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EFFECT OF OWNERSHIP STRUCTURE ON EARNINGS QUALITY OF LISTED CONSUMER GOODS FIRMS IN NIGERIA
ABSTRACT
Earning is believed to be the most significant item in the financial report because it serves as an indicator of the firm‟s financial performance and guides investors in evaluating the performance of the firm. However, the quality of financial reporting has remained an issue of major concern among the various users of financial information. As a result, measures are raised to curb this situation among which is ownership structure (distribution of company ownership among its shareholders). The study seeks to examine the effect of ownership structure on earnings quality of listed consumer goods firms in Nigeria. The study formulates four hypotheses and applied Panel Regression Technique to analyse the relationship between dependent variable earnings quality and the independent variable (ownership structure). The dependent variable was measured by the modified Jones model while the independent variable was proxied by, managerial ownership, institutional ownership, ownership concentration and foreign ownership of the sampled Consumer goods firms. Secondary data was extracted from the annual reports and accounts of nineteen sampled firms listed under the consumer goods sector of the Nigerian Stock exchange for the period 2009-2016. The study found that: Managerial ownership positively influences earnings quality, Ownership concentration negatively influences earnings quality but Institutional Ownership and Foreign Ownership have positive but insignificant influence on earnings quality. Based on the findings, the study concluded that ownership structure has a great effect on the earnings quality of listed consumer goods firms in Nigeria. The study recommends that Managers should be encouraged to have interest through share ownership in Nigerian Consumer goods firms but concentration of shares in the hands of few shareholders should be discouraged. The limitations of the study are that the results are only applicable to listed consumer goods firms, hence cannot be applied to non-listed firms, other manufacturing firms and other sectors of the economy.
TABLE OF CONTENTS
Title Page
Declaration – – – – – – – – – – i
Certification – – – – – – – – – – ii
Dedication – – – – – – – – – – iii
Acknowledgements – – – – – – – – – iv
Abstract – – – – – – – – – – v
Table of Contents – – – – – – – – – vi
List of Tables- – – – – – – – – – viii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study – – – – – – – – 1
1.2 Statement of the Problem- – – – – – – – 6
1.3 Research Questions – – – – – – – – – 9
1.4 Objectives of the Study – – – – – – – – 9
1.5 Statement of Hypotheses – – – – – – – – 10
1.6 Scope of the Study – – – – – – – – – 10
1.7 Significance of the Study – – – – – – – – 11
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction – – – – – – – – – – 13
2.2 Conceptualization – – – – – – – – – 13
2.2.1 Concept of earnings Quality- – – – – – – – 13
2.2.2 Measures of Earnings Quality — – – – – – – 15
2.3 Concept of Ownership Structure – – – – – – – 22
2.3.1 Managerial Ownership – – – – – – – – 23
2.3.2 Institutional Ownership- – – – – – – – 24
2.3.3 Ownership Concentration- – – – – – – – 25
2.3.4 Foreign Ownership- – – – – – – – 25
2.4 Review of Empirical Studies- – – – – – – – 26
2.4.1 Control Variables- – – – – – – – – 44
2.5 Theoretical Framework – – – – – – – – – 44
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction – – – – – – – – – – 49
3.2 Research Design – – – – – – – – – 49
3.3 Population and Sample of the Study- – – – – – – 49
3.4 Sources and Method of Data Collection- – – – – – 51
3.5 Technique for Data Analysis – – – – – – – – 51
3.6 Variables Measurement and Models Specification- – – – – 52
3.7 Model Specification- – – – – – – – – 53
3.8 Regression Diagnostics- – – – – – – – – 55
CHAPTER FOUR: RESULTS AND DISCUSSION
4.1 Introduction – – – – – – – – – – 57
vii
4.2 Descriptive Statistics – – – – – – – – – 57
4.3 Correlation Analysis – – – – – – – – – 58
4.4 Regression Diagnostics – – – – – – – – 61
4.5 Regression Result – – – – – – – – – 63
4.6 Hypotheses Testing & Discussion of Major Findings – – – – – 66
4.8 Policy Implication of the Findings – – – – – – – 69
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of the Findings – – – – – – – – 71
5.2 Conclusions – – – – – – – – – 72
5.3 Recommendations – – – – – – – – – 73
5.4 Limitations of the Study- – – – – – – – – 74
5.5 Areas for Further Research – – – – – – – 74
References – – – – – – – – – 75
Appendices – – – – – – – – – 91
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The financial report of a firm has a great value on the organization‟s activities and aid decision making by users of financial information. Earnings are a significant part of the financial reports that help users of accounting information to evaluate firm performance. The quality of accounting information is always inspected by the quality of accounting earnings. Hence, earnings quality is an important factor in determining the validity and reliability of reported figures.
