Printer Friendly

Corporate governance and agency behaviour: methodological analysis of the 'announcement effect of corporate governance failures' on Nigerian stock market prices.


The effect of corporate governance failure and agency behaviour on stock market prices has long been of great interest to financial economists, behavioural scientists and capital market researchers. Yet there is to date no consensus over what constitutes an effective governance mechanism that induces agents or managers to consistently act in the interest of share value optimization, neither is there a consensus on the immediate effect of corporate governance failures on stock market prices. In this research study, an in-depth investigation of the announcement effect of corporate governance failures of some highly rated Nigerian commercial/deposit money banks, publicly announced by the Central Bank of Nigeria, is undertaken. To this end a sample of seven highly rated conventional deposit money banks in Nigeria, whose chief executive officers (along with other top management staff and executive directors) were sacked by the Central Bank of Nigeria (CBN) for committing corporate governance malfeasance; against the CBN code of corporate governance were identified and examined. Using event study methodology, the mean abnormal returns and cumulative mean abnormal returns for the seven banks ranging from thirty seven (37) days before and after the announcement date were determined. Empirical results from our findings indicate that the stock market is informationally efficient in Nigeria and that investors do react to announcement of corporate governance failure. The study therefore recommends the strengthening and strict enforcement of corporate governance codes in Nigerian banks.

Keywords : Corporate governance, Event Study, Announcement effects, Stock price, Agency theory

JEL Classification : C12; E44; G10; G31; E63; N27


Since the seminal work of Jensen and Meckling (1) in proposing a theory of the firm based upon conflicts of interest between various contracting parties namely shareholders, corporate managers and debt holders--a vast literature has been developed in explaining both the nature of these conflicts, and means by which they may be resolved. Finance theory has developed both theoretically and empirically to allow a fuller investigation of the problems caused by divergences of interest between shareholders and corporate managers, and to fully summarise all the research that has been conducted in this field would be almost impossible. Indeed much of the empirical literature has tended to resolve this conflicts within the framework of corporate governance and agency theory; and there is as yet no consensus on the most effective mechanism to make managers act in the best interest of shareholders (2).

In a corporation, the shareholders are the principals and the managers are the agents working on behalf of, and for the interests of, the principals. In agency theory, a well developed market for corporate controls is assumed to be non-existent, thus leading to firm or market failures, non existence of markets, moral hazard, asymmetric information, incomplete contracts and adverse selection among others. Also various corporate governance mechanisms have been advocated which include monitoring by financial institutions, prudent market competition, executive compensation, debt, developing an effective board of directors, markets for corporate control, and concentrated holdings (Bonazzi and Islam (3)). This study adopts the position that developing an effective board of directors and stringent controls (and reaction) of shareholders and prospective investors remains an important and feasible option for an optimal corporate governance mechanism. This position can be defended on the premise that the efficiency of stock.

Sixteen years after the Lagos Stock Exchange commenced operations in 1961 it was re-designated the Nigerian Stock Exchange (NSE) in 1977. Branches were established in eight locations--Lagos, Kaduna, Port Harcourt, Kano, Ibadan, Onitsha, Abuja and Benin *. The Securities and Exchange Commission (SEC) was established to protect investors and promote capital market growth and development in the country. It is the apex regulatory organ of the Nigerian Capital Market. Formerly called the Capital Issues Committee and later the Capital Issues Commission (Capital Issue Decree No. 14 of 1973), SEC was established under the SEC Decree No. 71 of 1979 amended in 1988, 1999 and recently in 2004.

Operational Performance of the Nigerian Capital Market

The total number of listed securities (comprising government stock, industrial loans and equities) increased from 9 in 1961 to 52 in 1971 and 71 in 1978. It also increased from 157 in 1980 to 276 in 1994, but declined to 260 in 2000 then increased again to 277 in 2004, with an average annual growth rate of 17 per cent for the entire period. The total number of listed firms stood at 214 in 2005 **. However, as at December 31st, 2012 the NSE had 258 listed securities which predominantly consists of 198 ordinary stocks; with a total market capitalization of about N8.9 trillion (U.S. $57 billion).

NSE has continued to undertake policies to reduce information asymmetry and transaction costs to facilitate the use of the market by the private sector to raise funds. For example on 27th April 1999, NSE transited from the call-over trading system to the automated trading system (ATS). An electronic-business (e-business) platform was commissioned in July 2003. The approach makes it possible for investors in the Nigerian stock market to access the markets requires that investors and shareholders will react (either positively or negatively) to favourable or unfavourable information emanating from firms in which they have interest in, or in which they are shareholders.

In efficient market theory parlance, information is immediately incorporated into prices; such that only new information is expected to cause a change in stock market prices. Since news (announcements) is unpredictable, price changes is also expected to be unpredictable. To date the empirical literature is replete with a variety of studies on corporate announcements, events and disclosures--namely, studies on earnings announcements and corporate governance failure announcements--where investors in developed markets have been shown to either over-react or under-react to news or corporate governance failure announcements. For some of the studies, the precise event date abnormal returns have the same sign as subsequent stock returns for the subsequent (days, weeks or months) period; thus indicating that markets reacts slowly in adjusting to the newly available information. Over-reaction occurs when the event date abnormal return have the opposite sign over the subsequent periods (Gurgul and Majdosz (4); Furtado and Rozeff (5), Ozili (6)). Each of these changes may or may not be considered significant by the market. Against this background, the study focuses on the internal mechanism of corporate governance and agency theory, while paying particular attention to the announcement effect of corporate governance failures on stock market prices.


