COUNCIL MEMBERS

Alhaji Shehu Usman Ladan, B.Sc. (Hons), MBA,mni, FCNA, CPA - President/Chairman of Council Professor Mohammad Akaro Mainoma, Ph.D, FCNA, CPA - 1st Vice President Professor Benjamin C. Osisioma, Ph.D, FCNA - 2nd Vice President Mr. Anthony Chukwuemeka Nzom, MBA, FCNA, CPA - Immediate Past President Mr. James Ekerare Neminebor, HND, B.Sc. (Hons), MBA, FCNA - Treasurer Hajia Zuwaira Kishimi, B.Sc. (Hons), MBA, FCNA - Member Secretary Dr. Nuruddeen A. Abdullahi, Ph.D, mni, FCNA - Member Mr. Johnson Oludeinde Oluata, B.Sc. (Hons), ACIArb, CFE, FCNA - Member Mr. Audu Hassan Ohida, HND, MBA, FCNA - Member Mr. Anthony N. Kalu, FCNA - Member Alhaji Abubakar Ali Hina, MBA, FCNA - Member Alhaji Mohammed Lawal B. Maru, B.Sc., MBA, FCNA - Member Mrs Maureen Chikwalumuzor Eboka, B.Sc.,MBF, FCNA - Member Mr. Babajide Ibrahim Awe Agboluga, MBA FCNA - Member Mr. Ibrahim Maren Makut, HND, MBA, FCNA - Member Past Presidents Chief (Dr.) Johnson Kolawole Odumeru, FCNA - 1996 - 2001 Mr. Sunday Babalola Aloba, FCNA (Late) - 2001 - 2003 Alhaji Umar Hamid, FCNA - 2003 - 2005 Prof. Edet Robinson Iwok, Ph.D, FCNA (Late) - 2005 - 2007 Dr. Samuel Okwuchukwu Nzekwe, FCNA - 2007 - 2009 Chief (Mrs) Francess Iyamide Gafar, FCNA - 2009 - 2011 Hajia Maryam Ladi Ibrahim, B.Sc. (Hons), FCNA - 2011 - 2013 Alhaji (Dr.) Sakirudeen Tunji Labode, FCNA, CPA - 2013 - 2015 Mr. Anthony Chukwuemeka Nzom, MBA, FCNA, CPA - 2015 - 2017 Administration Dr. Sunday A. Ekune, B.Sc (Hons), M.Sc, FCNA, CPA - Registrar / Chief Executive Fatima Abdussalam, B.Sc. (Hons), CNA, CPA - Chief Accountant Mr. Gbeminiyi D. Ojelade B.Sc.(Hons), ACIA - Principal Manager (Registry) Rahman A. Bello B.A.( Hons), MBA, CNA - Principal Manager (Corporate Affairs) John O. T. Amah, Esq. LLB (Hons), LL.M, B.L., ACIArbN - Principal Legal Officer Mr. Femi Jogunade B.A. (Hons), ACIPM, MPIA - Senior Manager, Exams & Records Mrs Aduke Akande, ACTI, CNA - Head, Internal Audit Mr. Tajudeen Salaudeen, B.Sc., MCITP, MCPD - Head, ICT Nigerian College of Accountancy Joseph Femi Adebisi, Ph.D, ANIM, FCNA - Director-General Kayode Olushola Fasua, Ph.D, FCTI, FCNA - Director of Studies Editorial Board Chairman/Editor-in-Chief: Shehu Usman Hassan, B.Sc, M.Sc, Ph.D, FCFA, FCILRM, NAA, AAFA, CNA Deputy Editor-in-Chief: Prof. Joseph Offiong Udoayang, B.Sc, M.Sc, MBA, Ph.D, ACTI, FCNA Members: Akor Ikpam, B.Sc. (Hons), MBA, Ph.D, Kss, FCNA Luka Mailafia, B.Sc, MBA, M.Sc, Ph.D, NAA, FDA, CNA Shuaibu Umar Usmanu, B.Sc, MBA, CNA Eseyin Joseph Ayo, HND, B.Sc, PGD, ANIM, CNA Ismaila Olotu Abdullahi, B.Sc, M.Sc, Ph.D, MNAA, AAFA CNA Secretary: Mr. Sani Abdulmalik, BLS (Hons) CLN Editor: Mr. Obafemi Olusanya, PGD (Journalism) DISCLAIMER: The views expressed in this journal are not necessarily those of the Association. Authors should note that they are fully responsible for their papers and claims thereof. The Editorial Board and/or the Associatinn cannot be held liable for any acts of plagiarism or misleading/misrepresentation of facts. All correspondence should be addressed to the Editor-in-Chief, The Certified National Accountant, 250, Herbert Macaulay Street, P.M.B. 1011, Yaba, Lagos. Tel: +2347038433781 E-mail: [email protected] Web Address: www.anan.org.ng Chairman / Editor-in-Chief, Editorial Board Email: [email protected], [email protected] Cell: +2348067766435, +2348057777085, +2348090222215, +2348030645100

JULY - SEPTEMBER, 2017 1 Volume 25 Number 3, July - September, 2017

Editorial: 3 Editor-in-Chief

Articles Ownership Formation and Firm 5 Performance of Listed Deposit Money Banks in Nigeria: Abbas Usman

Implication of Accounting Information 13 on Bank Lending Decision in Nigeria: UDU, Ama Aka, ELECHI, Ogbonnaya O. & UDU, Uduma Samuel A.

Determinants of Segment Financial 22 Reporting of Listed Conglomerate Firms in Nigeria: Mazadu Abdullahi Saifullahi

Determinants of Profitability of Listed 32 Industrial Goods Firms in Nigeria: Yusuf Ibrahim and U-ungwa Masekaven Martin

Shareholding and Performance of 45 Listed Chemical and Paint Firms in Nigeria: Daddau Haruna

2 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3

EDITORIAL

I am elated to welcome readers of this issue of the Shehu Usman Hassan PhD, FCFA, FCILRM, NAA, Certified National Accountant Journal (CNAJ), AAFA, CNA Vol.25 Issue 3, July - September, 2017 published by the Association of National Accountants of Nigeria Department of Accounting (ANAN). The CNAJ has over the years established Kaduna State University, Kaduna momentous presence in the Accounting profession Kaduna State. and adored enviable status as an orifice for high quality research. The new look and reputation of the journal is particularly due to the time and commitment of the current Editorial Board.

I would like to thank my editorial board members, authors and all those who have played a role in making this revised issue a reality. I am especially grateful to the President, Alhaji Shehu Usman Ladan of our great and fast budding association for ensuring this issue of the CNAJ see the light of the day.

In this issue, five articles have been published on very timely topics, all of which should be of interest to CNAJ readers. Specifically, the issue contains the following:

Ownership Formation and Profitability of Banks in Nigeria, Implication of Accounting Information and Lending Decision in Nigerian Banks, Determinants of Segment Financial Reporting of Conglomerates Firms, Determinants of Profitability of Industrial Goods Firms, Shareholding and Performance of Listed Chemical and Paint Firms in Nigeria.

In addition to welcoming papers concerning any aspect of Accounting and Accounting Practice, I would be more than glad to consider suggestions from readers of CNAJ; the concern of the journal is expansive and ideas are always welcome.

JULY - SEPTEMBER, 2017 3 CNAJ VOLUME 25 NUMBER 3

Ownership Formation and Firm Performance of Listed Deposit Money Banks in Nigeria

ABBAS Usman*

ABSTRACT The study examines the influence of ownership formation on the profitability of listed deposit money banks in Nigeria for a period of ten (10) years (2007-2016). The study has fifteen (15) deposit money banks in Nigeria listed on the Nigeria Stock Exchange as at 2015 as its population where all the fifteen (15) listed deposit money banks in Nigeria were used as sample of the study by adopting census sampling technique. The study used secondary source of data where the data was extracted from annual report and accounts of the listed deposit money banks in Nigeria and the data was analyzed using panel multiple linear regression. The study found that, managerial shareholding, institutional shareholding, block shareholding and foreign shareholding have a strong positive significant impact on the profitability of listed deposit money banks in Nigeria. The study therefore recommends that, the banks should be encouraged by regulatory bodies concerned to use the shareholding formation discovered in this study due to the role that the variables play in enhancing the profitability of the listed deposit money banks in Nigeria.

Keywords: Ownership formation, Shareholding, Profitability, Deposit Money Banks (DMBs) and Nigeria

1. Introduction monitoring by the board should decrease. Amran and Ahmad (2013) predict that there are differences in Ownership formation is one of the most significant factors company performance because for managers that work for in shaping the corporate governance system of any companies, they will strive hard and make sure those company and that when ownership is dispersed, companies are making profit. Thus, these managers will expect to receive bonuses and shares from the companies shareholding control tends to be weak because of poor as a return for the hard work done. However, for the family shareholder monitoring (Mokaya & Jagongo, directors, they have two choices - to strive hard, to ensure 2015).Owners of shares of public companies are so many that family companies are making great profit, and later, that they are not able to efficiently managed the decisions they are the ones that receive the returns in terms of of the management team, and thus cannot be assured that bonuses or shares, or just feel comfortable with the current the management team represents their interests.Owners situation within which they are operating and only with a majority of the voting shares in a firm, through their endeavour to sustain their businesses. right to elect and control majority of the directors and to determine the outcome of shareholders' votes on other Institutional shareholders are organizations that have large matters have tremendous power to benefit themselves at amounts of funds to invest and they do invest a healthy the expense of the minority shareholders. Thus, the type of amount of these funds into company shares such aspension owners as well as the distribution of ownership stakes will funds, insurance companies and collective investment undoubtedly have an impact on the performance of firms institutions such as unit trust funds and investment (Srivastava, 2011). companies (Shah, Butt & Saeed, 2011). A general opinion exists that, Block-shareholding in a firm may actually Shehu (2013) argued that managerial ownership represents enhance its performance as having a large controlling the interest of managers in the equity shareholding of a shareholder with majority voting would ultimately firm. The reason behind the rise of this corporate decrease the firm's monitoring costs. There is also an governance variable is rooted in the agency theory which assumption that managers are imperfect agents of assumes that managers' equity holdings encourage them to shareholders, as they could attempt to pursue their own act in a way that maximizes the value of the firm. The interest of both shareholders and management starts to converge as the management holds a portion of the firms' *Abbas Usman is a lecturer in the Department of Accounting, Faculty equity ownership, this implies that the need for intense of Social and Management Sciences, Kaduna State University (KASU), Kaduna-Nigeria. 4 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 goals rather than work on optimizing the shareholders' focused on only ownership concentration and abandoned wealth. This is the reason why many families tend to other aspects of the ownership structure and this serves as entrust their business operations to family members who one of the stimulants of this study. In addition, most of the are also co-owners (Andow & David, 2016; Peterson & studies period ended before or at 2014 and this study filled Olayinka, 2017). this gap by extending its period to 2016.

Foreign shareholders are blessed with better monitoring The main objective of the study was to examine the impact abilities, but their financial focus and emphasis on liquidity of ownership formation on the profitability of listed result in them unwilling to commit to a long-term Deposit Money Banks (DMBs) in Nigeria. Other specific relationship with the company and to engage in a process of objectives include: to examine the impact of managerial restructuring in case of poor performance. These shareholding, institutional shareholding, block shareholders prefer strategies of exit rather than voice to shareholding, foreign shareholding on the profitability of monitor management (Aguilera & Jackson, 2003). A lot of listed DMBs in Nigeria. In line with the objectives of this studies have been conducted on ownership structure and study, the following null hypotheses are formulated: performance of firms and their findings were mixed and controversial. Divergent views exist about the impact of Ho : Managerial shareholding has no significant influence several ownership formation proxies on the performance 1 on the profitability of listed DMBs in Nigeria. of firms. Andow and David (2016), Basyith, Fauzi and Idris (2015), Saifullahi, Mohammed and Shehu (2015), Ho : Institutional Shareholding has no significant impact Gugong, Arugu and Dandago (2014), Shehu (2013) and 2 on the profitability of listed DMBs in Nigeria. Alipour and Amjadi (2011) are of the view that, managerial shareholding has a negative significant impact on the Ho : Block shareholding has no significant influence on performance of companies, while Zakaria and Purhanudin 3 the profitability of listed DMBs in Nigeria. (2014) are of a contrary view. They are of the view that, managerial shareholding has a positive significant Ho :Foreign shareholding has no significant impact on the influence on firms' performance. Abdalwahab and Zakaria 4 (2015), Alipour and Amjadi (2011) are of the view that, profitability of listed DMBs in Nigeria. institutional shareholding has a significant negative impact on the performance of companies while Abdulrahman and This study concentrates on ownership formation and Reja (2015) are of the view that, institutional shareholding profitability of listed deposit money banks in Nigeria. The has a positive significant influence on the performance of study covers a period of ten (10) years from 2007-2016. firms. On the other hand, Basyith et al (2015), Saifullahi et The dependent variable of the study is profitability, which al (2015) and Shehu (2013) are of the view that block is proxied by Return on Assets (ROA), while the shareholding has a positive significant impact on firm's independent variable is ownership formation proxied by performance while Fauzi and Locke (2012) are of the view managerial shareholding, institutional shareholding, that it affects firm’s performance negatively. Saifullahi et block shareholding and foreign shareholding. Bank size is al (2015), Abdulrahman and Reja (2015) are of the opinion used as control variable in order to eliminate bias of that foreign ownership has an insignificant impact on differences in the sizes of the companies. firm's performance, Zakaria and Purhanudin (2014) are of the view that it positively and significantly influences the The findings of the study will be of great benefit to listed firms' performance while Andow and David (2016) are of deposit money banks in Nigeria, as it would give them a the opinion that it negatively and significantly affects clue on efficient shareholding formation. It will also be firms' performance. beneficial to researchers when building up on existing body of knowledge. The study will benefit regulatory Although, several studies were carried out on the subject bodies in coming up with policies on shareholding matter, only a few were conducted in Nigeria. To the best of formation and preventing earnings manipulation. the researchers' knowledge, only one study has been carried out on deposit money banks in Nigeria which

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2. Theory and Evidence managerial shareholding on the financial reporting quality This section concentrates on the categorical review of of quoted manufacturing firms in Nigeria for a period of empirical previous studies in respect of all variables of five years (2007-2011). The study used 32 firms, study. longitudinal panel data was used which was analyzed with panel ordinary least square regression. The study found 2.1 Managerial Shareholding and Profitability that, managerial shareholding is negatively and Andow and David (2016) examined the influence of significantly influencing earnings manipulation in listed managerial ownership on the financial performance of manufacturing firms of Nigeria. However, the study conglomerate firms in Nigeria from 2004-2013. Secondary recommended that, managerial shareholding should not be data was employed which was analyzed with multiple encouraged by the regulating agencies of government and linear regression. The study found that, managerial all other stakeholders in Nigerian manufacturing sector. ownership has a significant negative impact on the firms' performance. It was recommended that, managerial In another view, Alipour and Amjadi (2011) examined the ownership should not control up to 50% or more of shares effect of ownership structure on corporate performance of allotted in the company which helps in reducing their listed companies on Tehran Stock Exchange in Iran from control over other shareholders which may be responsible 2005-2010. The study used 68 companies as sample of the for poor performance. Basyith, Fauzi and Idris (2015) study. Secondary source of data was used which was investigated the impact of managerial ownership on firm analyzed using regression analysis. The study found that, performance of blue chip firms listed on Indonesia Stock managerial shareholders' variable has a significant Exchange from 2010-2014. The study has 45 firms as its negative impact on performance. It was recommended that, population where 38 were used as sample. The study used investors while buying and selling decisions consider secondary data only which was analyzed using regression ownership structure as an important variable, they should analysis. The study found among other things that, select companies that the most percentage of ownership of managerial ownership has a significant negative impact on their shares belongs to five greater shareholders as more firm performance. The study concluded that, managerial suitable option. ownership influences firm performance. Saifullahi, Mohammed and Shehu (2015) examined the influence of 2.2 Institutional Shareholding and Profitability managerial ownership on the performance of six Abdalwahab and Zakaria (2015) investigated the effect of conglomerate companies in Nigeria from 2008-2013. The different ownership structure on the performance of listed study employed secondary data and it was analyzed with companies in Amman Stock Exchange from 2005-2009. multiple linear regression. It was found that, managerial The population consisted of all listed companies and a ownership has a strong negative significant impact on the sample size of 51 companies was derived using criteria. conglomerate companies in Nigeria. However, the study Secondary source of data was used which was analyzed recommended that, managers should be discouraged by the using regression analysis technique. It was found among board to hold a substantial unit of shares by instituting a other things that, institutional Shareholders variable has a policy that will restrict the number of their holdings to significant negative impact on performance. The study recommended that, investors should select for investment avoid decrease in performance. the companies that most percentage of ownership of their shares belongs to five greater shareholders as more suitable Gugong, Arugu and Dandago (2014),Zakaria and option. Abdulrahman and Reja (2015) studied ownership Purhanudin (2014) examined the impact of managerial structure and bank performance in Malaysia from 2000- ownership on the performance of firms in Nigeria and 2011. Using secondary data, multiple fixed effect Malaysia. The studies used secondary source of data and regression was used for the data analysis and the study the data was analysed using regression analysis. It was found that, institutional ownership has a positive found that, managerial ownership positively influences the significant impact on the Malaysian banks' performance performance of the firms and the studies concluded that, using ROE while an insignificant impact exists using ROA. the higher the managerial ownership, the high firm reports It was concluded that, the effects of institutional ownership high performance. Shehu (2013) assessed the influence of on Malaysian banks' performance cannot be concluded. 6 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3

Gugong, Arugu and Dandago (2014) examined the impact 2.4 Foreign Shareholding and Profitability of institutional ownership on the financial performance of Andow and David (2016) assessed the impact of foreign 17 listed insurance firms in Nigeria from 2001-2010. The ownership on the financial performance of conglomerate study used secondary data which was analyzed with firms in Nigeria from 2004-2013. The study employed regression technique and the study found that, institutional panel data and it was analyzed with regression technique. ownership has a significant impact on the insurance The study found that, foreign ownership has a negative companies' performance. It was recommended that, the significant impact on the conglomerate firms' code on owner's equity of listed insurance companies in performance. It was however recommended that, less Nigeria should be sustained and be promoted for full room should be given to the foreign investors to own implementation so that the firms can have a perpetual life shares which though would help in monitoring the because the stake of the owners could serve as a check and activities of the firm, expropriation of the firms' wealth to balance to further strengthen the corporate governance of foreign economy may be experienced. Abdulrahman and the insurance firms in order to give room for enhanced Reja (2015),Saifullahi, Mohammed and Shehu (2015) financial performance of the firms in Nigeria. examined the impact of foreign ownership on firms. Using secondary data, multiple regression was used for the data Alipour and Amjadi (2011) examined the effect of analysis and the study found that, foreign ownership has an institutional shareholding on corporate performance of insignificant impact on the firms' performance. Zakaria listed companies on Tehran Stock Exchange in Iran from and Purhanudin (2014) examined the impact of foreign 2005-2010. The study used 68 companies as sample of the study. Secondary source of data was used which was ownership on the performance of Malaysian listed trading analyzed using regression analysis. The study found that, and services firms from 2005-2010. The study used institutional ownership has a significant negative impact secondary source of data and the data was analyzed using on performance. It was recommended that, investors while regression technique. It was found that, foreign ownership buying and selling decisions consider ownership structure positively influences the performance of the firms and the as an important variable, they should select companies that study concluded that, the higher a firm foreign ownership, the most percentage of ownership of their shares belongs to the better it performs. However, from the literatures that five greater shareholders as more suitable option. the researcher was able to come across none extends its period to 2016 in order to take care of the events that 2.3 Block Shareholding and Profitability happened. Also, the study that was conducted on DMBs Basyith, Fauzi and Idris (2015),Saifullahi et al took only a sample of the firms, had it been that the whole (2015),Shehu (2013) examined the impact of block-holder population is used the outcome of the study could differ. ownership on firm performance in Indonesia and Nigeria This study takes the whole population in order to have from 2007-2014. The studies used secondary data only, sufficient representation. which was analyzed using regression analysis. The studies found among other things that, Block-holder ownership The theoretical explanation in this paper is agency theory. has a significant positive impact on firm performance. The The theory assumes both principal and the agent are study concluded that, Block-holder ownership influences motivated by self-interest. This assumption of self-interest firm performance.Fauzi and Locke (2012) investigated the dooms agency theory to inevitable inherent conflicts. If impact of block holder ownership on the performance of both parties are motivated by self-interest, agents are New Zealand firms from 2007-2011. Using secondary data likely to pursue self-interested objectives that deviate and analyzed with regression analysis the study found that, even conflict with the goals of the principal. Agents are block holder ownership has a negative significant impact supposed to act in the sole interest of their principals.The on the firms' performance. The study concluded that, the theory of agency describes how to best organize higher the block-holder ownership level, the more relationships in which one party determines the potential for agency problem to arise as consequence of more power to interfere with any decision made by the responsibility while another stakeholder does the board. work.Agency theory has been broadly used in examining the relationship between Shareholders of a firm and managers who run the affairs of those entities (Fama &