Earnings quality is the honest expression of the reported profit. It is the ability of the present earnings to give a real picture about the company and its ability to survive in future (Salawu, 2017). The scandals in Enron, WorldCom, Cadbury Nigeria plc, Intercontinental bank, Afribank, and Oceanic bank have casted doubt on the quality of reports and the ability to meet the expectations and needs of the users (Uwuigbe, Peter & Oyeniyi, 2014). The challenges necessitated review and globalization of accounting standards, adoption of the International Financial Reporting Standards (IFRS), and Corporate Governance Code in order to evolve efficient accounting practice. It also led to the birth of Financial Reporting Council of Nigeria (FRCN) Act No 6 of 2011.
Earnings management has a lot in common with earnings quality because high earnings management can produce low quality of earnings, as the manipulated information may lead to an incorrect decision but earnings management is not the only factor that affects quality of earnings. Other factors such as capital market and management compensation also contribute to the quality of earnings (Azzoz & Khamees, 2016). Prior research (Ayadi & Boujelbene (2016); Hashim & Devi (2014)) related earnings quality to the level of earnings management because of the difficulties in measuring earnings quality and established that firms use accounting accruals to manage earnings.
Ownership structure is generally referred to as the type of shareholders in a firm, which may influence firms‟ decisions that affect firm performance (Phung, 2015). The structure of a company is very important as they determine the economic efficiency of corporations being managed (Owiredu, Oppong & Churchill, 2014). Ownership is one of the main sources of agency problems between managers and shareholders or dominant and minority shareholders. Imbalances between ownership, control and monitoring may provide opportunities for some parties to exploit others. Managers perform services on behalf of shareholders and in most cases, the goals of the managers and shareholders may not align. The separated ownership leads to various conflict and controversies between shareholders, stakeholders and the managerial behavior. The ownership structure is also a factor that affects quality of accounting data because different ownership structures exist in different firms and as such influences performance, degree, and manner of management control (Namazi & Kermani, 2008).
More equity ownership by managers may encourage them to make value- maximizing decision and lead to increase in earnings quality which results to the alignment of managerial interests with the shareholders. On the other hand, high managerial ownership and lack of discipline from the financial market paves way for managers to pursue an opportunistic behavior and may attempt to maximize their gains at the expense of shareholders and this may promote entrenchment of managers which may be costly and hereby reduces the quality of earnings (Owiredu, Oppong & Churchill, 2014).
Institutions with large shareholdings play an active role in monitoring the management of reported earnings because when they have long term investments, they are more concerned with the underlying profitability of the companies and cautious of the use of discretional accruals to manage earnings, thereby enhancing the quality of earnings reported (Yang,Chun, & Ramadili, 2009). The institutional investors also have the ability, opportunity and resources to monitor, discipline, and influence managers‟ decisions in the firm. Researchers like Hashim and Devi (2014), Alves (2012), Koh (2003) and Mashayekh (2008) argued that institutional share ownerships may have implications for earnings quality as they are able to influence the company. When institutional investors exert more control over company management than when they are mere investors, earnings quality is expected to increase because they are able and motivated to encourage high quality reports (Velury & Jenkins, 2006).