Stock price reactions to announcements of managerial resignations due to corporate governance failures have been investigated by many researchers in developing economies. Part of this reaction focuses on forced resignations (4). Forced resignations or removal are relatively rare and are due more often to external factors like blockholder pressure or takeover attempts, than to normal internal or regulatory monitoring. According to economic theory, internal control mechanisms are effective if there are more changes of top management in poorly performing firms than in firms whose performance is good. Moreover improvements can be observed in firms performance after top management changes in the empirical literature, identifying forced removal or departures is difficult, because press reports do not describe them as such since a removal or departure announced as a retirement may be in reality a forced resignation, thus making it difficult to carry out event studies aimed at determining it financial markets discipline firms for illegal corporate behaviour (corporate governance failure via falling share prices and firm value.

In Nigeria corporate failure stemming from weak corporate governance, especially the internal mechanism, has been experienced in both the manufacturing and services sectors ***. In response to the need for better corporate governance practice in Nigeria, the Securities and Exchange Commission (SEC) and Corporate Affairs Commission (CAC) aligned corporate governance in Nigeria with international corporate governance (and agency theory) best practices; and spelt out the code of best practices on corporate governance in Nigeria in 2003 for firms incorporated and or listed in Nigeria and underscored the importance of board structure and compositions. Also, the Central Bank of Nigeria in 2006 introduced a corporate governance code of best practice for Nigerian banks in the post consolidation era. In this light, this study examines the effect of the announcement of illegal corporate behaviour on stock prices of some publicly quoted Nigerian banks. The examined types of illegal behaviour are insider trading, corruption, accounting fraud, tax fraud and a residual group, such as theft or employee enrichment at the expense of shareholders and other relevant stakeholders of the sampled banks.

Central Securities Clearing System (CSCS) database from the website for the purpose of monitoring movements in their stock accounts. This opportunity for on line, real time monitoring of stock accounts in the central depository enhanced transparency in the market (Adelegan, 2009). A recent development in the Nigerian securities market is the trade alert information system lunched in 2005. The alert system provides a text message on mobile phone to alert stockholders of any transaction in their stock within 24 hours. This is focused on ensuring transparency and curbing unethical practices in the Nigerian securities market.

Nigeria's capital market is still underdeveloped and emerging. A number of research studies have been undertaken to identify the level of efficiency and the problems hindering the development of the market for effective policy formulation (Adelegan (8); Oludoyi (9); Omole (10)). Analyses of market reactions to information in the Nigerian capital market are scanty, but include Ayadi (11) and Inanga and Asekomi (12). Event studies on the reactions of stock prices to publicly available information of stock split, earnings and dividend announcements, and omissions of dividend reveal that the financial markets in Nigeria respond by changes in firm values to publicly available information of stock split, earnings and dividend announcement and omissions of dividend (Olowe (13)).

Both efficient market theory and agency perspective are used in this study in analyzing the issues, and principles underlying corporate governance and securities market response, to announcements of forced managerial removal or resignation (or changes in board composition and top management changes) due to corporate governance failures in Nigeria. To this end the study uses share price movements and performance around the recent announcement of top management and board changes in the Nigerian banking sector, as a measure of the information conveyed by the change in the top management portfolios. A more robust treatment of this is provided in the next subsection.

* Efficient Market Hypothesis and the Nigerian Capital Market

In theory, for a market to be efficient, security price must fully reflect all available information. A precondition for this version of the efficient market hypothesis (EMH) is that information and trading costs are always zero. A weaker and more economical version of the EMH says that prices reflect information to the point that the marginal benefit of acting on the information does not exceed the marginal cost. There are three forms of market efficiency. The first category covers tests of return predictability, the second covers event studies of adjustment of prices to public announcements, and the third category covers tests for private information (Fama (14)). This has come to be known popularly as Fama's Efficient Capital Markets II position in the empirical literature.

In developed markets of industrialized countries, the EMH has been the subject of considerable research by economists. There is a strong measure of consensus among these researchers on the validity of return predictability and event studies for the major developed countries (16). Some EMH debate has also been carried out in some emerging markets with mixed conclusions on the validity of return predictability (Gandhi, Saunders and Woodward (15); Cooper (16); Parkinson (17); Dickinson and Muragu (18); Matome (19); Osei (20)), but with strong consensus of efficiency from event studies of adjustment of prices to public announcements.

Studies of market efficiency in the Nigerian capital market are scanty and many of these are tests of return predictability and event studies. In summary, most results support the return predictability of forecasting power of past returns. Evidence from Nigeria shows that share price adjust to public announcements of stock splits, earnings and dividend announcements. Similarly, information effects are associated with the announcements of stock splits, earnings and dividends in Nigeria. The present study focuses on corporate governance failures due to market malfeasance, while paying attention to the informational and real effects of top management changes; on stock prices.