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Jensen, 1983). Because of information asymmetries and FRNSHR= Foreign Shareholding self-interests of managers, shareholders lost trust in their BS= Bank Size agents. The shareholders seek to resolve these by putting in µ = error term place some monitoring mechanisms to align the interests of i= firm managers with shareholders and to reduce the extent for t= time information asymmetries and opportunistic behavior of 4. Results and Discussions managers (Donaldson & Davis, 1991). However, the This section presents and discusses results of both diversification of shareholdings in a company helps to a descriptive and inferential statistics. The descriptive greater extent in monitoring the activities of the agents in a statistics results are present in table 1 and discussed firm as each class of shareholders have their own personal- thereafter. interest which stimulate them to monitor the decisions of 1. RESULTS AND DISCUSSIONS the managers efficiently and this improves the financial Table 1: Descriptive Statistics performance of a company. Therefore, this study adopted Variables Min. Max. Mean Std. Variance Skewness Kurtosis Dev. the agency theory to anchor its variables. ROA 0.06 0.87 0.31 0.21 0.04 1.14 3.13 MGRSHR 0.01 0.27 0.07 0.05 0.002 1.55 5.68 3. Methodology and Model Specification INSTSHR 0.04 0.74 0.30 0.16 0.03 1.03 3.34 BLCSHR 0.04 0.72 0.23 0.15 0.02 1.46 4.52 This study adopted quantitative approach with a positivism FRNSHR 0.00 0.68 0.10 0.18 0.03 1.98 5.50 paradigm. The study used ex-post facto and correlational BS 4.57 14.19 7.44 1.84 3.37 1.15 5.06 Source: Output from Stata 11.2 research designs. The choice of the designs was as a result of their ability to describe the statistical influence and Table 1 shows a mean value of 0.31 for ROA, while relationship between two (2) or more variables. The study managerial shareholding, institutional shareholding, block has all the 15 deposit money banks in Nigeria listed on the shareholding and foreign ownership have mean values of Nigerian Stock Exchange as at 2015 as its population. All 0.07, 0.30, 0.23 and 0.10 respectively. The minimum value the 15 listed deposit money banks in Nigeria are used as of ROA stood at 0.06 while its maximum is 0.87, sample of the study by adopting census-sampling managerial shareholding has a minimum value of 0.01 and technique. Secondary source of data only was used where a maximum value of 0.27, institutional shareholding has a the data was extracted from published annual report and minimum value of 0.04 and its maximum value stood at accounts of the listed deposit money banks in Nigeria for a 0.74, block shareholding has a minimum and maximum period of 10 years (2007-2016) and the data was analyzed values of 0.04 and 0.72 respectively, foreign shareholding using panel multiple linear regression statistical technique minimum value stood at 0.00 while its maximum value is because it has the ability of predicting impact and 0.68. Foreign shareholding has the highest standard association between/among variables. deviation among the independent variable which implies that, it has the smallest contribution to dependent variable A longitudinal panel multiple linear regression model is while managerial shareholding has the contribution to specified in order to examine the impact of ownership profitability as it has the lowest standard deviation. The formation on the profitability of listed deposit money banks Skewness values were all close to 0 and 1. Also, the kurtosis in Nigeria. The model is specified below: values were all close to 0 and 3 except managerial shareholding, block shareholding and foreign shareholding ROAit=â0 + â1MGRSHRit + â2INSTSHRit +â3BLCSHRit + â4FRNSHRit + â5BSit+ µit which show higher than normal. The data is considered to be normally distributed and the regression result has been Where: validated using some tests. ROA= Return on Assets â = Constant 0 What follows is the presentation and discussion of the â1 -â = Coefficient of the parameters 5 regression results as contained in table 2 below. MGRSHR= Managerial shareholding INSTSHR= Institutional Shareholding BLCSHR= Block Shareholding 8 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3

Table 2: Regression Results Variables Coefficient T-Values P-Values Tolerance VIF Model Summary would increase the number of shares allotted to Constant -0.047 -1.86 0.065 MGRSHR 0.267 2.50 0.013 0.75 1.33 managers.The result provides an evidence of rejecting INSTSHR 0.234 2.85 0.005 0.12 8.50 BLCSHR 0.959 14.33 0.000 0.20 4.89 hypothesis one (1) of the study which states that FRNSHR 0.144 2.85 0.005 0.24 4.25 "managerial shareholding has no significant influence on BS 0.005 1.83 0.069 0.91 1.10 Mean VIF 4.01 the profitability of listed deposit money banks in Nigeria". Hettest 0.17 0.68 R2 0.9333 This finding is in line with the finding of Zakaria and Adjusted R2 0.9309 F-Statistics 402.74 Purhanudin (2014) who found managerial shareholding to Prob(Sig) 0.0000 be positively and significantly influencing firms' Source: Output from Stata 11.2 The model is therefore estimated as: profitability and contrary to the findings of Andow and ROA=- David (2016), Basyith, Fauzi and Idris (2015), Saifullahi,

0.047+0.267(MGRSHRit)+0.234(INSTSHRit)+0.959(BLCSHRit)+0.144(FRNSHRit)+0.005(BSit) Mohammed and Shehu (2015), Gugong, Arugu and A multicollinearity test was conducted. The standard is Dandago (2014), Shehu (2013) and Alipour and Amjadi that, the variance inflation factor (VIF) should be less than (2011) that found managerial shareholding to be 10.00 and greater than 1.00 while the tolerance values significant and negatively impacting on firms' should be less than 1.00. These two (VIF and tolerance profitability. values) are good measures for testing collinearity between the regressors. From table 4, the test result indicates that 4.2 Institutional Shareholding and Profitability tolerance values were consistently less than 1.00 while VIF From the regression table 4, institutional shareholding is values were also consistently greater than 1 and less than having a beta coefficient of 0.234 with a t-value of 2.85 10 which implies that there is absence of multicollinearity which is significant at 1% (0.005). This signifies that, in the predictor variables. Ordinary Least Square (OLS) institutional shareholding has a strong positive significant regression was run. The researchers conducted a test for impact on the profitability of listed deposit money banks in heteroskedasticity after running the OLS regression where Nigeria. This implies that, the profitability of listed deposit the result shows a Chi2 value of 0.17 which is insignificant money banks in Nigeria will increase by twenty-three at 0.68 and the result signifies the absence of kobo for an increase of 1% in the number of institutional heteroskedasticity and this led the researchers to interpret shareholding. The result is not surprising as it is in line the OLS result.Fixed and random effect regressions were with researchers' prior expectation that institutional conducted simultaneously and hausman test was also shareholders would use their expertise and experience in conducted. monitoring the activities of the managers toward achieving their objective of maximizing profit and this 4.1 Managerial Shareholding and Profitability makes the institutional shareholders to serve as monitoring From table 4, managerial shareholding has a beta mechanism as recommended by the theory of agency. The coefficient value of 0.267 with a t-value of 2.50 which is managements of listed deposit money in Nigeria are to use significant at 1%. This signifies that, managerial this finding and come up with policies aimed at increasing shareholding is strongly, positively and significantly the number of shares given out to institutions. The finding influencing the profitability of listed deposit money banks provides an evidence of rejecting the second (2nd) in Nigeria. The result implies that, for every 1% increase in hypothesis of the study which states that "institutional managerial shareholding of the banks, the profitability of shareholding has no significant impact on the profitability the listed deposit money banks in Nigeria increases by of listed deposit money banks in Nigeria". This finding is twenty-seven kobo approximately.The result is not in line with the finding of Abdulrahman and Reja (2015) surprising as it is in line with the researchers' prior who found that, institutional shareholding has a positive expectation that, managers would try as much as possible significant influence on the performance of firms and to ensure that an entity in which they have shares in is contrary to the findings of Abdalwahab and Zakaria operating efficiently in order to have higher profitability (2015), Alipour and Amjadi (2011) who found which in turn yields higher dividend to them. The policy institutional shareholding to be significantly and implication derivable from this finding is that, the negatively impacting on the profitability of companies. management of the banks should come up with policy that

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4.3 Block Shareholding and Profitability financial performance of the banks through their wealth of Table 4 shows that block-shareholding has a coefficient financial experience in another economic environment value of 0.959 with a t-value of 14.33 which is significant at especially at developed countries and also through transfer 0.000 (1%). This signifies that, block-shareholding is of modern technology. The managements of the listed strongly, positively and significantly influencing the deposit money banks in Nigeria are to use this finding and profitability of listed deposit money banks in Nigeria. The formulate a policy aimed at increasing the number of shares result implies that, for every one percent increase in the allotted to foreign shareholders. This finding provided an block-shareholding of the listed deposit money banks in evidence of rejecting the 4th hypothesis of this study which Nigeria, their profitability increases with ninety-six kobo states that "foreign shareholding has no significant impact approximately. The result is not surprising as it is in line on the profitability of listed deposit money banks in with the researchers' prior expectation that blocks Nigeria". This finding is in line with the finding of Zakaria shareholders’ use of their power to influence the decision of and Purhanudin (2014) who found foreign shareholding to the company towards their own interests of maximizing be positively and significantly influencing the profitability profit and also due to their acquisition of large number of of firms and contrary to the finding Andow and David shares they play a proactive role in dealing with agency (2016) who found that it negatively and significantly problem since they have interest in maximization of profit affects firms' profitability. and they have control over the company's assets. Block Cumulatively, table 4 shows F-Statistics value of 402.74 Shareholders reduce the cost of producing some which is significant at 1% (0.000) which confirms that the documents which are to be shared to holders of small units model of the study is well fitted, thus, the variables of the of shares and thereby, increase the profitability of the study are well combined and properly utilized. The R2 banks. The policy implication derivable from this finding is value is 0.9333 (93%) and the adjusted R2 value is 0.9309 that, the management of the listed deposit money banks in (93% approximately) which signifies that, the explanatory Nigeria are to come up with a policy that would increase the variable (proxied by Managerial shareholding, institutional number of shares allocated to block shareholders. The shareholding, block shareholding and foreign result produces an evidence of rejecting hypothesis 3 of this shareholding) of the study have explained the total study which states that "block-shareholding has no variation in profitability of listed deposit money banks in significant influence on the profitability of listed deposit Nigeria of up to the tune of 93% and the remaining 7% is money banks in Nigeria". This finding is in line with the covered by other factors which proved the fitness of the finding of Basyith et al (2015), Saifullahi et al (2015) and model. Shehu (2013) who found that, block shareholding has a positive significant impact on firm's profitability while 5. Conclusion Fauzi and Locke (2012) are of the view that block This study examines the impact of ownership formation on shareholding affects firm performance negatively. the profitability of listed deposit money banks in Nigeria. It was discovered that, managerial shareholding, institutional 4.4 Foreign Shareholding and Profitability shareholding, block shareholding and foreign shareholding From the regression table, foreign shareholding has a play an important role on improving the profitability of significant positive impact on the profitability of listed listed deposit money banks in Nigeria. Therefore, based on deposit money banks in Nigeria. This is confirmed from its the findings of this study, the researchers concluded that, beta coefficient value of 0.144 and a t-value of 2.85 which Shareholding formation contributes positively on is significant at 1%. The result implies that, for every 1% enhancing the profitability of listed deposit money banks in increase in foreign shareholding, the profitability of listed Nigeria. deposit money banks increases by fourteen kobo. This means that, foreign shareholding influences the Based on the conclusions of the study, the study therefore profitability of listed deposit money banks in Nigeria recommended that, managerial and institutional positively. This finding is in line with researchers' prior shareholdings should be increased. The number of shares expectation that foreign shareholders contributes to the allotted to the managers of the banks are to be increased as that will stimulate them to discharge their duties efficiently

10 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 since they have invested their own fund too in the banks, Donaldson, L. & Davis, J. H. (1991).Returns. Australian which in turn improves the banks' profitability. The number Journal of Management, 16, 49-64. of shares allotted to institutions should be increase as that Fama, E. F. & Jensen.M. (1983).Separation of ownership and will improve the level of monitoring of management control.Journal of Law and Economics, 26,301-325. activities that in turn will stimulate the managers to Fauzi, F., & Locke, S. (2012). Board structure, ownership discharge their responsibilities in line with their principals' structure and firm performance: a study of new zealand goals. The banks should increase the number of shares listed-firms. Asian Academy of Management Journal of allotted to block shareholders and persuade them to buy Accounting and Finance, 8(2), 43-67. additional shares since block shareholding increases the Gugong, B. K., Arugu, L. O., & Dandago, K. I. (2014).The profitability of the banks. Also, the number of foreign impact of ownership structure on the financial shareholdings allocation should be increased since it performance of listed insurance firms in Nigeria. increases the banks' profitability as that would assist the International Journal of Academic Research in banks in benefiting from the advice of foreign financial Accounting, Finance and Management Sciences, 4(1), expertise and modern technology. Overall, the study 409-416. recommended that, the banks should be encouraged by Malik, M. S., Awais, M., & Khursheed, A. (2016).Impact of regulatory bodies concerned to use the shareholding liquidity on profitability: A comprehensive case of formation adopted in this study due to the role that the Pakistan's private banking sector. International Journal of variables play in enhancing the profitability of the listed Economics and Finance, 8 (3), 69-74. deposit money banks in Nigeria. Mohamed, B. A. (2015). The determinants of bank liquidity: case of Tunisia. International Journal of Economics and REFERENCES Financial Issues, 5 (1), 249-259. Abdalwahab, K. A., & Zakaria, S. A. (2015). The effect of Mokaya, M. A., & Jagongo, A. (2015). The effect of ownership ownership structure on corporate performance of listed structure on the financial performance of firms listed at the companies in amman stock exchange: an empirical nairobi securities exchange. International Journal of evidence of Jordan. International Journal of Managerial Finance and Accounting, 4(11), 1-17. Studies and Research, 3(5), 41-49. Peterson, K. O., & Olayinka, U. (2017).Ownership Abdulrahman, A. N. A., & Reja, B. A. F. M. (2015).Ownership structure and bank performance. Journal of Economics, concentration and bank profitability. Future Business Business and Management, 3(5), 483-488. Journal, 3,159-171. Aguilera, R.,& Jackson, G. (2003).The cross-national Saifullahi, M. A., Mohammed, A., & Shehu, H. U. (2015). diversity of corporate governance: dimensions and Ownership diversity and corporate performance: determinants. Academy of Management Review, 28 evidence from Nigerian conglomerates firms. Journal of (3),447-465. Basic and Applied Research, 1(4), 89-101. Alipour, M., & Amjadi, H. (2011). The effect of ownership Shah, S. Z. A., Butt, S. A., & Saeed, M. M. (2011).Ownership structure on corporate performance of listed companies in structure and performance of firms: empirical evidence tehran stock exchange: an empirical evidence of iran. from an emerging market. African Journal of Business International Journal of Business and Social Science, Management, 5(2), 515-523. 2(13), 49-55. Shehu, H. U. (2013). Monitoring attributes and financial Amran, N. A., & Ahmad, A. C. (2013). Effects of ownership reporting quality of listed manufacturing firms in Nigeria. structure on malaysian companies' performance. Asian Journal of Nigerian Accounting Association, 15(1), 13- Journal of Accounting and Governance 4, 51-60. 38. Andow, H. A., & David, B. M. (2016).Ownership structure and Srivastava, A. (2011). Ownership structure and corporate the financial performance of listed conglomerate firms in performance: evidence from india. International Journal Nigeria. The Business and Management Review, 7 (3), of Humanities and Social Science, 1 (1), 23-29. 231-240. Zakaria, Z., & Purhanudin, N. (2014).Ownership structure and Basyith, A., Fauzi, F., & Idris, M. (2015). The impact of board firm performance: evidence from malaysian trading and structure and ownership structure on firm performance: an services sector. European Journal of Business and Social evidence from blue chip firms listed in indonesian stock Sciences, 3 (2), 32-43. exchange. Corporate Ownership and Control, 12(4), 344- 351.

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Shareholding and Performance of Listed Chemical and Paint Firms in Nigeria

Daddau Haruna * ABSTRACT: This study exermines the impact of ownership structure on the profitability, using listed chemical and paint firms in Nigeria. The main objective of the study is to ascertain the level to which ownership structure influences the profitability of Nigerian chemical and paint firms. The study covers a period of four years (2011-2015). The methodology employed is the use of secondary data and the correlation research design. The population of the study is all nine chemical and paint firms listed on the Nigerian Stock Exchange as at 31st December, 2015 and all firms were selected using censor sampling technique. The study used regression as a tool of analysis. Findings show that block ownership has positive impact on performance; foreign ownership has negative effect on performance, while managerial and institutional ownerships have no effect on performance of listed firms within the study period. The study recommends that foreign ownership should be discouraged and emphasis should be laid on the number of block holders an organization should have since they prove to influence performance positively and significantly. Keywords: ownership structure, profitability, chemical and paint firms

1. Introduction profitability of firms. Most of the empirical literatures studying the link between corporate governance and firm Profit is essential to the continuous survival of any business performance usually concentrate on a few aspect of organization and for it to attract patronage from investors, governance mechanisms, such as board of directors, potential investors, creditors and other stakeholders in the shareholders' activism, compensation, anti-takeover business world. All business organizations must always provisions, investor protection. Also most of the studies make important decision of making returns. This is carried out on ownership structure and profitability important because the future survival of any business provide contradictory results and a lot of them mostly depends on its ability to make returns in this competitive focus on larger sectors of the economy. Therefore, this environment. On the other hand, ownership structure of paper examines the effect of ownership structure and any company has been a serious agenda for corporate profitability of Nigerian chemical and paint firms. governance. The corporate setting constitutes of shareholders and others stakeholders. The various The major objective of the study is to ascertain the level to categories of company's shareholders constitute its which ownership structure influences the profitability of ownership structure. As such, who owns the firm's equity Nigerian chemical and paint firms. The specific objectives and how does ownership affect firm value has been a topic of the study are: investigated by researchers for decades. Thus, the impact of ownership structure on firm profitability has been i) To examine the impact of Managerial Ownership widely tackled in various developed markets and more (MGO) on Profitability of Nigerian chemical and paint recently in emerging markets, but was less discussed firms. before in Nigeria in recent changing environment. Though, ii) To investigate the influence of Institutional the modern organization emphasizes the divorce of Ownership (INST) on Profitability of Nigerian management and ownership; in practice, the interests of chemical and paint firms. group managing the company can differ from the interests iii) To ascertain the effect of Block Ownership (BLCK) on of those that supply the capital to the firm. Corporate Profitability of Nigerian chemical and paint firms. governance literature has devoted a great deal of attention iv) To determine the contribution of Foreign Ownership to the ownership structure of corporations. (FRNO) on Profitability of Nigerian chemical and paint firms. In addition, the type of owners as well as the distribution of ownership stakes will undoubtedly have an impact on the *Daddau Haruna is a lecturer in the Department of Accounting, Kaduna State University, Kaduna-Nigeria

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The following null hypotheses were formulated in and entrenchment effects whilst state ownership has been concordance with the above set out specific objectives of regarded as inefficient and bureaucratic. Morck, Shleifer the study to test the influence of ownership structures on and Vishny, (1998) studied and analyzed the relationship profitability of Nigerian chemical and paint firms. between the managers? percentage shares and corporate HO1 Managerial Ownership has no significant impact financial performance. They gave a positive relationship on Profitability of Nigerian chemical and paint firms. for holding within three ranges, from 0% to 5%, beyond HO2 Institutional Ownership has no significant influence 25%, but negative one between 5% and 25%. Also the on Profitability of Nigerian chemical and paint firms. works of Short and Keasy (1999) conducted in Great HO3 Block Ownership has no significant effect on Britain for 1998 to 1992 and used two measure methods: Profitability of Nigerian chemical and paint firms. accounting measure (return on shareholder“s equity) and HO4 Foreign Ownership has no significant contribution on market measure (like Tobin“s Q). They found that a Profitability of Nigerian chemical and paint firms. positive relationship between managerial ownership and firm performance from 0% to 16% (0% to 13% in market This research work will provide information to policy measure), beyond 42% and is negative from 16% to 42 % makers such as Corporate Affairs Commission who are (from 13% to 42% in market 25 measure). concerned with corporate governance assessment and administration. The work will also serve as a good On the other hand the research conducted by Ngoc (2007) reference material to those students who may wish to carry showed that the relationship between manager ownership out further research on the subject matter and related and firm performance was inverse U-shape and Tobin“s Q, discipline. with the inflection point is from 40% to 50%. The relationship between ownership structure and firm The rest of the paper is divided into four sections covering performance has been the subject of interest in the discussion on the literature review and theoretical literature. There are mixed results on how ownership framework, the research method and model specification, structure impacts on firm performance. Most of the results and discussions and conclusion and empirical results were derived from developed countries recommendation. such as the U.S. and U.K. However, differences in prevailing institutional, legal and economic influences 2. Review of Related Literature between the U.S. and other countries resulted in different This section discusses the related and relevant literature of impacts of ownership structure on firm performance. the study. The items discussed consist of empirical review According to the agency model, Jensen and Meckling of ownership structure proxies and profitability. The (1976) argue that there is a convergence of interests theoretical framework was also captured. between shareholders and managers as the managers' ownership increases, and thus higher managerial The result of research conducted by Osundina, Olayinka ownership should reduce agency costs and hence increase and Chukwuma (2016) shows a negative relationship firm performance. between Ownership Structure Index and Performance as measured by ROA although the extent is insignificant (- Morck, Shleifer and Vishny (1988) & McConnell and 3.1%). The implication of this result is that firms with Servaes (1990) find a significant relationship between family ownership and managerial or directorship managerial ownership and firm performance. However, ownership with less ownership concentration having block Demsetz (1983) implies that the increased level of insider holders are not directed towards better performance. ownership may reduce corporate performance. This notion is classified as the entrenchment hypothesis, an Managerial ownership appears to be one of the most explanation of which is offered by Stulz (1988), who contentious ownership structures as it has an inconclusive argues that in situations with a low level of managerial and mixed effect on company's performance. This ownership, firm value will increase because rights to ownership form is considered as a tool for alignment of transfer control will be more formally vested with insiders. management interests with that of individual shareholders Further, insiders are more organized than diffused in the organization, while at the other end, it encourages shareholders and will have a greater probability of securing entrenchment by managers, which is often cost effective high premiums in the case of takeovers. when they (managers) do not act in the best interest of shareholders (Mork et al., 1988; Stulz, 1988). The general The studies carried out by McConnell and Servaes (1990), impact of managerial ownership on corporate performance Han and Suk (1998) & Tsai and Gu, (2007), found depends on the relative strengths of the incentive alignment