Large shareholders also known as block holders also impact greatly in governance because their sizable stakes gives the incentives to bear the cost of monitoring manager. Large shareholders are expected to monitor managerial behavior and actions effectively and in turn reduce the scope of managerial opportunism to engage in earnings management. This results to an improvement in earnings quality reported by managers. A firm is said to be highly concentrated if a significant proportion of its equity lies in the hands of few individuals (Roodposhti & Chasmi, 2010). In concentrated firms, there may be conflict of interest between the majority and minority shareholders as the controlling shareholders may be entrenched due to their concentrated voting power and hide their personal benefits by reporting low earnings which reduces the quality of earnings. On the other hand, controlling shareholders may align their interest with minority shareholders by reporting high quality earnings (Kiatapiwat, 2010). Empirical studies have revealed mixed relationship, researchers like Shleifer and Vishny (1997), Amador (2012), Anderson and Reeb (2003a), and Haioui and Jerbi (2012) have revealed positive relationship while Wang (2006), Baba (2016), Alves (2012), Kiatapiwat (2010) revealed negative relationship.
Foreign ownership can also be considered as a good source of managerial and monitoring skills. Most times, foreign owners choose the best domestic firms to invest in or firms belonging to high-productivity industries. Studies have shown that the foreign investors may act as a monitoring force to mitigate the decision of managers or insider owners that may be costly to other shareholders as they are believed to have the ability to monitor managers and unite the interests of both the managers and shareholders. It is argued that when foreign investors increase their stock holding to a certain level, and become large shareowners, they have the power to influence managerial decisions in ways that benefit them, perhaps by expropriating wealth from minority shareholders. When foreign ownership level is minor or moderate, it may improve firm performance by monitoring which results to high quality earnings. However, when large, it may damage performance (Choi, Park, & Hung, 2012).
Nigerian firms are not left out of the great concern on earnings quality following the evidence of inappropriate accounting disclosures and financial recklessness that led to the fall of five biggest Nigerian banks in 2009 and Cadbury Nigeria Plc. scandal in 2006. The situation of Nigerian firms is similar to other developing countries where deliberate manipulation and misappropriation of shareholders‟ funds are widespread due to weak legal and financial reporting frameworks, unbalanced share ownership structure and corruption (Sadiq, 2011). Hence, eliminating these problems will make the Nigerian economy a more realistic target for international investments that will improve the country‟s market and economy. In an effort to improve the overall trust in the Nigerian capital market, the Securities and Exchange Commission (SEC) and the Financial Reporting Council of Nigeria (FRCN) have continually improved the corporate governance codes of which the latest review was in 2017.
The consumer goods sector has been chosen because it is one of the most vibrant sectors of the Nigerian capital market. The sector has attracted and retained foreign investment over decades which have resulted in boom in the retail sector. The fall in crude oil prices since 2014 has adversely affected the sector resulting to high production costs and reduction of profits, and this is mainly due to scarcity of foreign exchange in importing inputs for the companies. However, despite the importance of consumer goods sector to the Nigerian market, there is paucity of studies on impact of ownership structure on earnings quality in this sector. The level of research interest in this area will reflect the contributions of the various forms of ownership on the earnings quality of listed consumer firms in Nigeria.
1.2 Statement of the Problem
The financial reports of an organization should provide relevant and reliable information that will assist in making useful decisions. Hence, it is important that the financial information show a true and fair view of the organization‟s financial transactions during a period. Earning on the financial reports of companies summarizes the performances to various users. However, several factors may affect the quality of earnings reported such as; firm‟s business model, accounting standards, company industry, internal controls, macro-economic conditions, directors reporting choices and operating cycle (Dichev, Graham, Harvey & Rajgopal, 2013). The varying factors have resulted in a wide gap between what is reported and the actual position of the company which can be misleading to people placing reliance on such reports for decision making, investors‟ confidence become eroded and there may be reduction in the inflow of foreign investments. To overcome these issues, control mechanisms are being put in place of which, ownership structure of firms is one of the control mechanisms.
