2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Title: Corporate Governance Mechanisms: Compliance and Pattern of Market
Valuation Quoted Companies in Nigeria (2003-2010).
By
Dr. AKINKOYE Ebenezer Yemi
Department of Management and Accounting
Faculty of Administration,
Obafemi Awolowo University
Ile Ife
Nigeria
Key words: Corporate Governance, code of best practice, compliance and pattern of firms’
value
July 2-3, 2013
Cambridge, UK
1
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Abstract
The study evaluates corporate governance practices among Nigerian firms across industries
and examines the trend and pattern of market value of non-financial quoted firms in Nigeria
during the sample period. Data set that included data on economic value of firms, corporate
governance mechanism and related stock prices were obtained from the firm’s annual reports,
the publication of the Nigeria Stock Exchange (NSE) as well as the website of the firms.
Panel data generated on the pattern of firms’ market value and the level of corporate
governance practices were analysed using descriptive analysis techniques. The results
showed that listed firms observed between 2003 and 2010 have embedded corporate
governance initiatives with a compliance level of 72.15 percent and a growth rate of 5.83
percent. The results also showed that market value of firms increased from 2003 to 2008 for
all measures by 6.49, 16.61, 6.36 and 10.27 percent and declined in 2009 and 2010 by 8.42,
14.51, 8.4 and 10.75 percent
July 2-3, 2013
Cambridge, UK
2
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Introduction
The potential role that may be played by good corporate governance in promoting economic
development and attracting both domestic and foreign investments has attracted considerable
attention. Several researchers ( Zheka (2006); William (2009); Lawrence and Marcus,(2006);
Black, (2001); Ang, Cole and Lin (2000) etc) have argued that the propagation of an
effective legal framework and the design of code of best practice in order to ensure good
corporate governance should be viewed as an integral part of country’s strategy. This
becomes so important because corporations, according to Zheka (2006), have reached a
remarkable output growth and at present produced more than 90% of all world output. Today
and more than before, corporate governance reform has become a highly charged political
issue and subject of heightened importance and attention in government policy circles,
academia and the popular press throughout the developed and developing countries. It is a
burring topic among policy-makers and academic because the role of capital market has
grown so drastically and a flood of recent academic research has clearly documented the
importance of effective governance in maximizing the value and productivity of a nation’s
publicly traded firms. The spread of privatization programmes around the world has also
forced governments to improve and impress on effective governance systems in order for the
programme to be perceived as economic success.
However, the monumental financial fraud in several corporate organisation worldwide (Asia,
the Pacific, Europe, America and Africa) and the crash in capital market are of great concerns
to scholars, investors, governments and all stakeholders as a whole. In fact, the financial
scandals affecting major American firms, such as Enron, WorldCom and Arthur Anderson,
Cadbury in Nigeria and the resulting loss of confidence by the investing public in the stock
market have led to dramatic decline in share prices and substantial financial losses to millions
of individual investors. Both the public and experts have identified a principal cause of these
scandals as failed corporate governance. Poor governance standards in both private and
publicly owned firms were blamed in part for the financial crisis (Andrei 2003). For instance,
the erosion of investor confidence was identified as one of the major factors that exacerbated
the financial crisis in most developing economies particularly in Malaysia and other Asian
countries. Erosion of investors’ confidence in Malaysia was brought about by the country’s
poor corporate governance standard and lack of transparency in the financial system (Kashif,
2008).
July 2-3, 2013
Cambridge, UK
3
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
In reaction to the corporate governance scandal all over the world, the last 10 years in most
developing nations have brought about a series of reform to improve corporate governance
(Alberto, Florencio Lopez-De- Silanes, 2006). The policy process is going beyond
macroeconomic stability as effort is critically focused on the development of financial
institutions such as banks and capital market, the development of the legal infrastructure
supporting business and the creation of regulatory mechanisms compatible with best world
practice. Today, most developing economies have undergone substantial and fundamental
transformation as reforms are effected and the state monopoly is exchanged for more market
oriented ownership structure (Martin Hovey, Larry Li Tony Naughton 2003). But then, there
is still more ground to cover in order to reach the upward moving level of shareholders
protection brought about by corporate governance scandal. This is because in spite of the
recent reforms and the development of capital market in comparison with the developed
capital market, corporate governance in emerging economies appears still far from perfect as
the rate of financial scandal is very alarming.