JULY - SEPTEMBER, 2017 45 CNAJ VOLUME 25 NUMBER 3 significant Positive influence between institutional did not find a relation between institutional ownership and ownership and firm performance. They further explain that firm performance, the natural selection argument is applied they (Institutional Investors) serve as positive effect by the once more. active monitoring argument and therefore the monitoring influence is expected to be stronger for institutional Karami (2008) in the research entitled "Relationship investors than general shareholders. Also the works of between institutional owners and informational content of Hand (1990) found that institutional investors are more profit" collected evidences in connection with the sophisticated than other shareholders because they are supervisory role of institutional investors from the more professional regarding capital markets, industries and perspective that whether institutional ownership has effect businesses and they are better informed. In addition, on the informational content of reported profit? In this institutional shareholders have higher capabilities in taking research, the different attitudes (i.e. the active monitoring actions and can therefore monitor managers more hypothesis and the self-interest hypothesis) were examined effectively and less costly. Wahal (1996) found only short about institutional investors. To test the relationship term positive effects of institutional ownership but not long between informational content of corporate profit and term, as he then argues that institutional investors have a institutional ownership two models of multiple linear time preference for short term result than long term result. regression used. Based on the results of this research, the number of institutional ownership does not increase On the other hand negative effects are also found in the informational content of profit and may also degrade it, studies of Pound (1988) & Hand (1990). This is consistent while the level of institutional ownership structure does not with the findings of Osundina et al. (2016). One argument reduce the informational content of profit, but it is also to support this result is the institutional myopia argument, possible to increase it. which implies that the institutional investors prefer short term returns and will use their influence to encourage Positive effects of institution ownership on firm managers to pursue short term gains. In the same line, performance is found by McConnell & Servaes (1990), another argument is the strategic-alignment-conflict-of- Han & Suk (1998) and Tsai & Gu (2007), who explain the interest by Pound (1988). The conflict of interest and the positive effect by the active monitoring argument. The strategic alignment hypothesis suggest that institutional monitoring effect should be stronger for institutional investors tend to support managers instead of monitoring investors than general shareholders. According to Hand and controlling them, because of their interpersonal (1990), institutional investors are more sophisticated than business relationship with the firm in which they are other shareholders because they are more professional investing and because the benefit they gain from regarding capital markets, industries and businesses and supporting the managers is higher than the effective they are better informed. Apart from that, institutional monitoring gain. Therefore institutional investors may shareholders have higher capabilities in taking actions and have incentives to cooperate with managers. Cornett et al can therefore monitor managers more effectively and less (2007) in a research titled "the impact of institutional costly. ownership on corporate operating performance" analyzed the relationship between institutional shareholders as one Amina, Allam and Qasim (2017) in their study Corporate of the mechanisms of corporate governance and Governance and Firm Performance: Evidence from Saudi operational yield of large companies. They found a Arabia, collected pooled data from Saudi Stock Exchange significant and positive relationship between the ratio of (Tadawl) for a period of 2 years (2012-2014) from 171 operating cash flow to sales as a measure of performance listed companies. The finding of the study showed an and the number and percentage of institutional insignificant impact on ownership of the largest shareholders as corporate governance mechanism (Cornett shareholder and firm performance. However, the study of et al, 2007). Another argument is strategic-alignment- Peterson and Olayinka (2017) which investigated whether conflict-of-interest by Pound (1988). The conflict of ownership concentration influences bank profitability in interest and the strategic alignment hypothesis suggest that developing country context found that high ownership institutional investors tend to support managers instead of concentration have higher return on assets. monitoring and controlling them, because of their interpersonal business relationship with the firm in which It is generally accepted that managers exercise more they are investing and because the benefit they gain from freedom in the use of firm resources in case of a single supporting the managers is higher than the effective shareholder as they would if the ownership has been more monitoring gain. Therefore institutional investors may concentrated (Shleifer & Vishny, 1997). In studies of have incentives to cooperate with managers. Some studies diversification strategy, it was found that managers assume

46 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 more personal benefits (financial and reputational) in created by rising ownership concentration that gives more product or market diversification because of risk aversion, power to a circumscribed number of shareholders that in expense preference, and empire building (Thomsen & turn might expropriate value from minority shareholders Pedersen, 2000). Ownership concentration can counteract (La Porta, Lopez-de-Silanes, & Shleifer, 1999). This is true corporate diversification and gain more shareholder value. for certain countries (i.e. in Europe) where the agency Agency theory argues that managers tend to increase their problem comes from the conflict between controlling wealth and reputation by diversification and fast growth owners and minority shareholders, instead of between without maximizing firm market value (Jensen & ownership and management. In this case, large owners Meckling, 1976). Consequently, managers are not willing might be costly as they can redistribute wealth in both to downsize or reverse diversification if they are not efficient and inefficient way from minority shareholders pressured or obliged by ownership or external investors, to (Shleifer & Vishny, 1986). follow owners' interests in increasing firm market value. Therefore, according to the agency theory, managers' Traditionally, concentrated ownership has been thought to propensity to increase firm value depends, ceteris paribus, provide better monitoring incentives, and lead to superior on the ownership structure. performance (Leech and Leahy, 1991). Maher and Andersson (1999) indicated that the ownership Supporting this theory, in a landmark work, Amihud and concentration lead to extraction of private benefits by the Lev (1981) examine empirically this theory, confirming controlling shareholders at the expense of the minority that managers working in firms with large shareholders shareholders. The argument put across is that if owner- were less likely to invest in non-related mergers or controlled firms are more profitable than manager- acquisitions. These findings were supported by Hill and controlled firms, it would seem that concentrated Snell (1989) who conclude that diversification, investment ownership provides better monitoring which leads to better in R&D, capital intensity, and ownership structure all performance. Xu and Wang (1999), Wang et al. (2004), Delios and Wu (2005) reported a positive relationship determine firm productivity. They argue that large between ownership concentration and firm performance, shareholders control is negatively related to product employing percentage of shares held by top 10 diversification. Another stream of research in corporate shareholders or the Herfindahl index of ownership governance studies, takes into consideration the controlling concentration (the sum of squared percentage of shares mechanisms that induce managers to be aligned with controlled by each top 10 shareholder) as the dependent shareholders' interests. An example of these controlling variable. A study conducted in Kenya by Ongore & mechanisms is ownership concentration as it involves a K'Obonyo (2011) found a significant negative relationship trade-off between risk and incentive efficiency (Jensen & between ownership concentration and government, and Meckling, 1976; Demsetz, 1983; Shleifer & Vishny, 1986). firm performance. Larger shareholders might have stronger incentives to monitor and therefore, they should oblige managers to be The effect of foreign ownership on firm performance has aligned with their objective of increasing the value of their been an issue of interest to academics, researchers, and shares. But on the other side, Fama and Jensen (1983) policy makers. As posited by Gorg and Greenaway (2004), argue that ownership concentration above a certain level the main challenging question in the international business will allow managers to become entrenched and expropriate strategy is the outcome gained from foreign ownership of the wealth of minority shareholders. This argument has led firms. It is duly accepted that foreign ownership plays a scholars in a hot debate over the possible non-linear relation crucial role in firm performance, particularly in developing of ownership concentration and firm performance. As and transitional economies, researchers such as Aydin et al. (2007) have concluded that, on average, multi-national ownership dispersion creates possibilities for free riding enterprises have performed better than the domestically (Li & Simerly, 1998) because of a lack of monitoring on owned firms. It is therefore, not surprising that the last two management, a positive relation of ownership decades have witnessed increased levels of foreign direct concentration with firm value is expected. investments in the developing economies.

Consistent with this monitoring theory, Shleifer and Vishny There are many theories in extant literatures that have been (1986) show the important role of large shareholders and used to underpin research of this nature. The theories are how the market value is positively related to increasing stewardship theory, stakeholder theory and agency theory. values of shares held by larger shareholders. Nevertheless, The agency theory is the one this research work is hinged studies have emphasized another source of agency problem JULY - SEPTEMBER, 2017 47 CNAJ VOLUME 25 NUMBER 3 on. Therefore, the study is based on the proposition of from secondary sources which were extracted from the agency theory, the theoretical framework most often used annual report and account of listed chemical and paint by researchers to understand the relationship between the firms in Nigeria. The population of the study is all nine ownership structure and performance. It involves a contract chemical and paintfirms listed on the Nigerian Stock under which the principal (Owners) engages another party Exchange as at 31st December, 2015 and all firms were (Managers), called agent, to perform some services on their chosen as sample using censor sampling technique. The behalf, where some power of decision making are justification for choosing conglomerates firms to the best delegated to the agent (Jensen and Meckling, 1976). In the of our knowledge is premised on the fact that, it is still an modern business world, the principal is the shareholders, area with paucity of studies.This research work is who are the owners of the company, whereas the descriptive and highly empirical as it embraces the use of management of the company represents the agent.As regression analysis where ordinary Least Square posited by Brennan (1995), agency problem may arise as Technique is employed. Multiple regressions were used the agent fails to act in the best interest of principal and the for the analysis and SPSS was used to run the regression. effect may be reflected in the company's share price. It specifically exists in the companies when the management The equation below represents the model of the study has incentives to achieve their own interests at the expense using balanced panel data of ordinary least square. This of the shareholders (Agrawal & Knoeber, 1996) and will equation is represented as follows: act in an opportunistic manner to maximize their rewards. As parties internal to the organization, management tends PROFit = â0it + â1MGOit + â2INSTit + â3BLCKit + â4FRNOit + µit to have an information advantage over the principal due to Where: the day-to-day information and the insider knowledge. PROF = Profitability Because of the opportunistic behavior of agents, MGO = Managerial Ownership organizations will try to put in place mechanisms that have INST = Institutional Ownership to align the interests of the agents and principles or at least minimize the differences. One of the important BLCK = Block Ownership mechanisms is through the establishment of board of FRNO = Foreign Ownership directors. In addition, to safeguarding the interests of shareholders, board of directors is appointed through the â1 – â4 = Coefficient of explanatory variables election in the annual general meeting. The board of âo = Constant or Intercept directors is the agent to the shareholders in ensuring the transparent financial reporting that reflect the real financial µ = Error Term position of the companies. Thus, the role of the board of directors is imperative to counter "managerial opportunistic? behavior, which includes taking action for 4. Results and Discussion their own personal interests at the expense of the This segment presents the analysis of the data and tests of shareholders interests (Donaldson & Davis, 1991). In this hypotheses formulated in section one of the work. First, sense, corporate governance framework in which board of descriptive statistics table is presented and analyzed, directors is a part serves as an effective tool in meeting the followed by the correlation matrix table and the summary expectations and needs of the shareholders. Board of of Regression Result table, The policy implications and directors may provide better monitoring of management, Recommendation are made and drawn from the findings of therefore, can lead to transparent and reliable reporting. the study.

3. Research Methodology and Model Specification The study adopts the correlational design. The design is considered appropriate, in that, it is better in determining the relationship and degree of ownership structure influence on profitability in our study which may permit prediction.The data for this study were obtained mainly

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Descriptive Statistics Correlation Matrix The descriptive statistics for each of the variables were The table below explains the association between the designed to show the Minimum, Maximum, Mean and regressand and the regressors and also the association Standard deviation, and skewness values. Descriptive between the regressors themselves. The values were statistics helps readers to understand the measures of extracted from the Pearson correlation of two-tailed central tendency, measures of variances associated with significance. the variables of the study and the normality of the data used in the study. Table 3: Correlation Matrix Variable PROF MGO INST ONCON FRNO Table 2: Descriptive Statistics PROF 1 0.078 -0.040 0.158 -0.531** Variable Min Max Mean Std. Dev. Skewness MGO 1 0.040 0.487** 0.142 PROF 0.02 1.76 0.286 0.352 2.227 MGO 0.013 5.77 0.649 0.822 5.725 INST 1 0.027 -0.025 INST 0.00 0.017 0.624 0.498 0.561 ONCON 1 -0.045 BLCK 0.10 0.16 0.692 0.323 1.610 FRNO 1 FRNO 0.30 0.76 .0379 0.233 0.62 Extracted from SPSS 15 output file Extracted from SPSS 15 output file **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). From Table 2 above, the mean value for Profitability is Table 3 above shows that the independent variables (INST 0.29% for firms, while Managerial Ownership, and BLCK) are negatively related with Profitability while Institutional Ownership were having an average value of (MGO and FRNO) are positively associated with 64% and 62% respectively. Block Ownership has an Profitability. However, Foreign Ownership is significantly average value of about 69% and Foreign Ownership mean related with Profitability at 5% level of significance value stood at 38% within the period of the study. The minimum value for Profitability is 0.02 while the indicating a strong relationship, while for Managerial maximum is 1.76. Managerial Ownership and Institutional Ownership, Institutional Ownership and Block Ownership Ownership have a minimum value of 0.013, 0.00 and a are insignificantly related with Profitability. The tolerance maximum value of 5.77 and 0.017 respectively. Block values and the variance inflation factor are two good Ownership and Foreign Ownership recorded a minimum measures of assessing multicolinearity between the value of 0.10, 0.30 and a maximum value of 0.16 and 0.76 independent variables in a study. The result shows that respectively. The zero (0) values recorded for both variance inflation factors were consistently smaller than Institutional Ownership indicates that in a certain year the ten (10) indicating complete absence of multicolinearity firm does not have any amount of shares held within the (e.g Neter et 'al; 1996 and Cassey et 'al; 1999). This shows observation. It is observed that among the independent the suitability of the study model been fit with the four variables, Managerial Ownership has the highest standard independent variables. Also, the tolerance values were deviation and therefore it shows that the Managerial consistently smaller than 1.00, therefore extend the fact Ownership has the least contribution to the endogenous that there is complete absence of multicolinearity between variable. While on the other hand, Foreign Ownership has the independent variables (Tobachmel and Fidell, 1996). lowest standard deviation and it therefore shows its highest contribution to the stimulant of the study. The skewness values indicate the data is considered to be tolerably mild Summary of regression result and normally distributed. Therefore the result from the two This table shows the regression result of the endogenous normality test substantiates the validity of the regression variable (PROF) and the exogenous variables of the study result. (MGO, INST, BLCK and FRNO). The presentation is followed by the analysis of the relationship and contribution of all the independent variables to the dependent variable of the study and also the cumulative analysis.

JULY - SEPTEMBER, 2017 49 CNAJ VOLUME 25 NUMBER 3

Table 4: Summ ary of Regression Result Variable Coefficient t-values P-values Tolerance VI F Constant 0.506 3.620 0.001 MGO -0.853 -0.790 0.434 0.735 1-36 INST -0.26 -0.458 0.649 0.797 1.23 BLCK 0.821 0.504 0.017 0.750 1.33 FRNO -0.827 -4.092 0.000 0.862 1.14 R 0.560 R2 0.314 Adj R2 0.245 F-Stat. 4.578 F-Sig 0.04 D/W 1.44 Extracted from SPSS 15 output file

The cumulative correlation between the endogenous (1988). This provides an evidence of failing to reject null variable and all the exogenous variables is 0.560 showing hypothesis one of the study which states that Managerial that the association between Profitability and Ownership Ownership has no significant impact on Profitability. Structure used in the study is 56% which is positively, strongly and statistically significant. This implies that for From the table, Institutional Ownership has a t-value of - any changes in Possession Structure of Nigerian chemical 0.458 and a beta value of -0.26 which is significant at 65%. and paint firms; their Profitability will be directly affected. This signifies that Institutional Ownership has no significant influence on the Profitability of Nigerian The cumulative R2 (0.314) which is the multiple chemical and paint firms. It therefore implies that for every coefficient of determination gives the proportion of the 1% increase in the Proportion of shares held by Institutions total variation in the endogenous variable explained by the in Nigerian chemical and paint firms, the Profitability will exogenous variables jointly. Hence, it signifies 31% of the have no any significant changes. This may be as a result of total variation in Profitability of Nigerian chemical and the argument put forward by Wahal (1996) that paint firms is caused by their Managerial Ownership, institutional investors have a time preference for short Institutional Ownership, Block Ownership and Foreign term result than long term result which inversely have Ownership. This indicates that the model of the study is fit effect on the overall performance of the firm. This agree and the exogenous variables are properly selected, with Pound (1988); Hand (1990)& Osundina et al. (2016) combined and used. and disagree with Servaes (1990), Han and Suk (1998) & The Durbin Watson tests of first order auto-correlation Tsai and Gu (2007). This provides an evidence of failing to which have a value of 1.44 indicates that errors are reject null hypothesis two of the study which states that uncorrelated to each other indicating absence of serial Institutional Ownership has no significant effect on correlation within the period of the study. Profitability.

From table 4 above, Managerial Ownership has a t-value of From table 4, Block Ownership Concentration has a t- -0.790 and a beta value of -0.853 which is insignificant at value of 0.504 and a beta value of 0.831 which is all level of significance. This signifies that Managerial significant at 1%. This signifies that Ownership Ownership has negatively and insignificantly impacted on Concentration has positively, strongly and significantly the Profitability of Nigerian chemical and paints firms. It influenced the profitability of Nigerian chemical and paint therefore implies that for every 1% increase in the number firms. It therefore implies that for every 1% increase in the of shares held by managers, the Profitability of listed chemical and paint firms will decrease insignificantly. This number of shares held in Block in Nigerian chemical and may be as a result of the entrenchment hypothesis which paintfirms, the Profitability will significantly improve by state that managers may embark on self-serving interest 83k. This finding is consistent with Peterson and Olayinka rather than the shareholders interest which will have an (2017) and disagree with Amina et al. (2017). This adverse effect on the firm's performance. This is in line provides an evidence of rejecting null hypothesis three of with the findings of Morck et al. (1988) & McConnell and the study which states that Ownership Concentration has Servaes (1990) and contradicts Demsetz (1983)&Stulz no significant contribution on Profitability.

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From table 4, Foreign Ownership has a t-value of -4.092 exchange. An unpublished dissertation submitted to and a beta value of 0.827 which is significant at 1%. This the Institute of distance learning, Kwame Nkrumah signifies that Foreign Ownership is negatively, strongly University of science and technology, Ghana. and significantly influencing the Profitability of Nigerian Leech D, Leahy J (1991). Ownership Structure, Control chemical and paint firms. It therefore implies that for every Type Classifications and the Performance of Large 1% increase in the number of shares held by Foreigners in British Companies. The Economics Journal., 101: Nigerian chemical and paint firms, the Profitability will 1418-1437. decrease by Eighty two kobo (.82k). This provides an Mallin, C. (2007). Corporate governance (2nd ed), xford: evidence of rejecting null hypothesis four of the study Oxford University Press. which state that Foreign Ownership has no significant McConnell, J. J., & Servaes, H. (1990). Additional impact on Profitability. evidence on equity ownership and corporate value. 5. Conclusion Journal of Financial Economics, 27, 595-612. The study has provided both statistical as well as empirical Morck, R., Schleifer, A., & Vishny, R. W. (1988). evidence on the contribution of ownership structure Management ownership and market valuation: An proxies; managerial, institutional, block and foreign from empirical analysis. Journal of Financial Economics, the chemical and paint firms in explaining and predicting 20, 293-315. profitability measured by return on asset of the sample Ngoc D. (2007). Corporate ownership structure and firms. Thus, managerial ownership is negatively performance. The case of Management Buyouts. influencing profitability while foreign ownership is Journal of Financial Economics, 27:143-164. positively influencing profitability of the sample firms. On Ongore, V.O & K'obonyo, P.O (2011) Effects of Selected the other hand institutional ownership and block Corporate Governance Characteristics on Firm ownership are not significantly contributing to the Performance: Empirical Evidence from Kenya, profitability of the selected firms. It is therefore International Journal of Economics and Financial recommended that regulating agencies of government Issues 1: 3: 2011:99-122 (Securities and Exchange Commission& Corporate Palia, D., & Lichtenberg, F. (1999). Managerial Affairs Commission) and all other stakeholders in the Ownership and Firm Performance: A Re-examination Nigerian chemical and paint firms should encourage the Using Productivity Measurement. Journal of presence of block ownership and discourage the presence of managerial ownership because of the respective role Corporate Finance, 5(4), 323-339. they play in contributing to the return on assets as a Peterson, K. & Olayinka, U. (2017). Ownership measure of profitability of the selected firms. Concentration and Bank Profitability. Future Business Journal; 3(2) 159-171 References Pound, J. (1988), "The Information effects of Takeover Amina, B., Allam, H. & Qasim, Z. (2017). Corporate bids and resistance", Journal of Financial Economics, Governance and Firm Performance: Evidence from 22:2: 207. Saudi Arabia. Australasian Accounting Business & Short A, and Keasy T. (1999) How SME uniqueness affects Finance Journal; Wollongong 11(1) 78-98. capital structure: Evidence from a 1994-1998 Chibber PK, Majumdar SK (1999). Foreign ownership and profitability: Property rights, control and the Spanish data panel". Small Business Economics, 25: performance of firms in Indian Industry, Journal of 447-57. Law and Economics 42: 209 - 238 Stulz, R. M. (1988). Managerial control of voting rights: Demsetz, H. (1983). The structure of equity ownership and Financing policies and the market for corporate the theory of the firm. Journal of Law and Economics, control. Journal of Financial Economics, 20, 25-54. 26, 375-390. Tsai, H. & Gu, Z. (2007), "Institutional ownership and firm Gorg H. and Greenway T. (2004) Founding family control performance: empirical evidence from U.S.-based and capital structure: The risk of loss of control and publicly traded restaurant firms", Journal of the aversion to debt". Entrepreneurial Theory and Hospitality & Tourism Research, 31:1:19. Practice, 23: 53-64. Wahal, S. (1996), "Pension Fund Activism and Firm Han, K.C. & Suk, D.Y. 1998, "The Effect of Ownership Performance", Journal of Financial and Quantitative Structure on Firm Performance: Additional Analysis, 31:1:1. Evidence", Review of Financial Economics, 7:2-143. Osundina, J., Olayinka, I. & Chukuma, J. (2016). Hand, J.(1990), "A Test of the Extended Functional Corporate Governace and Financial Performance of Fixation Hypothesis", The Accounting Review, l: Selected Manufacturing Companies in Nigeria. 65:4-740. International Journal of Advanced Academic Ibrahim, R. (2012). Effects of ownership structure on the Research | Social & Management Sciences, Vol. 2(10) performance of listed companies on the Ghana stock

JULY - SEPTEMBER, 2017 51 CNAJ VOLUME 25 NUMBER 3 Determinants of Segment Financial Reporting of Listed Conglomerate Firms in Nigeria

Mazadu Abdullahi Saifullahi *

Abstract The main objective of this study is to examine the determinant of segment financial reporting in the conglomerate firms listed in Nigeria. The study employed correlation research design in a sample of five firms for a period of ten years (2007- 2016). Using ordinary least squares (OLS) multiple regression technique of analysis after correcting for heteroskedasticity, it was found that leverage is positively impacting on the segment financial reporting while profitability and managerial ownership were found to be negatively influencing segment financial reporting of conglomerate firms listed in Nigeria. The study recommended that, the management and the board of the conglomerate firms listed in Nigeria should intensify effort on improving the size of their firms, source for moderate debt, improve the firms performance and improve the ownership holding the manages.