* Corporate Governance and Agency Problems

Corporate governance is concerned with the ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other organisational insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are necessitated by the separation of ownership from control (management), an increasingly vital feature of the modern firm. A typical firm is characterized by numerous owners having no management function, and managers with no equity interest in the firm. This gives rise to the tendency for such a shareholder to take interest in the monitoring of managers, who, left to themselves, may pursue interests different from those of the owners of equity. For example, the managers might take steps to increase the size of the firm and, often, their pay, although that may not necessarily raise the firm's profit, the major concern of the shareholders. A large part of financial economics have long been concerned with ways to address this problem, which arises from the incongruence of the interests of the equity owners and managers, and have conducted significant research towards resolving it. The literature emanating from such efforts has grown, and much of the econometric evidence has been built on the theoretical works of Ross (21) and Jensen and Meckling. At the initial levels of the development of the theory, especially as it relates to the firm, concern seemed to focus more on the relationship between the management and shareholders than between them and other categories of stakeholders.

In modern times, the stakeholder theory has captured the attention of researchers and a survey of literature on this aspect of corporate finance can be found in the works of John and Senbet (22). According to this theory, the firm can be considered as a nexus of contracts between management on the one hand and employee's, shareholders, creditors, government and numerous other stakeholders (Sanda, et. al., (23)). Thus from the point of view of the stake-holders theory, concerns of corporate governance should go beyond the traditional management--shareholder relationship to include all the other stakeholders previously mentioned. This improved theory has recently undergone some refinements in the work of Jensen (24), who presents what he terms the "enlightened stakeholder theory" ****.

The main characteristics of any governance problem is that the opportunity exists for some managers to improve their economic payoffs by engaging in unobserved, socially costly behaviour or abuse and the inferior information set of the outside monitors relative to the firm. These characteristics are related since abuse would not be unobserved if the monitor had complete information. The basic idea--that managers have an information advantage and that this gives them the opportunity to take self-interested actions--is the standard principal-agent problem (Stiglitz (25)). The more interesting issue is how this information asymmetry and the resulting inefficiencies affect governance within institutions. Does the manager have better information? Perhaps the best evidence that corporate monitors possess inferior information relative to managers lies in the fact that monitors often employ incentive mechanisms rather than relying completely on explicit directives alone *****.

For banking institutions (the focus of the present study), the principal-agent problem may manifest itself within the context of the bank playing the role of external monitor over the activities of third parties to whom it grants loans. In fact, when making loans banks are concerned about two issues: the interest rate they receive on the loan, and the risk level of the loan. The interest rate charged, however, has two effects. First it sorts between potential borrowers popularly referred to as adverse selection (Stiglitz (26)) and it affects the actions of borrowers also termed moral hazard. These effects derive from the informational asymmetries present in the loan markets and hence the interest rate may not be the market clearing price (Stiglitz and Weiss (27)).

Naturally, agency relationships arise in any situation involving cooperative effort by two or more people. The relationship between the shareholders, who are the owners of the company, and the management and board of directors, is a pure agency relationship. Separation between ownership and control is intimately associated with the general agency problem. The problem of inducing an "agent" to behave as if he is maximizing the "principal's" welfare exists in all organizations. The main contributions to agency theory are given by Hart (28), Fama and Miller (29), and Harris and Raviv (30). According to Jensen and Meckling, if both parties are utility maximizes, the agent may not always act in the best interest of the principal. The principal can therefore limit divergences from own interest by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the aberrant activities of the agent.

Moreover, Jensen and Meckling assert that in some situations, it would pay agents to expend resources in the form of bonding costs, to guarantee that they will not take certain actions that would harm the principal, or to ensure that the principal will be compensated in the event of such actions being taken. It is believed that it is generally impossible for the principal or the agent to ensure that the agent will make optimal decisions from the viewpoint of the principal at zero cost. In most principal-agent relationships, the principal and the agent will incur positive monitoring and bonding costs, which may be pecuniary or non-pecuniary. In addition, there will still be some divergence between the agent's decisions and those decisions that could maximize the welfare of the principal. The monetary equivalent of the reduction in the welfare of the principal resulting from this divergence is the residual cost, which is also cost to the agency relationship. Agency cost is the sum of the monitoring costs by the principal, the bonding expenditure by the agent and the residual loss.

The existence of agency problems will affect macroeconomic growth and securities market performance in general and valuation of firms at the micro level. A firm can be viewed as a nexus of contracts, implicit and explicit, among various parties or stakeholders, such as shareholders, bondholders, employees and the society at large. The payoff structure of the claims of different classes is different. The degree of alignment of interests with those of the agents in the firms who control the major decisions in the firm are also different. This gives rise to potential conflicts among the stakeholders, which is the principal-agent problem. If left alone, each class of stakeholders pursues its own interest which may be at the expense of other stakeholders (1).

John and Senbet focused on the private agency perspective of corporate governance of managerialism. Managerialism refers to self-serving behaviour of managers. Ownership of modern corporations is widely diffused, with most large companies being owned by shareholders. Under separation of ownership from control, the actual operations of the firm are conducted by managers who typically lack ownership positions of stock. The potential conflict arising from managers and stockholders manifests itself in many ways. The management-stockholder conflict leads to managerial propensity for expanding a span of control in the form of empire building at the expense of capital contributors or owners, and for unduly conservative investments in the form of safe but inferior projects to maintain the safety of wage compensation and their own tenure.

Thus the existence of agency problems is potentially harmful to the owners of the firm and may lead to inefficiency and wealth destruction in an economy. It is in the best interest of owners to resort to control mechanisms that move the operation of the firm toward full efficiency in line with the Fisherian separation principle (Fisher (31)). The channels for efficiency gain are improved managerial performance and reduced cost of external capital resulting from appropriate control mechanism. These controls should be built into the corporate governance system, contractual mechanisms, and market for corporate control and takeovers. This reduces market malfeasance with the possible added advantage of positive influences on share price movements.

