market Performance: Empirical Evidence from Nigerian Banks. International Journal of Research in Management, Economics and Commerce, 6(12), 9–20.

    66. Shaba, Y., Yaaba, B. N., & Abubakar, I. (2016). Capital Structure and Profitability of Deposit Money Banks: Empirical Evidence from Nigeria. European Journal of Business and Management, 8(23), 110–121.

    67. Shleifer, A., & Vishny, R. W. (1996). A Survey of Corporate Governance. National Bureau of Economic Research, Working Paper 5554.

    68. Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. The New York: Modern Library.

    69. Solomon, J. (2010). Corporate Governance and Accountability, 3rd Ed., Chichester, UK: John Wiley & Sons Ltd. the Insurance Industry in Nigeria.

    70. Thompson, S., Dogarawa, A. B., Bello, A., & Fodio, M. I. (2016). Board Characteristics, Ownership Structure and Firm Value of Listed Petroleum Companies in Nigeria. Nigerian Journal of Accounting Research, A Publication of Department of Accounting, Ahmadu Bello University, Zaria, 12(2), 59-108. Available at SSRN: https://ssrn.com/abstract=3308005 or http://dx.doi.org/10.2139/ssrn.3308005

    71. Thuraisingam, R. (2013). The Effects of Corporate Governance on Company Performance: Evidence from Sri Lankan Financial Services Industry. Journal of Economics and Sustainable Development, 4(17), 103–109.

    72. Turnbull, S. (1997). Corporate Governance: Its Scope, Concerns and Theories. Corporate Governance: An International Review, 5(4), 180-205.

    73. Vintila, G., & Gherghina, S. C. (2012). An Empirical Examination of the Relationship between Corporate Governance Ratings and Listed Companies’ Performance. International Journal of Business and Management, 7(22), 46–61.

    74. Wilcox, C. U., & Osho, A. (2020). Corporate Governance Characteristics and Financial Performance of Nigeria Banks. Journal of Accounting Research, 6(1), 1–4.

    75. Yauri, N. M., & Koko, M. A. (2012). Introduction to Business Administration. In Ogundiya, I. S. & Amzat, J. (Eds.), The Basics of Social Sciences (pp. 593-614). Lagos, Nigeria: Malthouse Press.

    76. Yermack, D. (1996). Higher Market Valuation of Companies with Small Board of Directors. Journal of Financial Economics, 40, 185–213.