Key words: segment financial reporting, leverage, firm size, profitability and managerial ownership

1. Introduction minimum cost whether they disclose comprehensive information (Baker, Mrton, Walter & Mcfarland 1968). Globalization and internationalization of business have This means their proprietary costs are significant thy lower since changed the way financial information is prepared in compared to smaller companies. Moreover, larger the form of consolidated financial statements in order to companies can apply those accounting practices which cater for the growing internationalization of market trade reduce their reported income in order to eliminate political and the prospect of most highly diversified conglomerates exposure and avoid higher tax rates (Watts and and multinational companies. The International Financial Zimmerman 1978). Another reason is that in companies Reporting Standard (IFRS) 8, Operating Segments was with higher level of total assets, agency costs are higher due issued in November, 2006 and became effective on to their complex ownership structure. The degree of January 1, 2009 with early adoption encouraged financial disclosure depends on the agency costs (Watts & (IASB, 2006a). IFRS 8 supersedes the previous IAS 14 Zimmerman, 1986). Profitability is another important revised and requires disclosures that enable users to factor in determining segment reporting disclosure. evaluate the nature and financial effects of the business Profitable firms are said to have efficiently managed their activities in which it engages and the economic capital sources and gain rewards (Kelly 1994). Hence environment in which it operates. Management should disclosing much by companies especially by way of consider the key principle as it determines its segment segment disclosure will give the true picture of each disclosures rather than relying on a set of rules. IFRS 8 segment performance which may draw shareholders’ requires segments to be acknowledged in accordance with attention and other lenders to the nature of company's the management approach. IFRS 8 also provided that operation ( Leuz 1999). Increased proprietary costs prevent operating segments are to be identified on the basis of managers from revealing information about companies' internal reports that are regularly to make decisions about segments. resources to be allocated to the segment and assess its performance. The size of a firm is considered first in this Firm leverage is fundamental for companies to find if they study. are able to refine their capital structure by raising new funds. Leverage is a major determinant of segment Large companies are keen on being informative about reporting disclosure. Enterprises which issue long-term accounting information in order to attract the attention of debt to their shareholders are keen on revealing investors and financial analysts and inform potential disaggregated data (Salamon and Dhaliwal 1980). investors about firms' position in the international market Companies are considerably interested in external capital (Leuz, 1999). They face lower competitive costs than small companies since they get a stronger position in the market. * Mazadu Abdullahi Saifullahi, is a lecturer in the Department of Larger companies stand a chance to obtain new funds at a Accounting Nuhu Bamalli Polytechnic, Zaria Kaduna State, Nigeria. JULY - SEPTEMBER, 2017 21 CNAJ VOLUME 25 NUMBER 3 provided by financiers and are willing to reduce agency Saada (1998) and Leuz (1999). In addition, Alsaeed (2006) costs by revealing segment information (Prencipe 2000). In confirmed that proprietary costs are more important for addition by disclosing more including segment disclosure large companies because they are more likely to be by companies that may help in reducing suspicion by the followed by analysts and are expected to pay extra for investors and the shareholders of companies inability to segment disclosure. Salamon and Dhaliwah (1980) argued repay it debt Leuz (1999). that segment reporting is used by companies in order to attract potential investors and public interest. Bradbury Ownership diffusion is proved to affect significantly the (1992) expressed the point that firms with a more segment reporting (McKinnon and Dalimunthe 1993; privileged position in the international market tend to Alsaeed 2006). Low concentration of ownership or higher reveal additional aggregated data. managerial ownership might cause reluctance to the preparers of the financial statement to present segment The great majority have demonstrated the existence of a reporting data into their annual reports. When companies' significant positive correlation among corporate size and shares are owned by different shareholders scattered the amount of segment information ( Singhvi, 1967; Buzby, around the world the problem of separation of ownership 1975; Firth, 1979; McNally et al, 1982; Cooke, 1999; and management is more intense. Shareholders are not Wallace et al, 1994; Ahmed, 1996; Mahmood, 1999). Some involved in decision making and undertake operating costs of them argued that size is the only significant explanatory in order to influence manager's actions. Segment reporting variable of information disclosure (Firth, 1979; Chow and assists enterprises to handle with those problems and fill Wong Boren, 1987). On the other hand, there are the information gap between managers and shareholders. researchers who suggested that a negative relationship Shareholder's impression regarding the firms' figures may exists between firm size and segment disclosure. Based on be further deteriorated when shareholders do not have their evidence, large companies may have the incentive for access in internal corporate information as in the case of withholding value-relevant information to avoid the companies with high level of ownership dispersion. But political costs in terms of tight regulations and increasing even more relevant than preparation and dissemination tax and social obligations (Alsaeed, 2006; Jensen and costs are the potential disadvantages coming from the use Meckling, 1976). As a reflection, we hypothesize in of segment reporting by competitors and other parties. alternative form that: Managers may be unwilling to provide information to the bondholders and as a result they (bondholders) are forced Ho : there exists no significant relationship between firm to take measures in order to monitor the managers' actions. 1 size and segment reporting of conglomerate firms Prior studies by Kinsley & Meek., (2004) and Mckinon & listed in Nigeria. Dalimunthe (1993); Prencpe, - (1999); Sanders, Alexender and Clak (1999) and Berger & Hann (2005) has argued that Another important explanatory variable of segment compliance with IFRS is affected by institutional factors, reporting disclosure according to prior studies is governance and corporate characteristics. However, most profitability. Many researchers had examined broadly the of these studies concentrated on general IFRS disclosures connection between profitability and segment disclosure. not on IFRS 8 disclosures (segment reporting disclosure). Their findings resulted in either a positive (Singhvi, 1967; In addition there exist scanty local literatures on segment Giner et al, 1997; Saada, 1998) or a negative (Belkaoui and reporting disclosure. Thus, the main objective of this study Kahl, 1978; Kelly, 1994; Wallace and Naser, 1995; Leuz, is to examine the effect of firm specific characteristics, 1999) association between those measures. Another study ownership structure and segment reporting disclosure of conducted by McNally et al, (1982) proved that there is no conglomerate firms listed in Nigeria. The remaining part of significant correlation between profitability and the paper is structured as thus; literature review and disclosure. When a company makes profit then the hypothesis development is given in the following section incentives to announce those results are many. It has been while section three gives the methodology. Section four noticed (Karim & Ahmed, 2006) that a prescriptive presents the regression result and finally section five disclosure of a firm's annual reports is associated to good concludes the paper. results while a narrative disclosure is associated to bad results. According to Prencipe (2000) profitability is an 2. Literature review and hypothesis development indicator of an investment quality which reduces the The existence of a significant positive relationship between company's risk to "be adversely selected by the market. The size and segment disclosure was confirmed by Salamon supporters of a negative relationship between segment and Dhaliwal (1980), Bradbury (1992), Mitchell et al. disclosure and profitability (Wallace & Naser, 1995) claim (1995), Hermann and Thomas (1996), Giner et al. (1997), that competitive costs tend to increase when company's

22 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 profitability increases. Competition leads to increasing positive effect for the company (Warfield et al., 1995). On costs which harm the enterprise. As a reflection, the study the other hand, greater managerial ownership creates hypothesizes that; incentives for managers to run the business in their own self-interest, which may conflict with that of shareholders

Ho2 : there is no significant relationship between (the entrenchment effect), and hence adversely affect the profitability and segment reporting of conglomerate company (Wiwattanakantang, 2001). Ball, Robin and Wu firms listed in Nigeria. (2003) suggest that the institutional structures of East Asian countries create incentives for controlling owners Financial leverage has been used in many disclosures and managers to compromise financial reporting quality. studies as a variable which examines the potential linkage Claessens et al. (2000) find that the top management is between the level of segmental reporting disclosure and the related to the family of the controlling shareholders in percentage of debt in a company's structure of capital. about 60% of the sample firms, especially in Indonesia, Several studies carried out concluded on a positive Korea, Malaysia and Taiwan. Lemmon and Lins (2003) relationship between financial leverage and segment found that management groups are the largest block disclosure quality (Fama and Miller, 1972; Dhaliwal, 1978; holders in two-thirds of their sample firms. Firms in East Bradbury, 1992; Malone et al, 1993; Giner et al, 1997). In Asia are characterized by highly concentrated ownership dispute, prior surveys have also observed a rather negative (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998; La relationship between those variables (Belkaoui and Kahl, Porta, Lopez-de-Silanes, & Shleifer, 1999; Claessens, 1978; Kelly, 1994; Leuz, 1999) or found no association Djankov, and Lang (2000). For that, the current study among them (Chow and Wong-Boren, 1987; Ahmed and hypothesizes as thus; Nicholls, 1994; Wallace, 1994). It has been proved that highly leveraged firms enhance their capital structure when Ho4 : there exists no significance relationship between they increase their debt. That causes increasing cash flows managerial ownership and segment reporting. that can be converted into real assets. Those investments generate adequate returns to pay their debt. By disclosing Proprietary Costs Theory (Verrecchia, 1983, 1990; information enterprises can achieve to reach a lower Wagenhofer, 1990) states that companies limit voluntary interest rate and improve their financial position (Kevin & disclosure of information to the financial market because Zain, 2000). On the other hand, enterprises may avoid of the existence of disclosure related costs (proprietary revealing segmental information for fear of making their costs). These costs include not only the costs of preparing shareholders suspicious about their inability to repay the and disseminating information but also the cost deriving loan promptly. Based on the above contention the research from disclosing information which may be used by hypothesized as thus: competitors and other parties in a way which is harmful for the reporting company. Proprietary Costs Theory is based

Ho3 : there is no significant relationship between on the assumption that, in the absence of these costs, leverage and segment reporting of conglomerate companies are incentived to voluntarily disclose relevant firms listed in Nigeria. information to the market in order to reduce information asymmetry and, consequently, the cost of capital The relation between voluntary disclosure and managerial (Verrecchia, 1983; Diamond, 1985). Therefore, ownership has been previously examined by several studies proprietary cost theory is the theory that the present study is (Nagar, Nanda, and Wysocki, 2003). Arcay and Vazquez hinged on. (2005) found that voluntary disclosure is positively related to board ownership. Leung and Horwitz (2004) examine 3. Methodology and Data voluntary segment disclosure in Hong Kong firms and find Correlation research design is used to describe the a non-linear relation. Disclosure increases as executive statistical association between two or more variables. It is director ownership rises from 1% to 25% but declines once therefore, most appropriate for this study because it allows ownership rises above 25%. A few studies report an for making of predictions regarding the expected insignificant relationship between voluntary disclosure and associations between and among the variables. The managerial ownership (Kelton & Yang, 2008). The population of the study comprises all the six listed discrepancies in these studies could be attributed to Conglomerate firms quoted on the Nigerian Stock measurement differences. Similarly, Fan and Wong (2002) Exchange as at 31st December 2016 (UACN, Transcorp link ownership structure in East Asia to weak information International, SCOA, John Holt, Challerams and A.G quality. On the one hand, greater managerial ownership Leventis) between 2007/2016. The sample size is five mandate managers to align their interest with the interests firms after filtering out Transcorp International which was of shareholders (the interest alignment effect), and hence a listed in 2010. Longitudinal balanced panel data from

JULY - SEPTEMBER, 2017 23 CNAJ VOLUME 25 NUMBER 3 secondary sources was used only because it is a quantitative Table 2 is the summary statistics of the explanatory study with positivism paradigm and the data needed for variables. The average of segment financial reporting analysis can be adequately extracted from the audited (SFR) is 61% with the minimum of 25% and a maximum financial reports and accounts of the selected firms within of 17%. The result indicates that there is strong presence of the period of the study. Multiple linear regression technique SFR in our sample firms. Firm size (FSZ) average is was employed to examine the model of the study. The 7.387895, ranging from the extreme values of 4.934897 parsimonious model of the study is presented as thus; and 8.412987 as the maximum. This implies that most of SFRit = âá0 + â1FSZit + â2PROFit + â3LEVit + â4MGOit + €it the firms in our sample are substantially large in terms of asset. The average of the leverage (LEV) of the sample Where: firms is as high as 9.797087, which is quite impressive. Â0 = Constant term Ranging from 0.152683 to 1.69058, profitability averages i = firm 0.499333%. Here also, the disparity of all the means from t = time their standard deviations is minimal, indicating that the s = Segment data are not positively skewed and are fit to produce result â1 to â4 = coefficient of the parameters that is reliable. ? = stochastic disturbance Table 3: Regression Results The following table describe the variables and there measurements Variable Coefficient t-values p-values Vif Tolerance Constant 0.8126664 2.57 0.013 Table 1 Variable definition and measurement FSZ 0.0029395 0.06 0.950 2.37 0.421221 S/N Variable Measurement LEV 0.0646655 2.40 0.020 2.02 0.494236 1 Segment financial Measured by the variability of the segment PROF -0.3154051 -1.80 0.077 1.22 0.820648 reporting (SFRQ) return on asset; SFRQ=Log(2+Max Adj ROAsi MGO -0.1482271 -3.58 0.001 1.17 0.854381 – Min Adj ROAsi) whereby Adj ROA=(ROAsi R2 0.2590 Adj. R2 – Industry ROA multiply by Assetsi divide by 0.2052 F-statistics 4.81 total asseti (Etteredge et.al., 2002) 2 Firm Size (FSZ) Measured by the natural log of total asset F-sig 0.0021 Hettest-Test 2.97 3 Profitability Measured by the profit after tax to total asset (0.0849) (PROF) Hausman 1.76 4 Leverage (LEV) Measured as the ratio of total long-term debt Test (0.7802) to owners’ equity plus total long-term debt. LM-Test 0.00 (1.000) 5 Managerial Measured by the proportion of shares owned b SOURCE: STATA OUTPUT 2017 ownership (MGO) manages to the total number of shares Source: by author 2017 The cumulative association between dependent variable and all the independent variables is 0.2590 indicating that Result and discussion the relationship between segment financial reporting (SFR) and firm attributes used in this study is 25% which is This section presents the Descriptive Statistics, describing positively and statistically significant. This implies that for the trends of the variables within the period covered by the any changes in firm attributes of listed Nigerian study, followed by the correlation matrix which analyzes conglomerates firms; the segment financial reporting will the association between dependent and each independent be directly affected. The cumulative Adj. R2 (0.20) which variable, individually and cumulatively. Furthermore, the is the multiple coefficient of determination gives the regression result examines the model that capture the proportion or percentage of the total variation in the dependent variable (SP) and all the independent variables dependent variable as explained by the explanatory of the study (Book Value, Earnings and Change in variable jointly. Hence, it signifies 20% of the total Earnings). variation in segment financial reporting of conglomerate firms listed in Nigerian is caused by the corporate Table 2 Descriptive Statistics Statistics SFR FSZ LEVR PROF MGO Mean 0.6122217 7.387895 1.69058 0.499333 1.173818 Std. Deviation 0.2989211 0.827041 1.834857 0.3058959 0.907777 Minimum 0.2523407 4.934897 0.152683 0.068186 0.0716041 Maximum 1.771234 8.412987 9.797087 1.675414 3.489056 Source: STATA Output 2017

24 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 attributes (firm size, leverage, profitability and managerial to company's decisions. Thus, the second hypothesis of ownership). Thus, the moderate percentage of 20% is this study is ejected based on the findings of this study. possible considering the number of the corporate attributes and those used in this study. This indicates that the model is The study’s expectation is that high profitable are more fit and the explanatory variable are properly selected, likely to disclose segment information of their combined and used. Thus, this is evidenced by F- statistics organization. The result in respect of profitability and of 4.81 which is statistically significance at 1%. segment financial reporting did not prove otherwise, but Furthermore, the result in table 3 shows the presence of shows that profitability is negatively associated with Heteroskedasticity in the panel as indicated by the Breuch segment financial reporting in conglomerate firms listed in Pagan/Cook-Weisberg test for heteroskedasticity Chi2 of Nigeria. In addition, financial statements can be 2.97 with p-value of 0.0849. The Breusch and pagan deliberately made more complex and difficult to Lagrangian multiplier test for random effects indicates that understand by financial users. Managers are boosted to there is no much variation between the OLS result and the disclose more in order to improve company's position and random effects result as indicated by chibar2 0.00 with a p- status in the market and, also, to increase firms share value of 1.000. Thus, the ordinary least square regression prices. Profitable organizations seek to insure their (OLS) regression is presented in table 3 above. shareholders that they succeed to maximize firms' value in order to keep their money and avoid bankruptcy. The regression result reveals that firm size is positively Nevertheless, they want to share that information with correlated with segment financial reporting but potential investors who might be interested in raising statistically insignificant at any level of significant. This is money in the business. Thus, the third hypothesis of the indicated by the coefficients value of 0.0029395, t- value study is rejected based on the finding of this study. of 0.06 and a probability value of 0.95. That means large organizations may not likely to generate complete The regression result reveals that managerial ownership is accounting information than small firms. The cost of found to be statistically and significantly influencing collecting, analyzing and disclosing information is segment financial reporting at 5% level in determining the comparatively higher for large firms than smaller ones segment financial reporting of conglomerate firms listed in because of their size and inability to construct and preserve Nigerian. This implies that managerial ownership is efficient management information system which significantly improving the segment financial reporting. facilitates them in generating segmental data. Due to their However, disclosure such as management earnings efficient structure and organization, large firms are not forecasts may reduce information asymmetry in firms with capable to produce financial information at a minimum low managerial ownership because the disclosure relates cost. Moreover, production and disclosing costs are to the information about expected earnings that is typically considered to be higher for large firms as they contain a subject to manipulation by managers. It can be argued, large fixed component of those costs (Meek et al, 1995). though, that certain types of disclosures, such as general The composition of production and dissemination costs information, might not play the same role in addressing the with high fixed and variable elements will not allow large agency problem. In addition, none of the prior studies has firms to reduce per unit costs. However, this result considered the relation between ownership and voluntary produced an evidence of not rejecting hypothesis one of non-financial disclosure related to intangibles. The the study. benefits and the costs of information on intangibles are both high, making it likely that greater managerial Looking at the relation between leverage and segment incentives are involved in the decision to voluntarily financial reporting, a positive and statistically significant disclose them. Similarly, in the case of intangible- association emerged. This is supported b the coefficients intensive firms, the role of managerial ownership is more value of 0.0646655 and a t- value of 2.40 with a p-value of intensified because managers have greater discretionary 0.020 which is significant at 5%. This result signifies that power, as they are the experts in the decision making of the highly leveraged companies are prone to disclose more firms. On the one hand, one would expect that the detailed information in order to fulfill their creditors' importance of voluntarily disclosing information of needs. A high debt to equity ratio is connected to higher intangibles prevail over the incentive from managerial agency costs. Leveraged companies have more incentives ownership because the disclosure can reduce the to share segment information with their creditors so as to information asymmetry that is high in intangible intensive restrain information asymmetry (Bradbury, 19920). Their firms. On the other hand, due to the high proprietary cost of ultimate goal is to increase monitoring and reduce information on intangibles, managerial ownership may conflicts between firms' bondholders (either shareholders lead to the withholding of information in intangible- or debt holders). That would increase creditors' confidence intensive firms. Yet, there is lack of evidence to clarify the