Methodology Used

* Event Study

Over forty years ago Fama, Fisher, Jensen and Roll (48) introduced events study methodology which still seems an unbeatable tool for uncovering stock price as well as trading volume reactions to the arrival of new information. Obviously, the methods that are used now under event study differ from those of Fama, et. al. (32) but the main idea has remained the same over the whole period since this methodology was introduced by Gurgul and Majdosz. An event study examines if the average abnormal return on the event day is equal to zero (null hypothesis) versus an alternative hypothesis of a non-zero abnormal return:

Ho: [AAR.sub.E] = 0

Hi: [AAR.sub.E] [not equal to] 0 (1)

The average abnormal return ([AAR.sub.E]) on the event day is the aggregation of the individual stock abnormal returns aligned in event time (50). This is mathematically represented as follows:

[AAR.sub.E] = 1/N [N.summation over (i=1)] [AR.sub.i,E] (2)

As previously noted an event study methodology is employed in this paper. The periods over which the security prices was examined are the days before and after the announcements with the announcement day also inclusive. This period of examination is also called the event Window. Event studies are naturally concerned with how to measure the effects or impact of a particular firm specific corporate event on company security price. The relevant event here is corporate governance failure announcements. This event is taken as the basis for conducting an event study of this nature; specifically to determine the impact of corporate governance failure announcements on stock prices.

The present study has taken an event window of 122 days (narrowed down to 75 days after weekends and public holidays have been excluded) including the event date, that is, the date when the corporate governance failure (by the top management staff of the sampled banks) was announced. The total event window was broken into two parts. First part was composed of stock prices before corporate governance failures was announced and the second part was composed of stock prices after corporate governance failure was announced. The event date, that is, the date when the announcements was made is termed as t while the middle of the event window is O. the first part of the event window was composed of 37 days stock prices (-37) while the second part of the event window was also composed of 37 days stock prices (+37). Thus, the total event window was (37)-t-(+37) where -37 represented pre-announcement phase, t the event date and +37 the post-announcement phase.

* Sample Selection

The paper examines the impact of the public announcement of illegal corporate activities--by the Central Bank of Nigeria (CBN) by some top management staff whose appointment was also terminated--on the 14th of August, 2009. During the event period of the present study, the population of publicly quoted banks on the floor of the Nigerian bourse stood at twenty four (24). The study however focused on eight (8) banks who were reported by the regulatory authorities (Central Bank of Nigeria) as being guilty of the most recent corporate governance misconduct and scandal in the Nigerian banking industry. This sampling procedure has been described as nonprobability purposive or convenience sampling technique by Agbadudu and Ogunrin (33).

In non-probability sampling, elements of a population are not deliberately given equal or known chance of being included in a sample. In other words, non probability sampling does not guarantee randomness (Nachmias and Nachmais (34)). Non probability purposive sampling technique describes the process of choosing sample elements while being guided by assumptions ot what typical elements are; elements which are most likely to provide a researcher with the information required (Asika (35)). Nevertheless, our sample still constitutes over thirty three (33.33) per cent of the total deposit money banks in Nigeria at the time of the study.

Deriving our convenience sample was facilitated by the public announcements made with regards to our sample. The Central Bank of Nigeria on August 14th, 2009 sacked the chief executive officers (along with other top management staff and executive directors of five (5) highly rated conventional/universal deposit money banks in the country; for offences and unethical practices ranging from falsification of accounting statements, embezzlement and the granting of loan and other credit facilities to customers and business partners/ clients (way above their capital base and regulatory obligor limits) without any form of collateral. security; which made them technically insolvent. The sacked CEOs--who are currently facing trial in the law courts in Nigeria--were also accused of doing little or nothing to recover the loans granted and also of hurriedly presenting such delinquent and toxic assets/loans as bad debts in their accounting statements and books (Omachonu (36)).

Furthermore, on September 16th 2009, while addressing capital market regulators and active market participants in the Nigerian Stock Exchange trading floor (in Lagos State Nigeria), the Central Bank of Nigeria Governor stated that
   the problem with the five banks, whose top executive
   were removed, is a clear case of a lack of liquidity, lack
   of capital and a lack of sound corporate governance ...
   practices (STV (37)).

Shortly, after, an additional three CEOs were sacked for similar offences after a careful and thorough scrutiny of their accounting and financial statements by the CBN; thus bringing the number of affected banks to eight (8) out of the total twenty four (24) deposit money banks operating in the country at that time. However, one of the banks, Equatorial trust bank was riot listed in the Nigerian bourse and so could not be analysed in the present study.

The data utilised for the present study was obtained from the Nigerian Stock Exchange daily official listing and it covered the period August to December 2009. Our model was specified using daily stock price of the selected banks as the dependent variable while CBN announcement of corporate governance failure on the part of the banks served as the independent variable (Explanatory variable). Specifically the model is specified in functional form as follows:

[] = [[varies].sub.0] + [[varies].sub.1] [] + [] (3)


[[varies].sub.0] = Intercept of the entire event study regression equation

[] = Daily stock price of the selected banks before and after CBN announcement of corporate failure in the selected banks.

[] = CBN announcement of corporate governance failure in the selected banks (where "O" is period before the announcement, and "1" is period after the announcement was made.