The accounting scandals that rocked Oando in 2017, the Nigerian banking sector in 2009 and the scandal of some public quoted companies like Cadbury Nigeria Plc between 2003- 2006, Unilever Brothers, African petroleum and the Nigerian Stock Exchange(NSE) in 2010 were seen to be attributed to non-compliance with regulations, connivance of board of directors with company managers against uninformed minority shareholders and other stakeholders, weak board governance due to lack of or insufficient independence, ability and heterogeneity in board composition, and weak executive monitoring due to lack of active institutional shareholders and unethical shareholders activism by shareholders‟ association. As a result of this, the Federal Government of Nigeria through some agencies came up with institutional structures to protect investors of their investments from corrupt practices. (Ugowe, 2016). The Securities and Exchange Commission (SEC) introduced Code of Corporate Governance in 2003, which was updated in 2011and 2014 respectively, the Nigerian banking industry also introduced Guidelines for Whistle blowing (Mall, 2016). The Asset Management Corporation Act of 2010 was enacted for banks and the Financial Reporting council of Nigeria Act No 6 of 2011 was also established. Despite all this, the quality of financial reports still remains questionable.
Several studies have been conducted to examine the relationship between ownership structure and earnings quality in the developed and emerging markets including Nigeria. Some of the studies include; Affan, Rosidi, and Liliki (2017), Ayadi (2014), Hashim and Devi (2014), Amador (2012), Karuntarat (2013), Spinos (2013), Alves (2012), Ismail (2011), Habbash, (2010), Kiatapawat (2010), An (2009), , Katz (2008), which were conducted in other countries while Shehu and Yero (2012), Muhammad (2014), Mohammed (2014), Musa (2014), Adebiyi and Olowookere (2016), , AbdulHadi (2016), Lawal and Mohammed (2014), Ogbonnaya, Ekwe and ihendinihu (2016), Shehu and Ahmed (2012), Amos, Ibrahim, Ibrahim and Nasidi (2016) , Baba (2016), and Uwuigbe, Erin, Uwuigbe, Igbinoba and Jafaru (2017) were studies conducted in Nigeria. The results of their findings were mixed and there was no general agreement on the relationship between ownership structure and earnings quality.
From the empirical studies reviewed on ownership structure and earnings quality, except for the works of Affan, Rosidi, and Liliki (2017), and Uwuigbe, Erin, Uwuigbe, Igbinoba and Jafaru (2017) whose study ended in 2015, the most recent works ended in 2014. The results obtained during these periods can be regarded as not being too current because a lot of activity has taken place such as changes in corporate governance code of 2003 which has been updated in 2011, 2014 and the most current in 2017. The recession that hit the Nigerian economy in 2016 which created a lot of challenges for companies must have also overtaken the position of these companies as at that period (Ibenegbu, 2016). Hence, there is need to conduct a more recent research that will capture the changes. It is to this end, that this study extends its scope of research to 2016.
Prior studies (AbdulHadi (2016); Musa (2014); Spinos (2013); Alves (2012); Al-Zyoud (2012); Shehu & Abubakar (2012); Yang Chun & Ramadili (2009)) have related ownership structure to earnings management and have interpreted earnings management to be the same as earnings quality because of the significance of the relationship between earnings management and earnings quality. Earnings management has a lot in common with earnings quality because high earnings management can produce low quality of earnings but earnings management is not the only factor affecting earnings quality. This study fills the gap by measuring earnings quality as the inverse of the results of earnings management proxy of modified Jones model.