JULY - SEPTEMBER, 2017 25 CNAJ VOLUME 25 NUMBER 3 debate surrounding the influence of managerial ownership Berger, P.G, and Hann, R, (2005), Segment Disclosures, on voluntary disclosure of intangibles. Proprietary Costs, and the Market for Corporate Control, Working Paper, re SSRN-ID 357780 Conclusions and Recommendations Bradbury, M.E. (1992), Voluntary Disclosure of Financial This study has empirically examined the determinant Segment Data: New Zealand Evidence, Accounting effect of corporate attributes on the segment financial and Finance, pp.15-26. Buzby, S.L. (Spring, 1975), Company Size, Listed Versus reporting of conglomerate firms listed in Nigeria. Unlisted Stocks and the Extent of Financial Correlation research design was used as a research design Disclosure, Journal of Accounting Research, pp.16- and a longitudinal balanced panel model was used to 37. examine the relationship between the explanatory variable Chow, C.W. and Wong-Boren, A. (1987) Voluntary on the explained variable and account for the individual Financial Disclosure by Mexican Corporations, heterogeneity of the panel attributes. The study provides The Accounting Review, Vol.62, No.3, pp.533-541. positive relationship between firm size and leverage on the Claessens, S. Djankov, S. and Lang. L (2000) The segment financial reporting. In addition a negative and separation of ownership and control in East Asian statistical association was also established between corporations. Journal of Financial Economics. 58 (1- profitability and managerial ownership on the segment 2): 81-112. financial reporting of conglomerate firms listed in Nigeria. Cooke, t.e, (1998). Regression analysis in accounting However, based on the findings of the study it is finally disclosure studies. Accounting and Business Research 28(3): 209-224. concluded that, corporate firms' attributes play a prominent Dhaliwal, D.S. (1978), The Impact of Disclosure role in determining segment financial reporting of Regulations on the cost of Capital, FASB Report, conglomerates firms listed in Nigeria. Therefore, in line Economics Consequences of Financial Accounting with the findings and conclusions of the study, it is Standards: Selected Papers. recommended that, the management and the board of the Diamond, D. (1985) 'Optimal release of information by conglomerate firms listed in Nigeria should intensify effort firms', Journal of Finance, 40(3): 1071-1094. on improving the size of their firms, source for moderate Ettredge, M.L., Kwon, S.Y., Smith, D.B. & Stone, M.S., debt, improve the firms’ performance and improve the (2006). The Effect of SFAS No. 131 on the ownership holding the manages. Crosssegment Variability of Profits Reported by Multiple Segment Firms. Review of Accounting References Studies, 11(1), pp.91-117. Ahmed, K. and Des Nicholls ,(1994), "The Impact of Non- Fama, E.F. and Miller, M. (1972), ¨The Theory of financial Company Characteristics on mandatory Finance¨, Hinsdale, IL: Dryden Press. Disclosure Compliance in Developing Countries: The Fan, J. and Wong T. J (2002) Corporate ownership Case of Bangladesh", The international Journal of structure and the in formativeness of accounting Accounting Education and Research, 29, pp. 6277. earnings in East Asia. Journal of Accounting and Ahmed, K., (1996), "Disclosure policy choice and Economics. 33 (3): 401-425. corporate characteristics: a study of Bangladesh", Firth, M.A. (1979) The Impact of Size, Stock Market Asia Pacific Journal of Accounting, pp. 184203. Listing and Auditors on Voluntary Disclosure in Alsaeed, K. (2006), The association between firm- Corporate Annual Accounts, Accounting and specific characteristics and disclosure: The case of Business Research, pp.273-280. Saudi Arabia, Managerial Accounting Journal, Giner, B., Ruiz A., Cervera, N. and Arce, M. (1997) Volume 21, Number 5, pp. 476-496 Accounting policy choice and the disclosure of Arcay M. R. and Vazquez M. F. (2005) Corporate segmental information: Spanish evidence, Paper characteristics, governance rules and the extent of presented at the XX EAA Annual Congress, Graz, voluntary disclosure in Spain. Advances in April. Accounting., 21: 299-331. Herrmann, D. and Thomas, W. (1996) Segment Reporting Backer, Morton and Walter B. McFarland,(1968), " in the European Union: Analyzing the Effects of External Reporting for Segments Of a business", Country, Size, Industry and Exchange Listing, New York , National Association of Accountants, Journal of International Accounting, Auditing and Ball. A. Robin R. and Wu J. S (2003) Incentives versus Taxation, 5 (1): 1-20. standards: Properties of accounting income in four Jensen, M. and Meckling, W., (1976), Theory of the firm: East Asian countries. Journal of Accounting and Managerial behavior, agency costs and capital Economics. 36 (1-3): 235-270. structure, Journal of Financial Economics 3, 305- Belkaoui, A. and Kahl, A. (1978), "Corporate Financial 360. Disclosure in Canada, Research monograph Karim, M.W, and Ahmed, J.U, (2006), Determinants and No.1 of the Canadian Certified General Accountants IAS disclosure compliance in emerging economies: Evidence from exchange-listed Association, Vancouver: Canadian Certified companies in Bangladesh, Working Paper Series, General Accounting Association.

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Working Paper no 21, Centre of Accounting, Prencipe, A. (1999) Segment reporting in Italy: regulation Governance and Taxation Research, New Zealand and practice', Paper presented at the Prentice-Hall. Kelly, G.J. (1994) 'Unregulated segment reporting: Saada, T. (1998) 'La politique de publication des Australian evidence', British Accounting Review, informations segmentées des enterprises 26: 217-34. francaises (Segment reporting publication policy by Kelton, A. S. and Yang Y (2008) The impact of corporate French companies)', Revue Francaise de governance on Internet financial reporting. Journal Gestion, 121: 95-107. of Accounting and Public Policy. 27 (1): 62-87. Salamon, G. and Dhaliwal, D. (1980) Company size and Kevin, L.T, and Mat Zain, M, (2000), Segmental financial disclosure requirements with Reporting: An Insight into Malaysia's evidence from the segmental reporting issue, Journal Companies, Working Paper, re SSRN-ID 293552 of business finance and accounting, 7(4): 555-68. Kinsey, P.J, & Meek, G.K, (2004) The effect of revised IAS Sanders, J., Alexander, S. and Clark S. (1999) New 14 on segment reporting by IAS companies segment reporting. Is it working?, Strategic European Accounting Review, Vol 13, No 2, pp 215 Finance, 81(6): 35-38. Singhvi, S. S. (1967) Corporate Disclosure Through La Porta, F. Lopez-de-Silanes, R. and Shleifer A (1999) Annual Reports in the USA and India, Unpublished Corporate ownership around the world, Journal of Doctoral Dissertation, Graduate School of Business, Finance. 54 (2): 471-517. Columbia University. La Porta, F. Lopez-de-Silanes, R., Shleifer A. and Vishny Verrecchia, R. (1983) 'Discretionary disclosure', Journal of R. W (1998) Law and finance. Journal of Accounting and Economics, 5: 179-Verrecchia, R. Political Economy. 106 (6): 1113-1155. (1990) Information quality and dis cretionary Lemmon, M. L. and Lins K. V (2003) Ownership structure, disclosure, Journal of Accounting and Economics, corporate governance, and firm value: 12: 365-80. Evidence from the East Asian financial crisis, Verrecchia, R. E. (1983) Discretionary disclosure, Journal Journal of Finance. 58 (4): 1445-1468. of Accounting and Economics, December, pp. 179- Leung, S. and Horwitz B (2004) Director ownership and 194. voluntary segment disclosure: Hong Kongevidence, Wagenhofer, A. (1990) Voluntary disclosure with a Journal of International Financial Management & strategic opponent, Journal of Accounting and Accounting. 15 (3): 235-260. Economics, 12 (4): 341-63. Leuz, C. (1999) 'Proprietary versus non-proprietary Wallace, R. S. O. and Naser, K. (1995) Firm-specific disclosures: voluntary cash flow statements and determinants of the comprehensiveness of business segment reports in Germany', Working mandatory disclosure in the corporate annual reports Paper, Department of Business and Economics, of firms listed on the stock exchange of Hong Kong, Journal of Accounting and Public Policy, 14(4), pp. Johann Wolfgang Goethe-Universitat, Frankfurt. 311-368. Mahmood, A. (1999), The impact of market characteristics Wallace, R. S. O., K. Naser and A. Mora (1994) The on the comprehensiveness of disclosure in Relationship Between the Comprehensiveness of financial reports: an empirical study, The Journal of Corporate Annual Reports and Firm Characteristics Commercial Researches, Vol. 13 No.1, pp.47 in Spain", Accounting and Business Research, 25, Malone, D., Fries, C. and Jones, T., (1993), An Empirical pp. 4153. Investigation of the Extent of Corporate Financial Disclosure in the Oil and Gas Industry, Warfield, T.D. Wild, J. J. and Wild K.L (1995) Managerial Journal of Accounting, Auditing, and Finance, ownership, accounting choices, and informativeness Vol.8, No.3, pp.249-273. of earnings. Journal of Accounting and Economics. Mckinnon, J. and Dalimunthe, J. (1993) Voluntary 20 (1): 61-91. disclosure of segment information by Watts, R.L. and Zimmerman, J.L. (1978) Towards a Australian diversified companies, Accounting and positive theory of the determination of the Finance, 33(1): 33-50. accounting standards, The Accounting Review, McNally, G.M, Lee, H.E and Hasseldine, C.R. (1982), 53(1):112-34. Corporate Financial Reporting in New Zealand: An Watts, R.L. and Zimmerman, J.L. (1986) Positive Analysis of User Preferences, Corporate Accounting Theory. Englewood Cliffs, NJ: Characteristics and Disclosure Practices for Wiwattanakantang Y (2001) Controlling Discretionary Information, Accounting and shareholders and corporate value: Evidence from Business Research, pp.11-20. Thailand, Pacific-Basin Finance Journal. 9 (4): 323- Mitchell, J., Chia, C. and Loh, A. (1995) Voluntary 362. disclosure of segment information: further Wiwattanakantang Y (2001) Controlling shareholders and Evidence, Accounting and Finance, 32 (1):15-26 corporate value: Evidence from Thailand, Pacific- Nagar, V. D. Nanda, and Wysocki P (2003) Discretionary Basin Finance Journal. 9 (4): 323-362. disclosure and stock-based incentives, Journal of Accounting and Economics. 34 (1-3): 283-309. Prencipe, A, (2000), Proprietary costs and voluntary segment disclosure: Evidence from Italian Listed companies, Working Paper, re SSRN_ ID 254480

JULY - SEPTEMBER, 2017 27 CNAJ VOLUME 25 NUMBER 3

APPENDIX . su sfr fsize lev pof mgo

Variable Obs Mean Std. Dev. Min Max

sfr 60 .6122217 .2989211 .2523407 1.771234 fsize 60 7.387895 .827041 4.934897 8.412987 lev 60 1.69058 1.834857 .152683 9.797087 pof 60 .499333 .3058959 .0648186 1.675414 mgo 60 1.173818 .907777 .0716041 3.489056 . correlate sfr fsize lev pof mgo (obs=60) sfr fsize lev pof mgo

sfr 1.0000 fsize -0.1143 1.0000 lev 0.2339 0.1523 1.0000 pof 0.0728 0.3071 0.7055 1.0000 mgo -0.4235 0.1860 -0.1409 -0.2512 1.0000 . reg sfr fsize lev pof mgo

Source SS df MS Number of obs = 60 F( 4, 55) = 4.81 Model 1.36566445 4 .341416113 Prob > F = 0.0021 Residual 3.90621277 55 .07102205 R-squared = 0.2590 Adj R-squared = 0.2052 Total 5.27187722 59 .089353851 Root MSE = .2665

sfr Coef. Std. Err. t P>|t| [95% Conf. Interval]

fsize .0029395 .046309 0.06 0.950 -.0898657 .0957448 lev .0646655 .0268968 2.40 0.020 .010763 .1185679 pof -.3154051 .1747599 -1.80 0.077 -.6656318 .0348215 mgo -.1482271 .0413491 -3.58 0.001 -.2310925 -.0653618 _cons .8126664 .3163637 2.57 0.013 .1786595 1.446673

. vif

Variable VIF 1/VIF

pof 2.37 0.421221 lev 2.02 0.494236 fsize 1.22 0.820648 mgo 1.17 0.854381

Mean VIF 1.70

. hettest Breusch-Pagan / Cook-Weisberg test for heteroskedasticity Ho: Constant variance Variables: fitted values of sfr

chi2(1) = 2.97 Prob > chi2 = 0.0849

28 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3

. xtreg sfr fsize lev pof mgo, fe

Fixed-effects (within) regression Number of obs = 60 Group variable: year Number of groups = 10

R-sq: within = 0.3052 Obs per group: min = 6 between = 0.1030 avg = 6.0 overall = 0.2567 max = 6

F(4,46) = 5.05 corr(u_i, Xb) = -0.2360 Prob > F = 0.0018

sfr Coef. Std. Err. t P>|t| [95% Conf. Interval]

fsize -.0127484 .0512535 -0.25 0.805 -.1159164 .0904196 lev .0778121 .0296426 2.63 0.012 .0181448 .1374795 pof -.3650982 .1945972 -1.88 0.067 -.7568021 .0266057 mgo -.1555052 .0446136 -3.49 0.001 -.2453078 -.0657026 _cons .9396982 .3463495 2.71 0.009 .2425328 1.636864

sigma_u .08314098 sigma_e .27842604 rho .08186826 (fraction of variance due to u_i)

F test that all u_i=0: F(9, 46) = 0.49 Prob > F = 0.8753 . xtreg sfr fsize lev pof mgo, re

Random-effects GLS regression Number of obs = 60 Group variable: year Number of groups = 10

R-sq: within = 0.3026 Obs per group: min = 6 between = 0.0877 avg = 6.0 overall = 0.2590 max = 6

Wald chi2(4) = 19.23 corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0007

sfr Coef. Std. Err. z P>|z| [95% Conf. Interval]

fsize .0029395 .046309 0.06 0.949 -.0878244 .0937034 lev .0646655 .0268968 2.40 0.016 .0119487 .1173823 pof -.3154051 .1747599 -1.80 0.071 -.6579282 .027118 mgo -.1482271 .0413491 -3.58 0.000 -.2292698 -.0671845 _cons .8126664 .3163637 2.57 0.010 .192605 1.432728

sigma_u 0 sigma_e .27842604 rho 0 (fraction of variance due to u_i)

. hausman fe re

Coefficients (b) (B) (b-B) sqrt(diag(V_b-V_B)) fe re Difference S.E.

fsize -.0127484 .0029395 -.0156879 .0219637 lev .0778121 .0646655 .0131467 .0124596 pof -.3650982 -.3154051 -.0496931 .0855983 mgo -.1555052 -.1482271 -.0072781 .0167521

b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(4) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 1.76 Prob>chi2 = 0.7802 Breusch and Pagan Lagrangian multiplier test for random effects

sfr[year,t] = Xb + u[year] + e[year,t]

Estimated results: Var sd = sqrt(Var)

sfr .0893539 .2989211 e .0775211 .278426 u 0 0

Test: Var(u) = 0 chibar2(01) = 0.00 Prob > chibar2 = 1.0000

JULY - SEPTEMBER, 2017 29 CNAJ VOLUME 25 NUMBER 3

. xtreg sfr fsize lev pof mgo, robust Random-effects GLS regression Number of obs = 60 Group variable: year Number of groups = 10

R-sq: within = 0.3026 Obs per group: min = 6 between = 0.0877 avg = 6.0 overall = 0.2590 max = 6

Wald chi2(4) = 28.77 corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

(Std. Err. adjusted for 10 clusters in year)

Robust sfr Coef. Std. Err. z P>|z| [95% Conf. Interval]

fsize .0029395 .0441893 0.07 0.947 -.0836699 .089549 lev .0646655 .0405431 1.59 0.111 -.0147975 .1441284 pof -.3154051 .1585419 -1.99 0.047 -.6261414 -.0046688 mgo -.1482271 .0302765 -4.90 0.000 -.2075679 -.0888863 _cons .8126664 .2789179 2.91 0.004 .2659974 1.359335

sigma_u 0 sigma_e .27842604 rho 0 (fraction of variance due to u_i)

30 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3

Implication of Accounting Information on Bank Lending Decision in Nigeria

UDU, Ama Aka, PhD, ELECHI, Ogbonnaya O. & UDU, Uduma Samuel A. PhD*

Abstract: The study examines empirically the implications of accounting information on the Bank lending decision in Nigeria, using annual time series data spanning from 1980 to 2015. The specific objectives of the study include; finding the implication of cash and cash equivalent on the Bank's lending decision in Nigeria; ascertaining the implication of dividend yields on the Bank's lending decision in Nigeria and evaluating the effect of earning yields on the Bank's lending decision in Nigeria. The study adopts the Augmented Dickey-Fuller (ADF) test, and documents that all data engaged in the study were stationary at I (I). The study further engages the Johansen co-integration test and found that the proxies of accounting information (that is; cash and cash equivalent, dividend yields and earning yields) and Bank lending decision is positively co-integrated indicating a stable long-run relationship. The result of ECM shows a well-defined error correction term, and indicates a feedback of 63 percent of the previous year's disequilibrium from the long run accounting information and the elasticity of bank lending decision in Nigeria. The implication of this result is that cash and cash equivalent, dividend yield and earning yield which are proxies to accounting information maintained equilibrium with the bank lending decision in Nigeria. Based on the above finding, the study is of the view that banks should give necessary accounting information to customers before given out loan to guarantee sanity in the Nigerian banking system.

Key Words: Accounting Information, Bank Lending Decision, cash and cash equivalent, Nigeria

1. Introduction worst still, the lending decision is not dependent on accounting information (Francis, 2014). It is usually very The role of accounting information in directing bank easy to issue out loans but not often so easy to recover them. lending decisions in recent times cannot be over- Banks usually take some risk when lending money. To emphasized. Most studies have admitted that adequate ensure the safety of funds committed, banks should create a accounting information has guided credit analysts, framework that exposes relevance information to the prospective borrowers, bankers, investors, accounting internal constraints of each bank. Accounting systems can professionals on the way to operate in their lending aid in decision making providing information relevant to decisions. (Arvanitidou, Konstantinidou, Papadolous & the decision and to the decision maker (Gray, 1996). Xanthi, 2011 and Francis, 2014). The issue of accounting Effective and efficient accounting information play a information could be linked to those of solvency, liquidity central role in management decision making (Trimisiu and profitability, which means obtaining necessary Tunji, 2012; Royaee, Salehi, & Aseman, 2012 and Hubber, accounting information that would describe the client's 1990). financial stand and long term liability. On the other hand, lending decisions form the major segment to banking To a creditor or borrower, some of the accounting operation. Consequently, loan request has to be properly information that inspires their decision to give out credits is appraised by considering the necessary financial the banks' dividend yield, earning yield and perhaps the accounting information required. However, the use of cash and cash equivalent. While a high dividend yield accounting information in bank lending decision is an issue could reflect stocks that are undervalued and will provide a of concern to stakeholders in the Nigerian banking *UDU, Ama Aka is a lecturer in the Department of Management industries. This is largely as a result of scandals involving Sciences, Ebonyi State University, Abakaliki, Nigeria; ELECHI, Chief Executive Officers of major banks in Nigeria in the Ogbonnaya O. is a lecturer in the Department of Accountancy, 2000's. It is now a question of whether the banks have Ebonyi State University, Abakaliki, Nigeria. UDU, Uduma Samuel refused to use information provided by borrowers or A. works at the Office of the State Auditor General, Ebonyi State, borrowers do not provide an accounting information or Abakaliki.

