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The Impact of Share Market Capitalization on a Company's Performance: a Case Study in the Nigerian Confectionary Industry

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The Impact of Share Market Capitalization on a Company's Performance: a Case Study in the Nigerian Confectionary Industry African Journal of Business Management Vol.3 (5), pp. 220-226, May 2009 Available online at http://www.academicjournals.org/AJBM ISSN 1993-8233 © 2009 Academic Journals Full Length Research Paper The impact of share market capitalization on a company’s performance: A case study in the Nigerian confectionary industry Oluwatoyin, Matthew1 and Gbadebo, Olusegun Odularu2* 1Department of Economics and Development Studies, College of Business and Social Sciences (CBS), Covenant University, P. M. B. 1023, Km 10 Idiroko Road, Ota, Ogun State, Nigeria. 2Regional Policies and Markets NSF, FARA, Roman Ridge, Accra, Ghana. Accepted 14 April, 2009 This article focuses on the impact of companies’ shares on their performance, using one of the largest confectionary companies in Nigeria as a case study. In other words, the article analyses the correlation between the sales of shares and the growth of the company. While it adopts the Ordinary Least Square (OLS) analytical technique, using the company’s annual data for 20 years, it recommends that the confectionary company should implement policies that will encourage increase in their profit after tax, dividends and turnover as these variables have positive and statistically strong significance on the changes in the company’s performance and the value of its market capitalization. Key words: Shares, performance, OLS. INTRODUCTION According to the Statistical / Monthly publication of the fastest growing US stock exchanges, and facilitates the World Federation of Exchanges, the twenty major stock trading of “over-the-counter” (OTC) securities which tend exchanges in the world (in terms of market capitalization to be issued by somewhat less established companies as and year-to-date turnover at the end of January 2009) well as the shares of large companies. include Johannesburg Securities Exchange, National By using alternative trading systems it is sometimes Association of Securities Dealers Automated Quotation possible to reduce transaction costs and also avoid some (NASDAQ), Sao Paulo Stock Exchange, Toronto Stock of the regulations that formal stock exchanges inevitably Exchange, New York Stock Exchange, Australian Secu- impose. Similarly, there is much competition between the rities Exchange, Bombay Stock Exchange, Hong Kong stock exchanges of different countries. For example, it is Stock Exchange, Korea Exchange, National Stock Ex- possible to buy and sell French shares on the London change of India, Shanghai Stock Exchange, Shenzhen market, using the Stock Exchange Automated Quotation Stock Exchange, Tokyo Stock Exchange, Euronext, International (SEAQ International) system. SEAQ Interna- Frankfurt Stock Exchange (Deutsche Borse), London tional has been dramatically successful in capturing mar- Stock Exchange, Madrid Stock Exchange (Bolsas y ket share from the domestic stock exchanges of many Mercados Espanoles), Milan Stock Exchange (Borsa countries, to the extent that, for some countries, a larger Italiana), Nordic Stock Exchange Group OMX (includes proportion of trades take place in London than on their the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, own exchanges. Riga and Vilnius Stock Exchange), and the Swiss Ex- As the global economic crisis deepens, stock exchan- change. The NASDAQ system is a computerized market ges around the globe are facing competition both from linking dealers throughout the United States and, to some each other and from new high-tech entrants. It seems extent, Europe. NASDAQ remains one of the largest and likely that there will be a continued trend towards concen- tration of share trading in a few leading centers, with domestic stock exchanges in some countries becoming increasingly irrelevant. Within Europe, for example, there *Corresponding author. E-mail: [email protected]. have been moves to develop a pan-European stock Oluwatoyin and Gbadebo 221 change, although to some extent this already exists in the as it pertains to the sale of shares and stocks of public form of SEAQ International. Individual countries seem limited liability companies. loath to give up their domestic stock exchanges, although ii.) To analyze the effects that the sales of these shares as financial markets are now so liberalized, and as infor- have on the overall performance of the company. mation technology develops further, there is nothing to iii.) To analyze the effects the performance of the com- stop individual investors using whichever stock exchange pany, in terms of turnover, profit after tax and other such system is the cheapest or most efficient. variables have on the price of the company’s shares. The capital market in any country is one of the major iv.) To make concrete and justifiable conclusions and pillars of long term economic growth and development. recommendations based on the findings of the study. The market serves