[] = Error term

In line with the previously stated objective of the study, for testing the hypothesis, the t-test, standard deviation and the mean cumulative average return (CAR) was applied in measuring the event.

* The T-Test

T-test has been applied to test the impact of corporate governance failure announcements on the stock prices of the affected banks both in the pre-announcement and post-announcement period. The total event window of 75 days stood at 37 days prior to the announcement and 37 days after the announcement of corporate governance excluding the event date. The t-values are calculated with the formula given below:

t = CAR/{6CAR/[square root of N]}

The t-values were further compared with the table values at 1%, 2% and 5% level of significance.

* Standard Deviation

The standard deviations for all the stocks was also calculated for pre and post announcement events to find out the magnitude change in stock prices. It is calculated as

[sigma] = [square root of CAR/n]


CAR = Cumulative abnormal returns

n = Number of days

* Mean Cumulative Average Returns

Here, we used returns as a proxy for stock price. The returns are further calculated in detail with normal, average, abnormal and cumulative returns. The normal returns of all the sample stocks are calculated as:

[] = ([P.sub.t] - [P.sub.t-1])/[P.sub.t-1]


[] = Current day normal return

[P.sub.t] = Current day stock price

[P.sub.t-1] = Previous day stock price

The abnormal returns for all the stocks have been calculated using the constant mean return model. After obtaining the mean returns for all the sample stocks, the abnormal returns had been calculated with the help of the following formula:

[] = [] - E([])


[] = Current day Abnormal return

[] = Current day Normal return

E([]) = Expected Return (Mean Return)

The abnormal returns calculated were further converted into cumulative abnormal returns for application of statistical techniques with the help of constant mean return model. The cumulative abnormal returns are calculated for both the days preceding and after the event date. The mean CAR is calculated as :

Mean CAR = [N.summation over (i=1)] CAR/n


Mean CAR = Mean of Cumulative Abnormal Returns

[CAR.sub.i] = Cumulative Abnormal Returns

n = Number of days

As a frame of reference, the following hypotheses are posed:

[Ho.sub.1]: There is no significant difference between stock prices in the pre and post announcement period.

[Ho.sub.2]: Stock prices of the listed banks show a negative abnormal return upon the announcement of corporate governance misconduct.

These hypotheses, serve as the link between theory, speculation and facts. The confirmation or otherwise of these propositions is the subject of the next section of the study.

Empirical Research Findings

In this study, we specifically test whether the mean of the cumulative abnormal returns (MeanCAR) before and after the event window are statistically significant and also if stock prices show a negative abnormal return upon the announcement of corporate governance misconduct of some top management staff of Nigerian banks. The non-significance of the MeanCAR value before and after the event will mean that the announcement had no significant influence on the selected banks stock returns. Also the adoption of a pre-event analysis approach enabled us determine whether news leakages prior to the date (timing of the announcement of corporate misconduct in the banks, induced market reactions that could result in changes in share prices. The post analysis enabled us consider the fact that there may be a delay in price reactions to the CBN announcements. While the MeanCAR before and after the CBN announcement showed the reaction of stock prices. The results is shown in Table 1.

As shown in Table 1, it can be deduced that all the sampled banks had positive abnormal return before the CBN announcements of their non-compliance with sound corporate governance principles/ practices. This simply means that investors and shareholders were satisfied with the returns of all the sampled banks prior to the announcements of their non-compliance with corporate governance principles set by the Central Bank of Nigeria. The bank with the maximum MeanCAR before the announcement was Union Bank PLC (1.66) while the lowest was FinBank PLC (0.19). These result reflect the reality in the Nigerian banking system since FinBank was previously classified as a relatively smaller bank in the banking industry by the CBN while Union Bank PLC was always portrayed as a trouble free bank which ranked among the nation's top three banks. The standard deviation before the announcement shows that there was more dispersion in Union Bank returns than other sampled banks (0.212) while there was less dispersion in FinBank stock returns (0.072). The dispersion in Union Bank stock returns in the pre-announcement period might very well be due to leakage from insiders within the bank.

The results after the CBN announcements resulted to a negative MeanCAR for all the seven sampled banks. This clearly show that the investors or shareholders were not satisfied with the abnormal returns after the announcements were made. This might very well mean that the investors must have taken the CBN announcement as bad news thus negatively affecting the banks share prices or returns. As shown in Table 1, the most affected banks after the CBN announcement was Union Bank PLC while the least affected was FinBank PLC. This further confirms that investors react more to surprise and less to expected outcomes.

The results also further show the speed with which the information was impounded by the market (investors) and how readily it was reflected in stock prices (and returns). This may suggest the existence of some form of informational efficiency; and that the market exhibits some form of efficiency, thus giving credence to some previous work which suggests the existence of some form of efficiency in the Nigerian bourse as far as the efficient market hypothesis is concerned (see Osamwonyi and Anikamadu (38); Eriki and Idolor (39)). Whether the level of efficiency is Weak-Form, Semi-Strong form or the Strong-Form is completely outside the purview of this study. This is however not explored further in this study; as it has been left at best to other interested researchers. We however, note that informational efficiency does add to the thrill, excitement, frenzy and suspense in the stock market, most especially if prices can be empirically shown to be unpredictable.