12 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 higher return, earnings yield measures how much return an 2. Theoretical and Empirical Evidence investment in a company earned over the past 12 months. This study adopted two accounting theories to explain the Like the dividend yield, the higher the earning yields, the link between accounting information and bank lending more attractive the investment (Hafij-Ullah and Syeda, decisions. These include institutional or legitimacy theory 2014). Away from the above, cash and cash equivalents and stakeholder theory. Institutional theory explains the refer to the line item on the balance sheet that reports the behavior of a bank or accounting choice with regards to value of a bank’s assets that are cash or can be converted lending decisions. The theory states that companies adopt into cash immediately. These include bank accounts, systems and management practices that are considered marketable securities, commercial paper, treasury bills and legitimate by other companies in the field. Companies are short-term government bonds with a maturity date of three answering to the pressures that are coming from their months or less. Thus, if all these accounting data are made institutional environment as well as making choices that available to the users, banks' decision with regards to their are socially accepted. Companies need external financial lending processes would be enhanced in Nigerian banking resources which influence on companies' choices (Moore industries. It is undoubtedly an established fact that Credit et al. 2012). Additionally accounting has been seen as a management is the core of the entire operations of the symbol for legitimacy (Carpenter & Feroz 2001). The banking industry. However, "the numerous and varied theory assumes that because of the pressure of external risks in lending system form many factors that can lead to environment, companies rely on accounting information the nonpayment of obligations when they are due", (Rioux, that is most favorable for their stakeholders. External 2013 and Atwood, 2009). In fact the prompt repayment of environments includes other companies that are operating loans and interests thereon determines the viability of a in the same field and as they are aiming on the same goal to bank. Existing literatures (e.g. Out, 2009; Mfam, 2012 and reach the potential creditors and ensure liquidity, the Agarwa & Saxena, 2012) in accounting and banking competition is hard. Hence, external environment affect profession recognize the importance and relevance of companies' behaviour and choices. accounting information in bank lending decision making. The relationship between accounting information and Stakeholder theory is one of the most known theories in the bank lending system forms the fact that financial field of business management. The theory, originated by statements are among the most important sources of credit Freeman (1984), implies that the focus should be rather on information available to bank lending officers. stakeholders instead of just shareholders. Stakeholder theory has increased the attention towards the importance Furthermore, lack of proper accounting information from of the relationship between companies and stakeholders. It loan applicant, improper accounting records by borrowers, is obvious that companies cannot cope without their ineffective regulations guiding against loan defaulters and stakeholders and they are heavily dependent on these high rate at which loans go bad had posed problems to constitute groups. The approach focuses on creating value banks and had been used as an index for evaluating banks' for stakeholders and has stated to be a more long-term loan applications. However, accounting information helps orientated procedure than only a shareholder approach. to take long term investment decisions by giving the proper The main concern in stakeholder approach is to target view of present condition and would be condition of the benefits and direct important decision-making to banks. Though top management needs accounting stakeholders. Companies should benefit as well as exact information in every step to take any sort of lending costs from stakeholders (Ayuso et al. 2014; Phillips 2003; decisions in banks but practically, there is no significant Stieb 2009). The core of the theory emphasizes going study conducted on the implications of accounting beyond stakeholder thinking and address the stakeholders' information on the bank lending decision in Nigeria using perceptions. The theory includes an idea about who has cash and cash equivalents, dividend yields and earning input in decision-making and who benefits from the yields as a variable. outcome. The discussion generally leads to the decision about the distribution of the financial outputs as Therefore, this study was initiated to bridge the intending stakeholders are seeking compensation for their gap. Thus, the main trust of this paper is to evaluate the investment (Phillips 2003). Stakeholder theory develops a implications of cash and cash equivalent, dividend yield framework for this research as it theorizes the accounting and earning yields on the Bank's lending decision in role in creditors' decision-making. Stakeholder approach Nigeria. The rest of this paper is split as follows; section exemplifies why the focus is on accounting information. It two presents the theoretical and empirical evidence, implies that companies release information in order to section three highlights the methodological issues, section serve its stakeholders as well as reach own goals, i.e. four discusses results while section five concludes. ensuring cash. Companies signal through accounting

JULY - SEPTEMBER, 2017 13 CNAJ VOLUME 25 NUMBER 3 information to its stakeholders, which is used as a strategic significant relationship with banks lending decision. The tool by companies. However, empirical literature that implication of the result is a policy shift on the part of the examines the link between accounting information and government towards adequate financial reporting among bank lending decision has been scanty as not much have firms in Nigeria, by ensuring external auditors and audit been documented on the area of accounting research. committees of borrowing firms comply with the However, few of the studies on this area are stressed below; government regulations as it affects financial reporting. Agbaje, et al (2014), investigated on the effect of Mai (2015) studied on information on financial statements accounting information management on profitability of for loan decision making of commercial banks in Vietnam. Nigerian banking industries using Ordinary Least Square Adopting a survey design, the study engaged 74 official (OLS) technique. The result revealed that accounting employees in commercial banks in Vietnam to gather information had impacted significantly on the growth of relevant information. The result showed that there is a profitability in the Nigerian banking industry. The study qualitative characteristics of banks when disclosing the concluded that accounting information should be targeted financial statements. The study therefore, concluded by more and seen as a real reform in banking industries in suggesting a six oriented solutions to improving the loan Nigeria. decision making in Vietnam banks. Hafij-Ullah et al. (2014), in his study on the role of accounting information in Mfam (2012) carried a study on the application of strategic decision making in manufacturing industries in accounting ratios in measuring solvency of small scale Bangladesh. The study employs five strategic decision industries in the manufacturing sector of Cross Rivers areas such as basic strategic decision, manufacturing State, Nigeria. The purpose was to determine accounting decision, human resource decision, long term investment ratios applied in measuring solvency of small scale decision and marketing decision. The result of the study industries in the area. A descriptive survey design, the proved that there is a significant relationship between population comprised 667 accounting staff of palm oil, accounting information and strategic decisions in all the wood, and bread baking factories. There was no sample in selected areas. The study concluded that the use of the study as the entire population was covered. accounting information in making strategic decisions is Questionnaire and interview schedule were used to collect important in manufacturing industries in Bangladesh. Miia data. The questionnaire was validated and tested for (2014), investigated a study on the usefulness of financial reliability using the Cronbach Alpha Formula and obtained accounting information in commercial lending. a reliability coefficient of 0.76. There were four research questions and three null hypotheses tested at 0.05 level of The aim of the study was to narrow the gap between studies significance in the study. Mean and standard deviation concerning the information needs and usefulness of were employed to analyze research questions and ANOVA accounting information among creditors and investors. In to test the null hypotheses. The findings were that carrying out the study, data were collected through accounting ratios such as current ratio, quick ratio, interest questionnaire surveys, which were sent out to managers of coverage ratio, capital employed to net worth ratio, return commercial banks in Sweden. Overall, the results indicate on capital employed ratio, operating expenses ratio, net the consistency with the recent research. The importance of assets turnover ratio, and current assets turnover ratio are accounting information was found to be significant and not applied in determining solvency in these enterprises. It practically, all the three main statements: balance sheet, was concluded that accounting staff of small scale income statement and cash flow statement were found to be industries lack knowledge in applying accounting ratios in complementary. determining solvency and this has far-reaching implications on the survival of these firms. The study, Francis. (2014) studied on the accounting information and therefore, recommended that management of these firms bank lending decision in Nigeria. The cluster sampling and should engage their accounting staff in training and simple random sampling technique were adopted in his retraining to upgrade their capacity in handling accounting study. A sample of one hundred and thirty two companies ratios. It was also recommended that only qualified and was selected. A cross sectional data of companies for the competent accounting personnel should be employed in 2012 was collected from the Nigerian Stock Exchange small scale industries and that accounting ratios should be Facebook. The data collected were analyzed using applied by the management of small scale industries to Ordinary Least Square (OLS) technique. The result improve their financial situation and operational efficiency. suggests that accounting information (proxied by value of collateral, cash availability and borrowing firms' Otu (2006) conducted a study on the impact of accounting characteristics as contained in the financials), has a information on lending decision-making of commercial

14 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 banks in Ebonyi State of Nigeria. The purpose was to CCE is the cash and cash equivalent; investigate the impact of accounting information on DIY is the dividend yield, while lending decisions of commercial banks in the area. The EAY is the earning yield. study was a descriptive survey with a population of 49 senior staff from 12 commercial banks. No sample was To improve the validity of the estimates, it is usually drawn for the study as the entire population was covered in instructive to transform the variables into its logarithmic the work. A 5-point Likert scale questionnaire used to form in line with some empirical studies (e.g. Oriavwote & collect data for the study was validated by five experts and Eshenake, 2012 and Chekwube et al, 2014). its computed reliability using the Cronbach Alpha Formula obtained a coefficient of 0.73. Four research questions and Consequently, this log transformation gives credit to two null hypotheses tested at 0.05 level of significance equation 2 as specified as: guided the study. Data was analyzed by the use of percentages and mean scores for research questions and Lg BLD = f(LgCCE, LgDIY, LgEAY,) …...... …….. 2 student's t-test for hypotheses testing. The findings were that commercial banks rely on the applicants' financial Transforming equation 2 in its explicit form results to statements in granting loans and that the extent of equation 3 as given below; utilization of this information is high among the banks covered by the study. However, commercial banks LgBLD = á0 + á1LgCCE + á2DIY + á3LgEAY + et ……3 experience problems as a result of loan applicants' inability Where all variables are as previously defined, á á á to supply financial information alongside loan 1, 2, 3 applications. It was, therefore, concluded that even though are the parameter estimate while et is the disturbance commercial banks utilize accounting information in loan element. However, the general error correction model decisions; loan applicants are unable to provide this adopted for this study to eliminate the problem of spurious information. It was recommended that commercial banks estimates is of the form: should realize the challenges of producing reliable accounting information especially by small scale ÄLgBLDt = á0 + Äá1LgCCEt + Äá2LgDIYt + Äá3LgEAYt + Äá4ECMt-1 + et …….. 4 entrepreneurs. Where; all variables are as previously defined ECM = error correction term; 3. Methodological Issues ECMt-1 = One period lagged error correction term This study adopted the model of Francis (2014) and was estimatedet = disturbance from equation element 4; at period t; remodeled to suit the objectives of the study. Recall that et = disturbance element at period t; Ät = first difference operator; and our major task is to determine the implication of Ä = first difference operator; and accounting information on bank lending decision. To Ä = first difference operator; and Lg = natural logarithm. achieve this, accounting information was disaggregated Lg = natural logarithm. into cash and cash equivalent, dividend yields, and earning On Lg the = naturalbasis of equationlogarithm. (4) above, the conditional Vector yields while bank lending decision was proxied by total Error Correction Mechanism (VECM) of interest can now value of banks' loan. Cash and cash equivalents are the item be specified as: on the balance sheet that report the value of a company's ÄLgBLDt = á0 + Äá1LgCCEt + Äá2LgDIYt + Äá3LgEAYt assets that are cash or can be converted into cash immediately. Dividend yield is the ratio of the dividend per + ? äÄLgBLDt-1 + ? ãÄLgCCE t-1 + ? øÄLgDIYt-1 share and market value per share expressed in its ? ëÄLgEAY + âECM + e 5 percentage. It indicates actual returns on investment in t-1 t-1 ……………….t ordinary shares. Earnings per share, which is the ratio of á á are the long run multipliers, á is the drift and e profit after tax and the preference dividend issue. It shows 1 – 3 0 t the number of ordinary shares ranking for dividend. is the white noise errors. The symbols ä, ã, ø and ë are However, the choice of the variables above is informed by the short-run dynamic elasticities of the model’s past empirical studies and existing accounting theory.

Consequently, the traditional formulation and modeling of convergence to long-run equilibrium and â is the speed the above relation is specified in its implicit form as: of adjustment. Ä represents the first difference operator BLD = f(CCE, DIY, EAY,) …………………...... 1 and ECMt-1 is the one period lagged error correction correction term as previously defined. Where; BLD is the bank lending decision proxied by total value of banks' loan within the period under review; JULY - SEPTEMBER, 2017 15 CNAJ VOLUME 25 NUMBER 3

However, in the short-run, there may be disequilibrium in (i.e. number of times they are to be differenced to achieve which the model, i.e. stationarity). The time series characteristics of the et = LgBLDt – (á0 + ? á1LgBLDt-1 + ? á2LgCCEt-1 variables were tested using the Augmented Dickey-Fuller test. Basically, the idea is to ascertain the order of + ? á3LgDIYt-1+ ? á4LgEAYt-1) ……….. 6 integration of the variables as to whether they are Therefore, the error term is used to show the short-run behaviour of accounting information to its long-run stationary I(0) or non-stationary; and, therefore, the values. We can now specify the ECM equation for this number of times each variable has to be differenced to study as: arrive at stationarity. The standard ADF test is carried out

LgÄBLDt = á0 + ? á1ÄLgBLDt-1 + ? á2ÄLgCCE2t-1 + by estimating the following; yt = ñyt-1 + x1ä + åt …………………………….. 8

? á3ÄLgDIYt-1 + ? á4ÄLgEAYt-1 + a5ECMt-1 + After subtracting from both sides of the equation gives

et …………………………………………7 credit to equation (9) as : Äyt = áyt-1 + x1ä + åt ……………………………………. 9 Where; Äyt = áyt-1 + x1ä + åt ……………………………………. 9 Where á = ñ - 1 Ä denotes the difference operator; et is the disturbance Where á = ñ - 1 The null and alternative hypotheses may be written as:

Thus, in apriori, it is expected that á0<0, á1<0, á2>0, á3>0, á4>0. H0 : = 0 H : < 0 The unit roots test, the co-integration and error-correlation 1 The simple Augmented Dickey-Fuller (ADF) unit root test modeling were used to test the time series characteristics of described above is valid only if the series is an AR(1) the relevant data involved in this study. This is necessary process. If the series is correlated at higher order lags, the because it is believed that regression equations between assumption of white noise disturbances is violated. The non-stationary series may give "spurious" or meaningless results (New bold and Granger, 1974). Co integration and Augmented Dickey-Fuller (ADF) test constructed a Error Correction Model (ECM) were used to test for long parametric correction for higher-order correlation by run and short run relationship among the variables in the assuming that the y series follows an AR(P) process and model respectively, all at 5 or 10 percent level of critical adding P lagged difference terms of the dependent variable values, after confirming that all series were stationary at a y to the right-hand side of the test regression: particular order. The data for this study were time series Äyt = áyt-1 + x1ä + â1Äyt-1 + â2Äyt-2 + . . . + âpÄyt-pvt + åt……… 10 data at macro level spanning from 2000 to 2015. All the data were largely sourced from CBN Economic Report for The usual practice is to include a number of lags sufficient the Third Quarter of 2015, National Bureau of Statistics to remove serial correlation in the residual and to do this, (NBS) and CBN Annual Reports and Statement of the study employed the Akaike Information Criterion. The Accounts Various issues. Other sources of data include study therefore used the ADF test as in equation (9) and the Central Bank of Nigeria (CBN) Statistical Bulletin Volume result is as presented in table 1on the next page; 26, December 2015,and International Financial Statistics (IFS), various years. The study used the econometric view (E-view 9.0) software to estimate the data.

4. Results Discussion This section presents and discusses statistical results of the study.

Unit Roots Test Unit root test was performed on the variables to determine if they are stationary (i.e. zero mean and constant variance) and if otherwise, to determine their order of integration

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Table 1: Summary of Augmented Dickey-Fuller (ADF) Unit Root Tests Variables 1% Critical Value 5% Critical Value 10% Critical Value ADF t-Statistic Order Lag D(BLD) -5.756668 -2.757783 -4.863572 -6.563757 1(1) 1 D(CCE) -5.657765 -2.563878 4.953854 -7.472537 1(1) 1 D(DIY) -5.756668 -2.757783 -4.863572 -4.563736 1(1) 1 D(EAY) -5.657765 -2.563878 -4.953854 -8.556378 1(1) 1 Source: Author’s Computation, 2017.

From the above table, it can be observed that variables at whether or not there is a long run relationship between two trend are stationary if their ADF test statistic is greater than or more variables. Two variables are co-integrated if both their critical value in absolute terms. The results suggest their Max-Eigen and Trace statistic are greater than their that the null-hypothesis (H0) of unit root can be rejected in respective critical values. The co-integration test results the first difference, I(1) for all the variables in the study, show that all the series (BLD, CCE, DIY and EAY) have that is BLD, CCE, DIY and EAY. The implication of this is their Max-Eigen and Trace statistic greater than their that all the series were stationary at first difference and respective critical values, meaning that they are co- therefore their regression will not be a spurious one. integrated. Since the variables are stationary, integrated of order one, and co-integrated, it shows that there is a long 4.1 Co-integration Analysis run relationship between accounting information and bank The study adopted the Johansen's (1988, 1991) lending decision. This implies that adequate accounting multivariate co-integration test to determine if the information will guide creditors and borrowers in their variables are co-integrated. Co-integration analysis is lending decisions. The results of the Johansen Co- necessary in all times series data so as to determine integration test is presented in table 2 below:

Table 2: Johansson Co integration Results (Variables; BLD, CCE, DIY, EAY) Hypothesized Trace 0.05 No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 60.57737 87.53638 34.45637 0.0000 At most 1 * 53.57484 46.95637 20.45363 0.0000 At most 2 41.46377 32.53739 12.79453 0.0004 At most 3 20.66356 28.56436 10.55367 0.0022

Source: E-Views 9.0

4.2 The ECM Estimates them once 1 (I) using Augmented Dickey Fuller (ADF) test The estimated result of table 3 reports the initial over- and that all series exhibited a long run relationship after parameterized error correction of accounting information running a co integrated test. Here, all the series in the and bank lending decision in Nigeria. This was done after model were lagged equally and the estimated ECM results confirming that all series were stationary after differencing are as shown in table 3 on the next page;

JULY - SEPTEMBER, 2017 17 CNAJ VOLUME 25 NUMBER 3

From the estimates above, the logarithm transformation of Table 3: ECM Results cash and cash equivalent was found to be positive and Variable Coefficient Std. Error t-Statistic Prob. statistically significant. Its coefficient was found to be C -8.36E+10 5.52E+09 -5.742678 0.0000 1.45, indicating that a one percent rise in the accounting LCCE 8.14E+08 1.61E+08 6.573226 0.0047 information may have increased bank lending decision in LDIY 0.567945 0.085241 12.29232 0.0000 LEAY 1.78E+08 6.808350. 16.56477 0.0000 Nigeria by 1.5 percent point. The implication of this ECM(-1) -0.638379 0.046635 -5.987534 0.0000 finding suggests that adequate accounting information has

brought about a rise in bank lending decision in Nigeria R2= 0.89; Adj R2 = 0.87; F* = 342.1 and DW = 1.56 within the period under study. This empirical evidence Source: E-view 9.0 seems to coincide with the study of Francis. (2014) who studied on the accounting information and bank lending The result of parsimonious model as reported in table 3 decision in Nigeria and concluded that accounting above indicates model parsimony. Thus, this result clearly information (proxied by value of collateral, cash showed a well-defined error correction term, and indicates availability and borrowing firms' characteristics as a feedback of 63 percent of the previous year's contained in the financials), have a significant relationship disequilibrium from the long run accounting information with banks lending decision. Subsequently, our evidence and the elasticity of bank lending decision in Nigeria. The also showed that the coefficient of dividend yield was 1.46, implication of this result is that cash and cash equivalent, which is positive and highly statistically significant. This dividend yield and earning yield which are proxies to indicates that a one percent rise in dividend yield will spur accounting information maintained equilibrium with the bank lending decision by 1.5 percent point. This evidence bank lending decision through time. As expected, the is also in line with most of the empirical studies reviewed effect of these disequilibria error corrections is not only in this work. The evidence as shown in table 4 above large, but also negative. The implication of the above suggests that the coefficient of earning yields is positive and statistically significant. This implies that a one percent finding is that even if there is disequilibrium in the short rise in accounting information through earning yield may run, where accounting information is not sufficient to spur have risen bank lending decision by 3.8. percent point. lending decision in banks, it takes a reasonable time for This evidence is in line with the study of Miia (2014), who equilibrium to be restored. investigated a study on the usefulness of financial accounting information in commercial lending and the 4.3 Discussion on the Empirical Findings results indicate the consistency with the recent research. The empirical evidence as represented in table 4 has shown that accounting information favours bank lending decision The importance of accounting information was found to be in Nigeria. This is so because the co-efficient of significant and practically, all the three main statements: determination R2 is 80 percent, indicating that the balance sheet, income statement and cash flow statement variation in the dependent variable (BLD) is explained by were found to be complementary. changes in exogenous variables including CCE, DIY and EAY within the periods under review. 5. Conclusion and Policy Table 4: Short run estimation for BLD model So far, the paper has shown that accounting information Variable Coefficient Std. Error t-Statistic Prob. performs a crucial role on bank lending decisions in

Nigeria using a time series data spanning from 2000 to C 6.686389 1.463752 4.567979 0.0066 2015. Accounting information was disaggregated into LgCCE 1.453627 0.045267 33.11228 0.0000 LgDIY 1.462890 0.145267 10.07035 0.0000 cash and cash equivalent, dividend yields, and earning LgEAY 3.856879 0.942626 4.091632 0.0026 yields while bank lending decision was proxied by total

value of banks' loan. To further achieve the main objective R2= 0.80; Adj R2 = 0.76; F* = 124.67 and DW = 1.682 of the study, recent advances in econometric techniques Source: E-view 9.0 were applied in the analysis. The study started by

18 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 examining the stationarity properties of the data using the Atwood, J. (2009), Cash flow vs. collateral based lending: Augmented Dickey-Fuller (ADF) test, and documented Is there a more informative middle "C" ? CSME , that all series engaged were stationary at I (I). The study working papers 63 (1): 1 - 18. further engaged the Johansen co-integration test and found Dang, D. S., Marriott, N., & Marriott, P. (2008). The banks' that accounting information and bank lending decision is uses of smaller companies' financial information positively co-integrated indicating a stable long-run in the emerging economy of Vietnam: Corporate relationship. The result of ECM showed a well-defined error correction term, and indicates a feedback of 63 governance in less developed and emerging percent of the previous year's disequilibrium from the long economies. Emerald Group Publishing Limited. run accounting information and the elasticity of bank Dang, D. S., Marriott, N., & Marriott, P. (2006). Users' lending decision in Nigeria. The implication of this perceptions and uses of financial reports of small findings suggested that cash and cash equivalent, dividend and medium companies (SMCs) in transitional yield and earning yield which were proxies for accounting economies: Qualitative evidence from Vietnam. information maintained equilibrium with the bank lending Qualitative Research in Accounting and decision through time. Based on the above evidence, since Management, 3(3), 218-235. cash and cash equivalent, dividend yield and earning yield Danos, P., Holt, D., & Imhoff, E. (1989). The use of were significant with the lending process, it becomes imperative for banks to give necessary accounting accounting information in bank lending decisions. information to customers before given out loan. This will Accounting, Organizations, and Society, 14(3), guarantee sanity in the system. 235-247. International Accounting Standards Board [IASB]. (2010). Conceptual framework for References financial reporting. Abdel-Azim, M. H. & Eldomaity, T. I. (2007). Francis, K. E. (2014), Accounting information and bank Informativeness of accounting information to lending decision in Nigeria. Ilorin Journal of shareholders in Egypt: perspectives from the most Business and Social Sciences, 16 (1); 53 - 62 actively trading firms. Journal of Business and Gray (1996), 'Accounting will only be relevant in 356- 86'" Public Affairs, 4 (1): 23 - 36. ,http://www.oppapers.com/essays/accounting. Agarwal, H. and Saxena, P. K. (2012). Divergence between Hafij-Ullah, J. A. K. and Syeda, T. F. (2014), Role of accounting profit and economic profit in Hul: An accounting information in strategic decision econometric approach. Retrieved making in manufacturing industries in From Papers.ssrn.com/so13/papers.cfm%3Fa. Bangladesh. Global Journal of Management and Agbaje, W. H., Busari, G. A. and Adeboye, N. O. (2014), business Research, 14 (1): 1-15 Effect of accounting information management on Horngreen, C.T and Foster, G. (1975). Cost Accounting, A profitability of Nigerian banking industries. Managerial Emphasis. New Delhi, John Wiley International Journal of Humanities, Social sciences and Education, 1 (9): 100-105 and Sons Publisher, 910 P. American Institute of Certified Public Accountants Kitindi, E. G., Magembe, B. A. S., & Sethibe, A. (2007). (AICPA, 2011). Definition of Accounting. Lending decision making and financial Retrieved from www.investopedia.com/ information: The usefulness of corporate annual terms/a/accounting-principles-board.asp. 25th reports to lenders in Botswana. The International October, 2011. Journal of Applied Economics and Finance, 1(2), Arvanitidou, V., Konstantinidou, E., Papadolous, D., & 55-66. Xanthi, C. (2011). The role of financial accounting Mfam, K. I. (2012). Application of accounting ratios in information in strengthening corporate control measuring solvency of small scale industries in mechanisms to alleviate corporate corruption. the manufacturing sector of Cross Rivers state, Retrieved from idec.gr/../pdf. 15th February, Nigeria. Unpublished Ph.D Thesis, University of 2012. Nigeria, Nsukka. JULY - SEPTEMBER, 2017 19 CNAJ VOLUME 25 NUMBER 3