Furthermore, most of the studies on the effect of ownership structure on earnings quality in Nigeria have been concentrated on other sectors of the economy especially the banking sector and the manufacturing sectors. But there is paucity of studies in the listed consumer goods firms in Nigeria despite its relevance to the Nigerian market. This study is an attempt to fill the gap for the Nigerian consumer goods firms and further examines the effect of ownership structure on earnings quality of listed consumer goods firms in Nigeria. Therefore, it extends the very limited research on this issue and adds to a growing body of research.
1.3 Research Questions
The following research questions were answered:
i. How does managerial ownership affect the earnings quality of listed consumer goods firms in Nigeria?
ii. What is the effect of institutional ownership on the earnings quality of listed consumer goods firms in Nigeria?
iii. Does ownership concentration have effect to the earnings quality of listed consumer goods firms in Nigeria?
iv. What is the effect of foreign ownership on the earnings quality of listed consumer goods firms in Nigeria?
1.4 Objectives of the Study
The main objective of the study is to examine the effect of ownership structure on the earnings quality of listed consumer goods firms in Nigeria. The specific objectives include:
i. To determine the effect of managerial ownership on the earnings quality of listed consumer goods firms in Nigeria.
ii. To examine the effect of institutional shareholding on the earnings quality of listed consumer goods firms in Nigeria.
iii. To evaluate the effect of ownership concentration on the earnings quality of listed consumer goods firms in Nigeria.
iv. To examine the effect of foreign ownership on the earnings quality of listed consumer goods firms in Nigeria.
1.5 Statement of Hypotheses
Based on the objectives above, the following Hypotheses were tested.
H01: Managerial ownership has no significant effect on earnings quality of listed consumer goods firms in Nigeria.
H02: Institutional ownership has no significant effect on earnings quality of listed consumer goods firms in Nigeria.
H03: ownership concentration has no significant effect on earnings quality of listed consumer goods firms in Nigeria.
H04: Foreign ownership has no significant effect on earnings quality of listed consumer goods firms in Nigeria.
1.6 Scope of the Study
This study examined ownership structure and earnings quality specifically focusing on the listed consumer goods firms in Nigeria for the period of 2009-2016 (eight years), which belongs to the consumer goods sector of the Nigerian capital market. The dependent variable is earnings quality and the independent variables are managerial ownership, institutional ownership, ownership concentration and foreign ownership.
The choice of the period 2009-2016 is due to the fact that it succeeds the global financial crisis of 2008, it also coincides with the accounting and financial scandals of big companies and banks in Nigeria like the case of African petroleum and eight banks. Recent data that reflects the current economic circumstances of the companies can be readily obtained.
1.7 Significance of the Study
The relevance of the study stems from its importance to respective beneficiaries and stakeholders in the consumer goods sector. It provides a benchmark for consumer goods firms listed on the Nigerian Stock Exchange on the attributes of ownership structure that are effective in improving transparency of financial reports thereby improving the quality of earnings, the practical situation of the ownership structure and earnings quality are well understood and this improves the credibility, reliability, and transparency of accounting information published by listed consumer goods firms in Nigeria.
The shareholders/investors benefit from the study as it serves as a guide for investment decisions. The research provides effective evidence on understanding the concept of ownership structure, how ownership structure influences earnings quality thereby guides the investors on the best form of ownership structure that influences earnings quality in the consumer goods sector. A clear and comprehensive view on how the variables affecting the quality of earnings of the listed consumer goods firms in Nigeria are provided. The study also enriches knowledge on the role of different types of shareholders to monitor the firms within Nigeria.
In addition, Academics and future researchers also stand to gain a better understanding of the topic because the juxtaposition of earnings quality with each component of ownership structure leads to a new or modified knowledge on ownership structure for listed consumer goods firms in Nigeria. It also provides empirical evidence on the relationship between the variables. The research also suggests areas needing further researches.
Finally, the policy makers and regulatory bodies such as SEC, FRCN, and the government benefit from the study. The input offered by the study serves as a strong base for the regulators and policy makers to establish or reform policies that will help the consumer goods firms to achieve a better performance and promote economic stability.
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