As shown in Table 2, the t-statistics of all the sampled banks was statistically significant at 1 per cent levels both for the pre and post CBN announcement period. The results imply that the sampled banks obviously had a significant post stock return before the announcement while after the announcement, their stock prices or returns acted negatively. The t-statistics in Table 2 also revealed that the seven affected banks abnormal stock returns were statistically different (positive) before and after (negative returns) the CBN announcement. The key lessons from this study is outlined as follows:

* The announcement of corporate governance misconduct and removal of the CEO or changes in board of director's composition by statutory regulators will affect the banks stock prices and returns negatively. This is very likely to cause dissatisfaction to shareholders or investors.

* Shareholders or investors in the Nigerian bourse react more to surprises such as unexpected removal of CEO or changes in the board composition due to non-adherence to best corporate governance practices.

* Information leakages from corporate insiders can cause wide dispersion in stock returns even before the official declaration of an event or news.


From our findings, we adopt the position that predicting the financial consequence of corporate governance failure announcement--particularly through forced CEO removal--is not extremely complex. Indeed a major corporate governance challenge for banks involves the principal--agent problem and how it can undermine financial stability when the incentives of bank management and directors are not aligned with those of the owners of the bank. This may result in different risk preferences for management as compared to the firm's owners, as well as other stakeholders, including creditors, employees, and the public. Because of high transaction costs and institutional barriers, aligning the interest of these groups may be difficult, if not impossible, without regulatory intervention. Hence stock prices tend to go down over the period following such regulatory interventions (or announcements).

According to our results, announcements of changes in top management and board of director's members are significant because they affect shareholders' wealth. This is because news about Board of Directors and corporate leaders affect firm financial performance and stock prices. Announcement of the forced removal of a CEO or corporate leader produces negative information content with its attendant negative investor reaction. These findings is very much consistent with Bonnier and Bruner (40), Warner, Watts and Wruck (41) as well as Adelegan. In their study, they also hypothesized a negative information content of forced top management removal announcements, i.e., that forced top management change is in shareholders' interest but that it conveys bad news about the firms performance.

It would be very interesting to check whether stock prices react differently to forced and non-conflictual resignations (e.g. normal retirement). It would also be interesting to find out empirically the relative importance of different factors which cause forced removals (or resignations), such as block shareholder pressure, takeover attempts, financial distress, shareholder lawsuits or normal board monitoring. With the meagre sample size, determined by data availability and not by a probability criterion, we cannot do so in this study. Therefore, we must leave this problem for future research. While suggesting that this research work expresses a highly intelligent guide to determining the effect of corporate governance failures on stock market prices in Nigeria, which to the best knowledge of the research has not been done before in Nigeria highly.

These crucial and highly relevant issues require detailed and expensive research study.

Implications for Policy

The study has a number of recommendations, policy implications, and also, points to some areas for further research:

* The finding that announcement of corporate governance through the removal of C.E.O or changes in board of companies by regulators requires the strengthening and strict enforcement of corporate governance codes and practices in Nigeria. The Securities and Exchange Commission (SEC) and Corporate Affairs Commission (CAC) can strengthen its 2006 post-consolidation code of corporate governance and also attention should be focused on the issue of board independence and active participation, equity compensation and frequent executive sessions, as weak corporate governance practices will affect the effectiveness of the board.

* Research shows evidence that shareholders or investors will react more to surprises such as unexpected removal of C.E.O or changes in their board composition due to their non-adherence to best corporate governance practices. Government, through its regulators (CBN and SEC) should rather disclose such corporate misbehaviors privately to specialized bodies established to discipline them rather than allow the public discipline the banks by releasing unfavorable announcement publicly. As an alternative to prevent stock crash, the CBN, SEC or NDIC should disclose such information to the public gradually, say, in the "bad-worse-severe" continuum rather than immediately presenting the severe aspect of the announcement.

* Information leakage from corporate insiders can cause dispersion in stock returns before the declaration of an event or news. From the efficient market hypothesis, we see that investors, through insider information, attempt to out-perforin the market by trading on privately available information. Regulators should instill discipline among capital market participants especially in the Nigerian Stock Exchange in order to discourage insider trading and other related capital market malfeasance.

IDOLOR, ESEOGHENE JOSEPH, Ph.D. (Management), Ph.D. Finance

Academic Staff Member

Department of Banking and Finance

University of Benin City, Nigeria




Doctorial Student: Department of Banking & Finance, University ofNigeria : Enugu, Nigeria and Academic Staff Member

Department of Accountancy, Auchi Polytechnic, Auchi, Nigeria


The authors own full responsibility for the contents of the paper.


(1.) Jensen, M.C. & Meckling, W.H. Theory of the Firm: Management Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 4(1): 305-360 (1976).

(2.) Adelegan, O.J. Does Corporate Leadership Matter? Evidence from Nigeria. AERC Research Paper No. 189, African Economic Research Consortium : Nairobi (2009).

(3.) Bonazzi, L. & Islam S.M.U. Agency Theory and Corporate Governance: A Study of the Effectiveness of Board in their monitoring of the CEO. Journal of Modeling in Management, 2(1): 7-23 (2007).

(4.) Gurgul, H. & P. Majdosz. Stock Prices and Resignation of Members of the Board: The Case of the Warsaw Stock Exchange. Managing Global Transition, 5(2): 179-192, (2007).

(5.) Furtado, E.P.H. & M.S. Rozeff. The Wealth effects of Company Initiated Changes. Journal of Financial Economics, 18(1): 147-160, (1987).