Mai, T. H. M. (2015), Information on financial statements for loan decision making of commercial banks in Vietnam. Journal of Modern Accounting and Auditing,11 (2): 1-12 Miia, K. (2014), Usefulness of financial accounting information in commercial lending: Unpublished Master's thesis in Business Administration, Karistad Business School, Karistad University, Sweden. Miko, L., (1998), Accounting Management Information Used For Strategic Decisions, Original scientific paper, 22(1)52-53. Mirshekary, S., & Saudagaran, S. M. (2005). Perceptions and characteristics of financial statement users in developing countries: Evidence from Iran. Journal of International Accounting, Auditing, and Taxation, 14(1), 33-54. Modum, U. (1995). Management Information System Analysis and Design, Enugu, Fourth dimention Publishing Co. Limited, 650 P. Otu, J. U. (2009). Impact of accounting information on the lending decision-making of commercial banks in Ebonyi State. Unpublished M.Ed Thesis, University of Nigeria, Nsukka. Rioux, B. (2013), Working capital loan: cash flow vs asset based lender. Retrived October 9, 2013, from Rioux capital Web site, http://www.riouxcapital.com/working capital loans. Royaee, R., Salehi, A., and Aseman, H. S. (2012), Does accounting play a significant role in managerial decision-making? Research Journal of Business Management and Accounting,1 (4)57-63 Salmonson, R.F, Hermanson, R.H and Edwards, J.D (1981) A survey of Basic Accounting. Homewood, Richard D. Irwi. Inc, 625 P. Trimisiu Tunji (2012), Accounting information as an aid to management decision making, International Journal of Management and Social Sciences Research (Ijmssr), 1(3): 29-30

20 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 Determinants of Profitability of Listed Industrial Goods Firms in Nigeria Yusuf Ibrahim and U-ungwaMasekaven Martin*

ABSTRACT The issue of profitability of firms in Nigeria has become worrisome in view of the fact that it is only when Nigerian firms are profitable that they can propel the entire economy to the path of economic growth. This study examined determinants of profitability of listed industrial goods firms in Nigeria. The study adopted correlational research design, using a sample of fifteen listed industrial goods firms in Nigeria. Secondary data were collected from the sampled firms over the period of seven years from 2009-2015. The data were analysed using multiple regression analysis. Results indicated that firm size and cash flows have positive and significant relationship with profitability of listed industrial goods firms in Nigeria; leverage, liquidity and board size have negative and significant relationship with profitability of listed industrial goods firms in Nigeria while audit committee meeting does not significantly affect profitability of listed industrial goods firms in Nigeria. Based on the findings, the study suggests that industrial goods firms in Nigeria should weigh the potential economic benefits of debt capital against its cost before making decision as to the choice of debt capital. Where it is evident that additional level of debt will reduce profitability, other alternative sources of capital such as equity capital should be chosen. The study also recommends that minimum amount of liquidity should be maintained by industrial goods firms to reduce the extra cost attached to holding unnecessary liquid assets. This can be done by promoting the virtues of just-in-time, a concept which advocates minimum holding of inventory. Relatedly, industrial goods firms should always channel surplus cash to short-term investments instead of keeping them idle and avoid having large board sizes. Government should invest more in the assets of large industrial goods firms as bigger industrial goods firms have the tendency to make higher level of profit.

1. Introduction of a business unit is to achieve maximum profit in addition to secondary objectives such as increase in sales, assets, With increase in global competition, survival of every and market share (Aparna, 2015). Profit is the indicator of business entity is a very pertinent question in business efficiency of a business unit as it shows the level of arena. In such a competitive environment, good efficiency with which a business unit makes use of funds or performance is considered essential for business success. assets. The higher the profit, the more will be the efficiency Thus, all over the world, the issue of firm performance has of the business unit. been a major focus by stakeholders as business organizations exist to make commensurate profit on their Some researchers such as Burja (2011), investment. It is this desire to make profit that prompts SaleemandRehman (2011), Lobos andSzewczyk (2013), most investors to sacrifice their resources in anticipation of Asgari, Pour, ZedehandPahlavan (2015) contend that the profit. It can differentiate one company from the other. profit is affected by number of variables such as proportion Therefore, a key measure of performance is profitability as of leverage, which affects the expense of the firm in terms business organizations are mostly concerned with profit of interest payment, firm size, liquidity, cash flows, and wealth maximization. Without profitability, a firm corporate governance mechanisms such as board size, and would find it difficult to attract investors and sustainability audit committee meeting. It is the task of the firm's of business' operations in the long run would be at risk. management to utilize right strategies from time to time Magaretha and Supartika (2016) posit that in a competitive taking into account of these factors that might exert marketplace, business owners must learn how to achieve a considerable influence on the profit of the firm. satisfactory level of profitability. A number of studies such as Akinmulegun (2012), Firm profitability and ways of improving it are extensively Syed(2013) and Siyanbola, Olaoye and Olurin (2015) debated issues among managers and scholars (Pratheepan, 2014). This is born out of the fact that the primary objective Yusuf Ibrahim is a lecturer in the Department of Accounting, Ahmadu Bello University, Zaria; U-ungwaMasekaven Martin Foundation for Justice, Development and Peace, Makurdi. JULY - SEPTEMBER, 2017 31 CNAJ VOLUME 25 NUMBER 3 document evidence suggesting that leverage has Firm size is a very critical factor for the success of a relationship with profitability. Such studies hold basis business as it might wield significant influence on from the logic that use of debt subjects the firm under profitability. According to Glancey (1998), when larger monitoring mechanisms which exert pressure on managers firms take advantage of economies of scale, then a positive to run the business in a less costly manner as to easily relationship is expected between profitability and size of generate profit to settle debt obligations. Contrary to this the firm. Large firms have the advantage of exploring the argument, it can be contended that use of debt attracts extra benefits of economies of scale;theiraverage unit cost charges in terms of interest payments, which reduce declines over a range of output. They can also benefit from profitability. This study conjectures that leverage economies of scope; through extra cost savings as a result positively affects firm profitability. of the use of separate products that share some production facilities.They can purchase raw materials in bulk at lower The importance of liquidity management as it affects firm cost and even enjoy discounts for bulk purchase. profitability in today's business cannot be over Furthermore, large firms, comparative to small firms can emphasized. Liquidity forms a crucial part in management easily source in the finance market using their large assets of working capital as it ensures day-to-day running of base as collateral and utilize such funds for profitable business operations and settling recurring obligations investment opportunities. Contrary to the above line of (Eljelly, 2004). Therefore, liquidity plays a significant role thought, large firms might tend to be inflexible; the lack of in the successful functioning of a business firm. An flexibility of which would affect their smooth operations essential dilemma in liquidity management is to achieve and ultimately reduce profitability. This study conjectures desired trade-off between liquidity and profitability a positive relationship between firm size and profitability. (Ismail, 2016). While liquidity can be seen as being necessary for day to day running of the business, any level Cash flow is another variable of concern as far as of liquid fund constitutes a cost to the organization. This profitability of firms is concerned. Due to the relevance of cost is the opportunity cost for which the liquid (idle) funds cash flow in the company's performance, corporate would be invested to command positive returns. Moreover, organizations need to develop a suitable cash flow mix and availability of liquid funds constitutes agency costs as apply it in order to maximize profitability (Ali, Alireza & managers are prone to go for perquisites that are counter- Jalal (2013). In spite of the fact that cash flows are needed productive. Managers will have the free will to run the for meeting daily financial obligations of any enterprise, company with extravagance. Therefore, following the cash flows, just as liquidity, constitute cost to the tenets of agency theory, a negative relationship between organization. A similar argument can be extended to audit liquidity and firm profitability can be hypothesized. committee meeting. Frequency of audit committee meeting gives management foresight on ways of Several studies have established that board size influences improving financial reporting as well as ways of firm profitability. Fauzi and Locke (2012), Saibaba and mitigating agency costs (Al-Matari, Al-Swidi, Fadzil, Ansari (2012) and Ujunwa (2012) argue that a large board &Al-Matari, 2015). A contrary argument to this is that size attracts more innovation, creativity, visionary frequent audit committee meetings serve as harbor for thinking, strategic direction and investment proposals that extravagant spending on allowances to the members. would ultimately result to profitability. Smaller boards might lack capacity to make strategic changes due to their Knowledge of the determinants of profitability is crucial inefficiency in considering various alternatives for firm as it helps managers in developing an effective profitability. On the other hand, some researchers favour profitability strategy for their company. These factors are smaller boards and are of the view that large boards are important because they give insights into fluctuations in susceptible to disagreements, non-cooperation and waste profitability. Such knowledge of firm profitability of time in decision making as they are prone to suffer from determinants gives feedback to management. social loafing. Thus, their wealth of knowledge, innovative Management can then devise a set of strategies that should thinking, strategic focus, competences, and skills remain be taken to improve profitability in particular and overall unutilized (Drakos&Bekiris, 2010; Jensen, 1993; performance in general. This process is also applicable to Lin,2011). Therefore, it can be stated that board size has industrial goods firms. negative relationship with firm profitability.

32 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3

Industrial goods firms, which constitute firms that operate lags years behind, abrupt selection of variables without use in the industrial goods sector, have been reckoned, under of scientific approach such as stepwise regression, and the current administration, as having the potential to selection of very few firms from which possible accelerate economic development. Industrial goods firms generalisations might be difficult. For instance, Siyanbola, propel industrialization as they produce products which Olaoye and Olurin (2015) used primary data, based on continue to be relevant to industries. Amidst dwindling fuel questionnaire distributed to only 20 respondents. prices, credence is currently paid on the industrial goods Consequently, findings of the study might be susceptible to sector. Since these firms exist to make profit and their subjectivity. Akinmulegun (2012), Aqsa and Ghulam survival is significantly dependent on their ability to make (2014), Kidtmat and Rehman (2014), Marozva (2015), profit, it is necessary that internal determinants of their Johl, Kaur and Cooper (2015), Bulan, Sanyaland Yan profitability be assessed. In view of the present (2009), Niresh and Velnampy (2014), Dogan (2013), administration's resolve to revitalize the spate of among others, fail to cover current period. industrialization in the country, it has become imperative that the determinants of profitability of the industrial goods Moreover, in the context of industrial goods firms, firms, which are fast growing due to increasing demand for literature on the impact of firm size, liquidity, board size, their products, be examined. and leverage are still sparse. The few available studies (Bashar & Islam, 2014; Aparna, 2015; Devi& Devi, 2014; Studies on the determinants of firm profitability have Mutuku&Kyalo, 2015; Magaretha&Supertika, 2016) continued to gain momentum. These studies have rather utilize data from foreign firms, thereby, making established that variables such as firm size, liquidity, board application of their findings to listed industrial goods firms size, leverage, cash flows and audit committee meeting in Nigeria untenable. It is against this backdrop that this wield significant influence on profitability of firms. This study is undertaken to examine the determinants of notwithstanding, some studies found that the variables profitability of listed industrial goods firms in Nigeria. have insignificant relationship with profitability (Dogan&Topal, 2014). Therefore, the basic question this study seeks to answer is, to what extent do leverage, firm size, liquidity, cash flows, However, the challenge is, studies that have found that firm board size and audit committee meeting affect profitability size, liquidity, board size, leverage, cash flows and audit of listed industrial goods firms in Nigeria? The main committee meeting significantly affect firm profitability objective of this study is to examine internal determinants have produced mixed results. Findings of these studies of profitability of the listed industrial goods firms in have fallen into two divergent groups. On the one side of Nigeria. The study hypothesizes that leverage, firm size, the divide is a group of studies which conclude that firm liquidity, board size, cash flows and audit committee size, liquidity, board size and leverage have positive meeting do not significantly affect profitability of listed relationship with firm profitability. On the other side of the industrial goods firms in Nigeria. pole is another group of studies which submit that firm size, liquidity, board size, leverage, cash flows and audit 2. Literature Review and Theoretical Framework committee meeting have negative relationship with firm Different authors have examined the determinants of profitability. These mixed results have made it difficult for profitability of firms. Burja (2011) examined factors good policy formulation in the context of emerging influencing companies' profitability in the Romanian economies such as Nigeria. Chemical industry over the period, 1999-2009. He found out that inventories, debts level, financial leverage, In the context of the preceding arguments, it is exigent that efficiency of capitals affect the profitability (Return on a clear relationship between liquidity, firm size, board size Assets). and leverage be examined. This is necessary as most of the recent studies that have done this are foreign based. Ismail (2013) discovered that size positively affects Although there are many Nigerian studies, they are not performance of the general Islamic insurance companies in sufficient for current reliance as they suffer from one Malaysia while stability of underwriting operation, methodological pitfall to the other, prominent of which liquidity and solvency margin have negative relationship include: use of primary data where secondary data would with financial performance of the firms. Saliha and have been better, use of scope whose period of coverage Abdesatar (2011) unveiled that debt negatively affects the

JULY - SEPTEMBER, 2017 33 CNAJ VOLUME 25 NUMBER 3 level of performance of firms in Tunisia while firm size was reported to have positive effect on the financial Leverage has connection with agency theory as use of debt performance of the studied firms. Mistry (2012 found that impacts agency cost in several ways. In the first instance, leverage, interest rate and size are the most important the use of debt shrinks the free cash flow available to a determinants of the profitability while liquidity was found manger as promised interest payments to debt holders to have negative effect on the profitability. decrease free cash flow available for investment, other factors held constant. This shrinkage in free cash flow also Vatavu (2014) revealed that debt, tangibility, size, liquidity helps in restraining overinvestment problem. In addition, and thevariable of inflation are the determinants of return use of debt can prompt increased monitoring of managers on assets. Burca andBatrinca (2014) analyzed by debt holders such as bank, which exerts considerable determinants of financial performance in Romanian pressure on managers to pioneer the affairs of the business insurance market during the period, 2008-2012. Secondary profitably. data were collected from a sample size of 21 Romanian insurance companies. Results, through panel data analysis, In a related analysis, Johl, Kaur and Cooper (2015) have show that financial leverage, company size, growth, suggested various governance mechanisms to address the underwriting risk, risk retention and solvency ratio are agency problems. Agency theory thus provides a basis for major determinants of profitability of insurance firms. This firm governance through the use of internal and external study is valuable only that its application in the Nigerian mechanisms. The governance mechanisms are designed to context would be an issue due to its focus on foreign firms. mitigate agency conflict. One of such governance Furthermore, insurance companies are service oriented mechanisms used for this purpose is board of directors. companies. Hence, variables that affect its profitability Board of directors is expected to control for agency costs might be different from those of industrial goods firms in and enhance profitability of the firm. Nigeria that are product oriented firms. The effect of liquidity and cash flows won profitability is Kouser, Bano andZeem (2012) concluded that growth has also explained by the agency theory. This connection is strong positive relationship with profitability of the firms, captured in the Free Cash Flow (FCF) hypothesis which is however, size has less significant and negative impact on a corollary of the agency theory. Free cash flow allows the profitability. Margaretha and Supartika (2016) showed managers to pursue personal goals without having to go to that firm size, growth, lagged profitability, productivity the bond or equity markets which could have subjected and industry affiliation significantly affect profitability. them to external scrutiny. Therefore, having FCF or Aparna (2015) observed that liquidity and productivity are liquidity constitutes a necessary condition to put positively correlated with profitability while leverage, management's interests at odds with the interests of growth and size are negatively correlated with shareholders (Jensen, 1993). profitability.Devi and Devi (2014) found positive correlation between financial leverage and corporate Furthermore, in order to mitigate the agency cost arising profitability, and firm size and corporate profitability. between managers and resource holders, the agency theory provides a basis for understanding on the Quite a good number of theoretical constructs can be used governance of firms through various internal and external to underpin the relationship among determinants of mechanisms. Such mechanisms as the audit committee profitability and profitability of companies. The agency help in reduction of agency costs and consequently, theory was developed by Jensen and Meckling (1976). In achievement of desired level of performance, including its primitive form, the agency theory relates to situations in profitability. An important measure of controlling agency which one individual (called the agent) is engaged by costs is through the use of an audit committee which is an another individual (called the principal) to act on his/her important part of the control system for internal behalf based upon a pre-determined legal arrangement. monitoring (Jensen, 1993). Monitoring mechanisms such Since both individuals are assumed to be motivated by as audit committee enable the owners to closely monitor their pecuniary and non-pecuniary interests, and their the activities of the managers. Weak monitoring may allow interests do not always move in same direction, there is the managers to engage in unethical practices, while effective contention that the agent may take actions which will audit committee will reduce such practices by managers. endanger the principal's interests. Based on the agency theory, audit committee functions are

34 JULY - SEPTEMBER, 2017 CNAJ VOLUME 25 NUMBER 3 expected to yield a positive impact on performance, sustain profitability of the firm. compliance with the relevant laws and enhance the confidence of the investors. A key argument of the resource based theory, which was later coined by Pfetter and Salancik (1978) as resource Moreso, resource-based theory is a theory in strategic dependence theory, is that organizations attempt to exert management and finance which emphasizes the need for control over their environment by co-opting the resources organizations to articulate the relationships among firm needed to survive (Pfeffer&Salancik, 1978). Accordingly, resources, capabilities, and competitive advantage by boards are considered as a link between the firm and the harnessing available resources judiciously using their essential resources that a firm needs from the external capabilities and competences in a way as to achieve environment for superior performance. In the resource competitive advantage and sustain profitability. The dependence role, board of directors are deemed to be theory is credited to Penrose (1959). The theory contends capable of bringing resources to the firm, such as that the firm's ability to establish and sustain a profitable information, skills, innovation, ideas, business strategies, market position, critically depends on availability of among others(Hillman & Dalziel, 2003). underlying resources and capabilities. The resource based view suggests that competitive advantage and firm Board of directors also function as boundary spanners, and profitability are a consequence of firm-specific resources thereby enhance the prospects of a firm's business. For and capabilities that are costly to copy by other competitors example, the outside links and networks that board (Peteraf& Barney, 2003). Peteraf and Barney (2003) define members exercise may positively benefit the development firm resources as including all assets, capabilities, of business and long-term prospects. PfefferandSalancik organizational processes, firm attributes, information, (1978) observe, when an organization appoints an knowledge, among others, controlled by a firm that enable individual to a board, it expects the individual will come to the firm to conceive and implement strategies. support the organization, using his or her expertise. Pfeffer (1972) shows that board size is essential to managing an Liquidity is an asset to the firm, and thus following the organization's needs for improved performance. In the tenets of the resource-based theory, availability of liquidity presence of higher environmental uncertainty, larger board and judicious use of it will lead to creation and size brings about more efficient and effective strategy sustainability of competitive advantage. This competitive development and execution (Carpenter &Westphal, 2001). advantage will command increased profitability for the Thus, boards serve as a mechanism whereby a firm links firms against its competitors. Since resource based theory with its external environment to secure resources and, to sees liquidity as an asset to the firm, it therefore means that, protect itself against environmental uncertainty. Thus, the its proper use will avail the firm the opportunity to settle resources based theory views the board as a resource that short-term obligations that might mar its chances of can not only supplant its need for other resources, but also making profit. For instance, liquidity can be used as a influence the environment in its favour, and thereby resource to settle overdrafts and thus save the firm cost of improve the firm's financial performance. Based on the interest attached to long overdue overdrafts. Therefore, the tenets of the resource dependency theory, a positive resource based theory hypothesizes positive relationship relationship between large board size and firm profitability between liquidity and firm profitability. is expected.