a broad range of clientele including different levels of government, corporate bodies, and In view of the study objectives, the study tends to provide individuals within and outside the country. For quite some answers to the following research questions: Does the time, the capital market has become one of the means sale of shares of a company have any impact on its per- through which foreign funds are being injected into most formance? What effect does the public ownership of a economics, and so the tendency towards a global eco- firm have on its productivity? Thus, the study hypotheses nomy is more feasible/ visible there than anywhere else. include: It is, therefore, quite valid to state that the growth of the capital market has become one of the barometers for H0: The value of a company’s shares or stocks has no measuring overall economic growth of a nation. Thus, an effect on its performance and productivity. increase in the market share of a public limited liability Hl: The value of a company’s shares or stocks has an company through the sales of its shares increases its effect on its performance and productivity. capital base and encourages expansion leading to a H0: The performance of a company in terms of turnover, higher level of growth and productivity. This study will try profit after tax, bonuses and dividends history has an to clarify these and related issues. This study will deal effect on the price of its shares. with the impact of sales of a company’s shares through H1: The performance of a company in terms of turnover, the Nigerian Stock Exchange on its growth. Though, the profit after tax, bonuses and dividends history has no growth of companies is a multivariate function, one major effect on the price of its shares. factor of interest to this study is impact of the sale of shares and stocks in public limited liability companies on Section 1 gives a brief introduction to the study, its their performance. Many banks use shares to create justification, objectives and research questions. While more capital for themselves with which they use to run section 2 discusses the study background, section 3 their banks and make more money, thereby increasing presents the literature review, theoretical framework and wealth and encouraging their institutions to grow. research methodology. Section 4 analyses and The problem of this study is on how public limited interpretes the data, while the last section discusses the liability companies sell their shares to the public and use summary, conclusion and recommendations. this to ensure a higher level of productivity and growth in their company, which in the long run will have a positive effect on economic growth. This study will analyze the STUDY BACKGROUND trend of events pertaining to the sales of shares in rela- Nigerian capital market tion to the rate of growth of the confectionary company. The trend to be considered will be between the past 20 The Nigerian capital market, which is a member of the years, that is, between 1985 and 2005. Some of the Nigerian financial system, is a market that provides an justifications for undertaking this study include: avenue for the mobilization of long term funds. This market serves the needs of industries, the commercial i.) It would lead to more exposure about the stock market, sector, government and local authorities, which are big the way it operates and runs and the benefits the com- borrowers of funds. The Nigerian capital market consists panies stand to get if they make use of it. of two markets (primary and secondary markets) and ii.) It would also show how investment in the stock ex- some operational institutions. The main institutions in the change market helps the various firms and industries to Capital Market are the Securities and Exchange Commi- grow. ssion (SEC), which is at the apex and represents the iii.) It will enlighten the investing public on how to monitor regulatory authority for the market, the Nigerian Stock iv.) The fluctuations of the stock exchange prices and Exchange (NSE), the issuing houses and the stock- how to make good judgments for investments. broking firms. The secondary market in Nigeria is the NSE. In general, the Nigerian capital market helps to The objectives of the study include the following: stimulate industrialization and development in the Nigerian economy. It also improves the gearing of dom- i.) To understand how the stock market is run, particularly estic corporate sector and helps to reduce dependence 222 Afr. J. Bus. Manage. on borrowing. Access to finance for new and smaller It is done when a company on its own makes a direct companies and also the encouragement of institutional offer to members of the public. Offer for sale involves the development are based on the framework provided by sale of shares by a company to an issuing house, which the Nigerian capital market. will in turn issue a prospectus inviting members of the According to Claessens (1995), the existence of the public to subscribe for the shares. The issuing house NSE entails a number of benefits for the Nigerian eco- sells at a higher price and retains all the profit.
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