(6.) Ozili, K.P. Announcement of Corporate Governance Failures and its Effect on Stock Market Prices: Empirical Evidence from the Nigerian Capital Market: Unpublished B.Sc. Thesis, Department of Banking and Finance, University of Benin (2011).

(7.) Adelegan O.J. Capital Market Efficiency and the Effects of Dividend Announcement on Share Prices in Nigeria. African Development Review, 15(2&3): 5-17 (2003).

(8.) Adelegan, O.J.

i) How Efficient is the Nigerian Stock Market: Further Evidence. African Review of Money Finance and Banking, Supplementary Issue of Savings and Development, 143-165 (2004).

ii) Adelegan, O.J. Market Reactions to Initiations and Omissions of Dividend on the Nigerian Stock Market. Ibadan Journal of the Social Sciences, 4(1): 47-59 (2006a).

iii) Adelagan, O.J. Price Reactions to Dividend Policy Changes on the Nigerian Stock Market. African Journal of Economic Policy, 13(2): 59-79 (2006b).

(9.) Oludoyi, S.B. Capital Market Efficiency and the Effects of Earnings Announcements on Share Prices in Nigeria. Unpublished Ph.D. Thesis, University of Ibadan, Ibadan, Nigeria (1999).

(10.) Omole, D.O. Efficient Market Hypothesis and the Nigerian Capital Market under Financial Liberalization: An Empirical Analysis. Unpublished Ph.D. Thesis, University of Ibadan, Nigeria (1997).

(11.) Ayadi, F.O. The Random Walk Hypothesis and the Behaviour of Share Prices in Nigeria. Nigerian Journal of Economics and Social Studies, 26(1):57-71. (1984)

(12.) Inanga, E.L. & Asekomi, M.O. The Random Character of Equity Prices in the Nigerian Stock Market. Management and Development: RVB Research Papers XII, 12-7 (1992).

(13.) Olowe, R.A. Stock Splits and Efficiency of the Nigerian Stock Market. African Review of Money, Finance and Banking, 1(2): 97-125 (1998).

(14.) Fama, E.F.

i) Agency Problems and the Theory of the Firm. Journal of Political Economy, 88(2): 288-307 (1980).

ii) Fama, E.F. Efficient Capital Market II. The Journal of Finance, 46(5): 1575-1617, (1991).

(15.) Gandhi, D.K., Saunders, A. & Woodward, R.S. Thin Capital Markets: A Case Study of Kuwait Stock Market. Journal of Applied Economics, 18(1): 147-160, (1980).

(16.) Cooper, J.C. World Stock Markets: Some Random Walk Tests. Applied Economics, 14(1):515-531 (1982).

(17.) Parkinson, J.M. The EMH and the CAPM on the Nairobi Stock Exchange. East African Economic Review, 3(2): 105-110, (1987).

(18.) Dickinson, J.P. & Muragu, K. Market Efficiency in Developing Countries: A Case Study of the Nairobi Stock Exchange. Journal of Business Finance and Accounting, 21(1): 135-150 (1994).

(19.) Matome, T.K. The Price Discovery Process of the Namibian Stock Exchange and the Informational Content of the Share Index. Savings and Development, 22(3): 283-301 (1998).

(20.) Osei, K.A. Analysis of Factors Affecting the Development of an Emerging Capital Market: The Case of Ghana Stock Market. Research Paper No. 76. African Economic Research Consortium, Nairobi, Kenya (1998).

(21.) Ross, S. The Economic Theory of Agency: The Principal's Problem. American Economic Review, 63(2): 134-139, (1973).

(22.) John, K. & Senbet, L.W. Corporate Governance and Board Effectiveness. Journal of Banking and Finance, 22(1): 371-403 (1998).

(23.) Sanda, A.U., A.S. Mikailu & T. Garba, Corporate Governance Mechanism and Firm Financial Performance in Nigeria, Research Paper No. 149. African Economic Research Consortium. Nairobi, (2005).

(24.) Jensen, M.C. Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Working Paper No. 01-01, Harvard Business School (2001).

(25.) Stiglitz, J.E. Principal and Agent in Alexander, E. (2004). Corporate Governance and Banking Regulation. Working Paper 17, CERF Research Programme in International Financial Regulation. Cambridge, (1989).

(26.) Stiglitz, J.E. On the Causes and Consequences of the dependence of quality on price. Journal of Economic Literature, 25(1): 1-6, (1987).

(27.) Stiglitz, J.E. & A. Weiss. Credit Rationing in Markets with Imperfect Information. American Economic Review, 71(1): 393-409, (1981).

(28.) Hart, O. Firms, Contracts, and Financing Structure. Oxford: Oxford University Press (1995).

(29.) Fama, E.F. & Miller, M.H. The Theory of Finance, New York: Holt, Rinehart and Winston (1972).

(30.) Harris, M. & Raviv, A. The Theory of Capital Structure. Journal of Finance, 46(1): 297-355, (1991).

(31.) Fisher, L. Some New Market Indexes. Journal of Business, 39(1): 191-225, (1966).

(32.) Fama, E.J., L. Fisher, M. Jensen & R. Roll. The adjustment of stock prices to new information. International Economic Review, 10(1): 1-21, (1969).

(33.) Agbadudu, A.B. & Ogunrin, F.O. Aso-Oke: A Nigerian Classic Style and Fashion Fabric. Journal of Fashion Marketing and Management, 10(2): 20-25 (2006).