Similarly, the resource based theory provides a theoretical The structural inertia theory was put forward by Hannan foundation for the role of board of directors as a resource to and Freeman (1984). From the perspective of Hannan and the firm. Penrose (1959) states the importance of unique Freeman's (1984) theory of structural inertia, as bundles of resources a firm controls that are crucial for its anorganisation grows larger, bureaucracy increases, growth and profitability. Such resources include all assets, inflexibility sets in which may cause resistance to change capabilities, organizational processes, firm attributes, and ultimately decrease the level of profitability. This information, and knowledge controlled by a firm, in order means a functional relationship exists between company to improve efficiency and effectiveness (Tanna, size and profitability. The negative relationship is due to the Pasiouras&Nnadi, 2007). From this point of view, firm fact that when an organisation becomes larger, its increased governance structure and the board composition is viewed bureaucracy causes stiff resistance to change which will as a resource that can add value to the firm and enhance ultimately decrease the level of profit. The study therefore

JULY - SEPTEMBER, 2017 35 CNAJ VOLUME 25 NUMBER 3 proposes a negative relationship between firm size and Based on the data type and previous research studies, the profitability. study uses panel data regression technique. The major tool of data analysis that is used is multiple regression This study is hinged on the agency theory, resource based analysis which is carried out using STATA statistical theory and the structural inertia theory. This is because software, while SPSS software is used to run stepwise they best capture the variables of the study. The agency regression for selection of variables. The data is further theory relates board size, audit committee meeting and analysed using various robustness tests such as leverage with profitability; the resource based theory multicollinearity, normality and heteroscedasticity. These relates liquidity and cash flows to firm profitability and the are carried out in order to ensure that the independent structural inertia theory relates firm size to profitability. variables are free from multicollinearity problem, the data is normally distributed and the variability in the error term 3. Research Methods and Data is constant. The essence of these analyses is to improve the validity of all the statistical inferences that are made. This study adopts correlational research design. It is a Since the data has panel attributes, Hausman specification research design that seeks to explain statistical relationship tests are performed to ascertain whether the study should between two or more variables. It is considered most use fixed effect or random effect. appropriate research design for this study in view of the fact that it warrants testing of expected relationships The panel data methodology is adopted since the data between and among variables and the derivation of logical analysedhas panel attributes. Since there are various inferences regarding such relationships. variables that have been discussed in the literature as being determinants of profitability, their careful selection The population of this study consists of twenty-one listed becomes necessary. For this reason, stepwise regression industrial goods firms in Nigeria as retrieved from the was carried out, using SPSS software, to arrive at the best Nigerian Stock Exchange (NSE) Fact Book as at 31st model. Twelve (12) variables (Firm size, cash flows, December, 2015. These firms are shown in table 3.1. liquidity, board size, leverage, audit committee meeting, However, the basic criterion for inclusion of any company stock turnover rate, firm size, board meeting, audit quality, into this study is consistent availability of data throughout audit size, and board diversity)that have been commonly the period of study. Based on this, six (6) firms are been discussed in literature were used to run the stepwise eliminated. These include:Adswitch Plc, African Paints regression. Results as shown in appendix B were used to (Nigeria) Plc, DnMeyer plc, IPWA, Premier Paints plc and arrive at the model for this study. The model below (model West African Glass Industry Plc. Therefore, the adjusted six) was selected due to its higher R2 and inclusion of more population is fifteen firms (representing about 71% of the variables, comparative to other suggested models. The firms in the industry). These companies produce or deal in model is as follows: products such as cement, chemicals, protectives, industrial decorative and architectural coatings and paints and related ROAit= âo+â1LEVit+â2Sizit+â3LIQit+â4BSt+ â5CFOit+â6AMit+ eit products. Where: ROAit= Return on Assets for firm i in time t. The study focuses on industrial goods firms because it is LEVit=Leverage for firm i in time t. one of the sectors that has contributed immensely to the SIZit=Liquidity of firm i in time t. development of the Nigerian economy, and yet has not LIQit= Board size of firm i in time t. received adequate attention. With the recent BSit=Firm size for firm i in time t. administration's resolve to boost industrialization in the CFOit=Cash flows for firm i in time t country through establishment and sustainability of AMit=Audit committee meeting for firm i in time t. industrial firms, it has become necessary that a study of this âo=Intercept. nature be conducted. The study thus employs census â1,â2, â3,â4, â5 andâ6= Model coefficients. approach in sampling. Consequently, all the firms included e =Error term. in the adjusted population are investigated. Hence, the it sample size is fifteen (15).

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4. Results and Discussion directors as revealed by the mean value, with variability Descriptive statistics are displayed in Table 2. The intent is level of about 2.8 suggesting moderate variation in the sizes to provide understanding on the nature of data being used. of the board of directors of the studied firms.

Table 1:2: Descriptive Statistics of the Variables The minimum value and maximum value Variable Min Max Mean Std Dev. Skewness Kurtosis N of CFO is -0.30 and 0.49 respectively. The ROA -0.27 0.79 0.97 0.16 1.75 9.78 105 minimum value of cash flows for the firms SIZ 13.26 20.84 15.74 1.97 0.90 2.97 105 LEV 0.04 0.93 0.45 0.18 0.35 3.08 105 amounting to -0.30 represents instances of LIQ 0.33 0.98 0.68 0.15 -0.13 2.73 105 negative cash flows. The maximum value BS 4 18 7.85 2.76 1.41 5.42 105 of 0.49 represents the highest proportion of CFO -0.30 0.49 0.11 0.13 0.43 5.38 105 AM 1 4 3.24 1.00 1.41 5.42 105 cash flows relative to total assets maintained by the firms under study. On average, the Source: STATA output, 2016. cash flows of the firms as a proportion of their total assets is 0.11. This is with a Table 1 reports the descriptive statistics for the dependent standard deviation of 0.13 which suggests a and independent variables. The table reveals that the fairly low level of variability in the cash flows of the firms. minimum value of ROA for the firms is about -0.27. This is AM has minimum value of 1 which means that the attributed to the losses suffered by some of the firms for minimum number of audit committee meeting held by the certain years. The maximum value of ROA is 0.79, firms under study is once while the maximum value is 4 representing the maximum rate of return realized from implying the highest number of times audit committee assets utilized by the listed industrial goods firms in meetings are held by the firms under study is 4 times per Nigeria. The mean value of about 7% as can be seen in the year. The mean of their audit committee meetings is 3.24 above table suggests that on average, the studied firms which means that on average, the firms under study hold realize about 0.069 from utilization of their assets. This is audit committee meeting three times a year. The variability with a standard deviation of about 0.16 implying high rate level of their meetings is explained by standard deviation of of variability of the returns realized on assets (ROA) by the 1 which is less than the mean, implying that there is low firms.SIZ has minimum value of about 13.26, which level of variability in the number of times audit committee explains minimum size of the firms under study, and meetings are held by the firms under study. maximum value of about 20.84 which indicates the largest possible size of the firms under study. SIZ has a mean of Lastly, the values for skewness suggest that the explained about 15.74 and standard deviation of 1.97, representing variable and some of the explanatory variables are both very moderate level of variations in the size of the firms positively and negatively skewed, suggesting that the data under study during the period. LEV has minimum value of is normally distributed, however, some values of the about 0.04, maximum value of about 0.93 which indicates kurtosis tend to be high although such will have the proportion of debt owed by the firms with respect to insignificant effect on the conclusions reached. their total assets. On average, this ratio is about 0.45 (45%) while the variability level as shown by the standard deviation is about 0.15 (0.15%), implying high variability in the debt ratio of the firms.LIQ has minimum value of about 0.33 which implies the ratio of current assets to current liabilities of the firms under study while the highest ratio is represented by a maximum value of about 0.98, with average of about 0.68. It has standard deviation of about 0.15 which means that there is little variation in the liquidity position of the firms during the study period. The minimum number of Board Size (BS) is 4 members which mean that out of the 105 observations, the smallest board size is 4 members. On the other hand, the maximum board size is 18 members as shown by the maximum value. On average, the firms under study have a board size of about 8

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Regression analysis assumes that data must be normal for Considering the panel attributes of the study, fixed effect statistical analysis on the data to be relied upon. Hence, and random effect regressions were carried out. The results normality test was carried out using Shapiro-Wilk of these are presented in appendix. Subsequently, normality test. The results show that the data for most of Hausman specification test was conducted to give the variables is normally distributed as three of the direction as to the one (fixed or random) to choose. The variables have insignificant values (see appendix ) result reveals chi-square of 3.11 which is not significant. On this basis, the random effect model was selected. The It is necessary to know the correlation between the random effect robust test was carried out and the result as dependent variable and each of the independent variables detailed in appendix suggests that the random effect is as well as among the independent variables so as to reliable. Furthermore, Breusch and Pagan Lagrangian ascertain the direction of movement. Multiplier Test for random effects was carried out to ascertain whether pooled OLS or random effect should be From the correlation matrix, it can be explained that that used. The result produced a chi-square of 21.54 which is LEV and ROA have negative correlation with ROA. The significant at 1% (see appendix). Based on this evidence, implication of this is that the paired variables move in the result for random effect test is used as presented in table opposite direction, as one is increasing, the other is 4. decreasing and vice versa. On the other hand, SIZ and Table 4: Summary of Regression Result ROA as well as BS and ROA, CFO and ROA, AM and VAR COEFF Z P>(Z) ROA are positively correlated. This means that the paired variables move in same direction. Relatedly, the table SIZ 0.0138635 4.08 0.000 LEV -0.1363726 -2.66 0.008 indicates that LEV and LIQ, CFO and SIZ, SIZ and BS, LIQ -0.3488432 -3.38 0.001 AM and LEV, AM and LIQ, AM and SIZ, AM and BS, AM BS -0.020904 -3.18 0.001 and CFO are positively correlated while LIQ and SIZ, BS CFO 0.2492138 3.05 0.002 AM 0.0137606 1.24 0.216 and LEV, LIQ and BS as well as LEV and SIZ are C 0.3698303 3.92 0.000 negatively correlated. However, correlation does not R-Square: 0.5813 measure causation, further analysis were carried out using Wald Chi2 79.38 regression analysis.The following robustness tests are Prob 0.0000 carried out to find out whether dataused for analysis performed for interpretation is reliable. From the regression result presented in table 4., the R2 which is the multiple co-efficient of determination gives Multicollinearity isexamined using tolerance and variance the percentage or proportion of total variation in the inflation factor (VIF) values. The result of dependent variable (ROA) which is jointly explained by multicollinearity test is shown in the Appendix. As the independent variables to be approximately 58%. This shownin the appendix, the variables used do not pose signifies that 58% of total variation in ROA of listed multicollinearity problem. This is evident from their VIF industrial goods firms in Nigeria is explained by changes values being less than 10 and tolerance values being in SIZ, LEV, LIQ, BS, CFO and AM while the remaining, greater than 0.10 (rule of thumb). that is about 42% is caused by other factors not captured in the model. These factors could be financial such as stock Heteroscedatiscity test was carried out to find out whether turnover rate, size, non-financial such as management the disturbances appearing in the population regression competence or even macroeconomic like inflation rate, function are homoscedastic (same variance). Breusch- government policy, among others. Pagan's test for heteroscedasticity is performed. The result as presented in the appendix appendix produces the value The cumulative result hold sway as the Wald Chi2 has a of chi square of 44.22 while its probability is 0.0000 which high value of 79.38 which is significant at 1%. This means is significant at 1%. This indicates the presence of that the model can be well fitted with the variables heteroscedasticity. To address this, robustness test is run. selected. It further means that the selected variables are the The result of the test, as detailed in appendix reveals that major determinants of profitability of listed industrial the model can be relied upon for drawing statistical goods firms in Nigeria. The linear relationships among the inferences. independent variables with the dependent variable are discussed hereunder.

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From table 4, LEV has a beta value of -0.1363726. This study rejects the second hypothesis of the study which means that LEV has a negative relationship with states that liquidity does not significantly affect profitability of listed industrial goods firms in Nigeria. It profitability of listed industrial goods firms in Nigeria. further implies that for every one-point increase in Hence, with respect to the second objective of the study, it leverage, the profitability of industrial goods firms listed in can be stated that liquidity significantly affects Nigeria will drop by about 0.14. Therefore, leverage and profitability of listed industrial goods firms in Nigeria. profitability move in opposite direction. This analysis The finding of the study is in support to that of Kidtmat and supports the logic that use of debt attracts interest cost Rehman (2014),Saleem and Rehman (2011) and Ibe which reduces profitability of the firm. This is at variance (2013) but contradicts the finding of Marzova (2005). with the a priori expectation of the study which says that This finding lends support to the agency theory. The theory leverage has positive relationship with firm profitability. proposes negative relationship between liquidity and firm profitability on the basis that liquid funds increase agency The z-value of LEV is -2.66 with a probability of 0.008 costs which reduce firm profitability. However, the which is significant at 1%. This implies that the finding is in contrast to the submission of the resource relationship between leverage and profitability is negative based theory that liquidity is positively related to firm and significant. Therefore, the study rejects the first profitability. hypothesis of the study which states that leverage does not significantly affect profitability of listed industrial goods Contrary to the a priori expectation of the study which says firms in Nigeria. In relation to the first objective of the that board size has positive relationship with firm study, it can be concluded that leverage significantly profitability, the result for board size shows a coefficient affects profitability of listed industrial goods firms in value of -0.0209049 which implies that there is negative Nigeria. This finding corroborates the findings of relationship between board size and profitability of listed Mohammad (2014), Aqsa and Ghulam (2014) andEnekwe, industrial goods firms in Nigeria. In relation to the z-value Agu andEziedo (2014) that leverage significantly affects of-3.18 and the probability of 0.001 which is significant at profitability, although they reported positive relationship. 1%, a significant negative relationship between board size The negative relationship between leverage and and profitability of listed industrial goods firms in Nigeria profitability can be attributed to the negative effect of is revealed. This negative relationship is against the a using debts such as payment of costs in form of interest priori expectation of the study, which predicted that board payments which reduce profitability and the institution of size would have positive relationship with profitability, strict debt covenants which reduce the flexibility of the since board of directors with larger number of members firm. will have versatile experiences which will translate into profitable initiatives. Table 4.4 shows that liquidity has a coefficient of - 0.3488432 which means that it has negative relationship Based on the above results, the study failed to accept the with profitability of listed industrial goods firms in third null hypothesis of the study which says that board Nigeria. This further means that a one point increase in size does not significantly affect profitability of listed liquidity will lead to about a 0.35 point drop in industrial goods firms in Nigeria. Therefore, with respect profitability. This goes on to confirm the argument that to the third objective of the study, it can be submitted that liquidity funds are a cost to the organization as they board size significantly affects profitability of listed constitute idle funds which could have been channeled to industrial goods firms in Nigeria. This finding is in tandem viable investment opportunities that will produce positive with the finding of Johl, Kaur and Cooper (2015), Do?a returns and contribute to profitability. The z-value of LIQ andYildiz (2013), Malik, Wan, Ahmad, is -3.38 with a p-value of 0.001 which is significant at 1%. NaseemandRehman (2014), Oyerogba, MembaandRiro The implication is that LIQ has negative relationship with (2016), TopalandDogan (2014), Bulan, Sanyaland Yan profitability of listed industrial goods firms in Nigeria. (2009) although Do?aandYildiz (2013) and Bulan, Sanyaland Yan (2009) found the relationship to be This negative and significant relationship corresponds negative. The finding however opposes the resource with the a priori expectation of the study and justifies why based theory which states that large board size enhances new techniques such as just-in-time have been invented to firm profitability. It is also contrary to the submission of reduce amount of liquid assets held. On this basis, the the agency theory that board size has positive relationship JULY - SEPTEMBER, 2017 39 CNAJ VOLUME 25 NUMBER 3 with firm profitability. Firm Size and Profitability: The Empirical analysis shows that audit committee meeting regression result shows that SIZ has a positive coefficient has positive relationship with profitability of listed of0.0138635 and a Z-value of 4.08 with a p-value of 0.000. industrial goods firms in Nigeria. This is evidenced by its Hence, as firm size of the studied firms increases, their positive coefficient of 0.0137606 which implies that a one profitability also increases. This is to the extent that a one point increase in audit committee meeting leads to a point increase in assets of the firm will lead to 0.14 point corresponding 0.14 increase in profitability of listed increase in profitability of the firms. Thus, the p-value of industrial goods firms in Nigeria.The Z-value of AM is 0.000 which is significant at 1% signifies that SIZ strongly 1.24 with probability of 0.216 which is not significant at drives profitability of listed industrial goods firms in 10%, Nigeria. This finding corroborates with the a priori expectation of the study which states that there is positive Hence, the study fails to reject the null hypothesis which relationship between firm size and profitability of states that audit committee meeting has no significant firms.Consequently, the fourth hypothesis which states relationship with profitability of listed industrial goods that firm sizedoes not significantly affect the profitability firms in Nigeria. Therefore, with respect to the sixth of listed industrial goods firms in Nigeria is rejected. objective of the study, it can be stated audit committee Hence, in relation to the fourth objective of the study, it can meeting has no significant effect on profitability of listed be submitted that firm size significantly affects industrial goods firms in Nigeria. This finding is profitability of listed industrial goods firms in Nigeria. The inconsistent with the findings of Beasley, Carcello, finding is consistent with that of Babalola (2013), Baloch, Hermanson and Lapides (2000). Similarly, the finding Ihsan, KakakhelandSethi (2015),Asgari, Pour, contradicts the submission of the agency theory which sees ZadehandPahlavan (2015) and Dogan (2013). It however, audit committee meeting as a strong internal control contradicts the findings of Kumar and Kaur (2016), mechanism for mitigating agency costs and improving Niresh&Velnampy (2014). The finding goes contrary to profitability. the hypothesis of the structural inertia theory that there is negative relationship between profitability and size. 5. Conclusion and Policy Implications On the basis of the findings of the study, the following Quantitative analysis reveals that CFO has a positive conclusions were made: coefficient of0.2492138 and a Z-value of 3.05 with a p- value of 0.002. This implies that, as cash flows of the Findings revealed that leverage has negative and studied firms increase, their profitability also increases. significant relationship with profitability of listed This is to the extent that a one point increase in assets of the industrial goods firms in Nigeria. Therefore, it can be firm will lead to 0.25 point increase in profitability of the concluded that reduction in level of leverage by listed firms. The p-value of CFO is 0.002 which is significant at industrial goods firms in Nigeria will lead to increase in 1% , implying that CFO strongly influences profitability of profitability. listed industrial goods firms in Nigeria. This finding contradicts the a priori expectation of the study which Firm size was found to be a positive and significant anticipates negative relationship between cash flows and determinant of profitability. This is as a result of the fact profitability of firms. Based on the above evidence, the that the two variables have positive and significant study rejects the fifth hypothesis which states that cash relationship with firm size having the potential to predict flows does not significantly affect the profitability of listed profitability. For this reason, it can be concluded that industrial goods firms in Nigeria. Hence, in relation to the bigger industrial goods firms have the tendency to make fifth objective of the study, it can be concluded that cash higher profits than smaller industrial goods firms. flows significantly affects profitability of listed industrial goods firms in Nigeria.This finding is in tandem with the The study found that a negative relationship between findings ofOkpe, Duru and Alor (2015). However, the liquidity and profitability of industrial goods firms listed in finding is contrary to the proposition of the agency theory Nigeria. The study concludes that high volume of liquidity that cash flows increases agency costs and thereby reduces reduces profitability of industrial goods firms listed in profitability. Nigeria.

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The study found that board size has negative and v. Industrial goods firms in Nigeria need to develop significant relationship with profitability of listed suitable cash flow mix and apply to maximize industrial goods firms in Nigeria. Based on this, the study profitability. For cash flows to be well structured and concludes that a large board size reduces profitability. This effectively utilized, industrial goods firms in Nigeria is because of the extra cost required in running the board's need to devise various ways of selecting the best activities as well as remuneration packages. components of its cash flows which would be used in their operations to improve their profitability. The study also concludes that increase in level of cash flows can help increase profitability of industrial goods Previous studies that have examined determinants of profitability selected variables abruptly. There is the firms in Nigeria. Cash flows define the solvency, tendency that such variables might not be the significant flexibility, and financial stability of industrial goods firms ones. This study took a different dimension, by using in Nigeria. stepwise regression to filter the variables that wield much influence on profitability of listed industrial goods firms in Based on the findings of the study, the following Nigeria. The basic contribution of this study is the recommendations are made: ascertainment of key determinants of profitability and their relationship with profitability using current data. i. Industrial goods firms in Nigeria should weigh the With this strength, the findings of the study can be relied potential economic benefits of debt capital against its upon for policy formulation, and in carrying out further cost before making decision as to the choice debt studies. The recommendation offered can also be applied capital. Where it is evident that additional level of and such application will yield significant impact to the debt will reduce profitability, other alternative sources resuscitation of the industrial goods sector in Nigeria. of capital such as equity capital should be chosen. Although debt capital is needful for the sustainable References operations of the industrial goods firms, there should Ali, M., Alireza, A. and Jalal, A. (2013). The association be caution in keeping high level of leverage as between various Earnings and cash flow leverage has negative relationship with profitability. measures of firm performance and stock returns: Leverage level of up to 50% per cent of total assets is some Iranian evidence. International Journal of considered high. Accounting and Financial Reporting, 3(1), 24-39. ii. The study recommends that minimum amount of Al-Matari, A. K., Al-Swidi, E. H., Fadzil, F. H. and Al- liquidity should be maintained by industrial goods Matari, E. M. (2015). Board of Directors, Audit Committee Characteristics and Performance of firms to reduce the extra cost attached to holding Saudi Arabia Listed Companies. unnecessary liquid assets. This can be done by International Review of Management and promoting the virtues of just-in-time, a concept which Marketing, 2(4), 241-251. advocates minimum holding of inventory. Relatedly, Akinmulegun, S. O. (2012). The effect of financial surplus cash should always be channeled for short- leverage on corporate performance of some selected term investments instead of keeping them idle. companies in Nigeria. Canadian Social Science, iii. It is recommended that industrial goods firms should 8(1), 85-91. avoid having large board sizes. This is crucial as large Aparna, K. (2015). Determinants of profitability: A firm board sizes add more cost to the organization. level study of Steel Authority of India Limited Depending on the circumstances of the firm, and in (SAIL). Journal of Finance and Accounting, 4(12), line with the Nigerian Code of Corporate Governance, 1-4. a board size of five (5) board members is considered Aqsa, I. and Gulam, M. M. (2014). The impact of financial optimal. However, a board size of up to 12, unless leverage on firm performance in fuel energy sector, circumstances dictate, is considered inappropriate. Pakistan. Research Journal of Finance and iv. Government should invest heavily in the assets of Accounting, 5(23), 172-179. large industrial goods firms as bigger industrial goods Asgari, M. R., Pour, A. A. S., Zadeh, R.A. and Pahlavan, S. firms have the tendency to make higher level of profit. (2015). The relationship between firm's growth Such firms can easily explore advantages of opportunities and firm size on changes ratio in economies of scale to minimize cost and ultimately retained earnings of listed companies in Tehran make profit. Stock Exchange. International Journal of Innovation and Applied Studies, 10(3), 923-931. JULY - SEPTEMBER, 2017 41 CNAJ VOLUME 25 NUMBER 3

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