(34.) Nachmias, C. & Nachmias, D. Research Methods in the Social Sciences: Alternative Second Edition without Statistics. London: Edward Arnold (Publishers) Ltd. (1982).

(35.) Asika, N. Research Methodology in the Behavioural Sciences, Lagos: Longman Publishers (1991).

(36.) Omachonu, J. How Over-ambition and Weak Regulation Wrecked Banks. Business Day, 8(21): 1-4 (2009).

(37.) STV. Silver Bird News. Lagos: Silver Bird Television Studios. 16th September, (2009).

(38.) Osamwonyi, I.O. & Anikamadu, M.O. The Nigerian Stock Market, Efficient Market Hypothesis and the Runs Test. Nigeria Journal of Business Administration, 4(2): 30-55, (2002).

(39.) Eriki, P.O. & Idolor, E.J. The Behaviour of Stock Prices in the Nigerian Capital Market: A Markovian Analysis. Indian Journal of Economics and Business, 9(4): 675-694 (2010).

(40.) Bonnier, K.A. & Bruner, R.F. An Analysis of Stock Price Reaction to Management Change in Distressed Firms. Journal of Accounting and Economics, 1(1):95-106 (1989).

(41.) Warner, J., R. Watts, & K. Wruck. Stock Prices and Top Management Changesp. Journal of Financial Economics, 20(1): 461-492, (1988).

* The head office in Lagos was opened in 1961, Kaduna branch was opened in 1978, Port Harcourt, 1980, Kano, 1989, Onitsha, 1990, Ibadan, 1990, Abuja area office 1999, Yola, 2002 and Benin, 2005. A second stock exchange named the Abuja Stock Exchange was established in 1998. Because of political pressures, it was later converted into a commodity exchange on 9th August 2001, as a forum where commodities can be traded. Farmers, for example, would have a market where they can trade in futures as well as substantial capital support in the same way as companies source for funds in the capital market. However, it has not yet commenced operations fully.

** The CBN bank recapitalization policy led to the merger and business combination arrangements of 89 banks into 25 banks IN 2005, most of which were previously listed on the NSE. This led to a reduction in number of listed firms, but an increase in overall stock market capitalization of listed firms in general, and in particular an increase in market capitalization of banks.

*** In the financial services sector, the collapse of Forum Finance, Abacus Merchant Bank Nigeria Limited, Royal Merchant Bank Nigeria Limited, Rim Merchant Bank, Financial Merchant Bank, Progress Bank, Republic Merchant Bank, among others, are attestations to the fact that weak corporate governance will ultimately result in corporate failure. Outside the banking sector, manipulation of accounting policies, methods and the attendant effect on accounting figures of African Petroleum (AP) which concealed debts well in excess of 20 billion naira, overvaluation of the shares of Lever Brothers, overstatement of accounting figures and profit of Cadbury Nigeria and fraudulent sale of shares involving Bonkolans securities and others (7).

**** For Jensen, the traditional stakeholders theory encourages managers to be servants of many masters, with no clear guidance whenever trade-offs (or indeed, conflicts) occur, as they often do. He argues that the absence of any criterion for choice in cases of trade-offs (or conflicts) tend to give managers some discretionary powers to serve the masters of their own choice.

***** For example, such incentive mechanisms may take the form of tying a portion of a manager's compensation to the company performance in the stock market through the use of stock options.

Overall, the presence of asymmetric information can prevent certain equilibrium outcomes from being achieved, and the market equilibria that often result fail to be pareto optimal showing the importance of perfect information for the efficient operation of financial markets and efficient management of financial firms.

Sample Banks            MeanCAR    Mean CAR   Standard    Standard
                        (Before)    (After)   Deviation   Deviation
                                              (Before)     (After)

Bank PHB                  0.73      -0.73       0.140       0.141
Spring Bank               1.57      -1.56       0.206       0.205
Intercontinental Bank     1.47      -1.46       0.199       0.198
Afribank                  0.98      -0.97       0.163       0.162
Oceanic Bank              0.74      -0.74       0.142       0.141
Union Bank                1.66       1.62       0.212       0.209
Fin Bank                  0.19      -0.19       0.072       0.071

Source: Author's Computation


Sample Banks            t-STATISTIC   t-STATISTIC
                         (Before)       (After)

Bank PHB                  31.56 *       31.71 *
Spring Bank               46.32 *       46.19 *
Intercontinental Bank     44.81 *       44.64 *
Afribank                  36.63 *       36.53 *
Oceanic Bank              31.88 *       31.83 *
Union Bank                47.62 *       47.12 *
Fin Bank                  16.14 *       13.93 *

Note: * Significant at 1 per cent level
COPYRIGHT 2015 Reprinted with permission from JFMA. Copyright reserved with JFMA.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2015 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Idolor, Eseoghene Joseph; Braimah, Abdulganiyu
Publication:Journal of Financial Management & Analysis
Article Type:Report
Geographic Code:6NIGR
Date:Jul 1, 2015
Previous Article:Investment in innovation and stock price behavior--lessons from the U.S. financial crisis: research findings.
Next Article:Discrete wavelet transform-based prediction of stock index: a study on national stock exchange fifty index.

Terms of use | Privacy policy | Copyright © 2022 Farlex, Inc. | Feedback | For webmasters |