In Nigeria, the level of the state of corporate governance is perceived to plays an important
role in attracting and holding the foreign investments, for building a robust capital market and
for maintaining/restoring the confidence of both domestic and foreign investors Thus,
corporate governance has a special significance to Nigeria. Towards achieving these goals,
regulators in Nigeria have brought a number of changes in laws and regulations over the last
10years, of which the common one enacted by the Securities and Exchange Commission
(SEC) is a significant one as it is aimed at bringing a substantial change in the arena of
corporate governance in Nigeria. The aim of the guidelines is to enhance good corporate
governance practice in the listed companies in the interest of the investors in the capital
market.. The guidelines, in the main time, have drawn attention of different stakeholders and
management as different professional institutes, chambers and associations are examining the
Security and Exchange Commission’s guideline and discussing their effects upon acceptance
and practice on business, behaviour of management and investors.
Numerous initiatives have also been proposed by government, and different regulatory bodies
to ensure good corporate governance practice and enhanced market value of firms in Nigeria,
for example, new listing/disclosure rules, mandatory training for board of directors, enforced
codes of governance etc. Emphasis is placed on good governance at the firm level in order to
ensure firm performance and an alignment with the international best practice. It is expected
that the guidelines would be practiced as a code of good corporate governance and therefore
have not been made mandatory to be followed Although, whether the adoption of best
July 2-3, 2013
Cambridge, UK
4
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
practice and whether corporate governance mechanisms stimulate and enhance market value
can only be determined through empirical investigation. Nevertheless, as the Nigerian stock
market is expanding in terms of volume of trading and market capitalization there is a need to
determine the level of adoption and analyse the governance structure and values of firm as
this has not been explored sufficiently in the past study in Nigeria.
A review of the literature show that very little works exist on this issue in Nigeria and the
few studies on corporate governance in Nigeria focused on the relationship between corporate
governance mechanisms and performance of firms measured in terms of profitability and
productivity ( Ahmandu et al 2005, Oladimeji; Adetunji and Olawoye,2009). However, most
of the studies ignored the significant compliance level by firms. Thus, this, study therefore
looked at the adoption of code of best practice, compliance level and pattern of firms’ value
measured by Tobin’Q and other value indicators in a descriptive framework during the
sample period. . In achieving this, the study provides answers to the following research
questions: What is the pattern of value of non-financial quoted firms in Nigeria? And what is
the corporate governance structure of firms in Nigeria viz a viz the level of compliance.
The structure of the paper is organized as follows. Section 2 provides a brief summary of
framework for Corporate Governance in Nigeria. Section 3 gives the methodology adopted in
the work. Section 4 provides the discussion of results. The last section contains the
concluding remarks.
2. Framework for Corporate Governance in Nigeria
The Nigeria corporate governance legal framework is primarily governed by the Investments
and Securities Act (ISA) NO 29 of 2007, the rules and regulations of the Securities and
Exchange Commission (SEC) pursuant to the ISA, the Companies and Allied Matters Act
(CAMA) 1990 and the Trustees Investments Act 2004. Also a voluntary 2003 code of
corporate governance issued by SEC appointed committee outlines best practices with
regards to the roles and duties of boards of directors and management, the role and duties of
audit committees, and the rights of shareholders. Standards and regulations regarding
directors qualifications, responsibilities, remuneration, orientation, and credentials;
management succession; and the annual evaluation of board performance must be adopted
and publicly disclosed. The code is implemented on a comply-or-explain basis. However, in
order to improve enforcement, the commission in 2008 made some of the provisions legally
binding. For instance, certain sections of ISA 2007 contain provisions from the code and their
July 2-3, 2013
Cambridge, UK
5
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
inclusion in the ISA has made them mandatory for operators and companies. But there is no
assessment directly addressing Nigeria’s compliance with the principles of corporate
governance developed by the Organisation for Economic and Cooperation Development.
The principal regulatory agency of the Nigeria capital market is the SEC. It is under the
supervision of the Federal Ministry of finance, but remains independent in its regulatory and
developmental activities. Its powers are derived from the investments and Securities Act of
2007, which repealed the investments and Securities Act of 1999. The ISA charges the SEC
with the registration and supervision of market operators, self regulatory organizations
exchanges clearing houses, depositories, venture capital activities collective investment
scheme, capital market trade associations, and public securities. The regulatory tools
available to the SEC are rule- making, registration, inspection, investigation, surveillance,
and enforcement. As the 2008 Doing Business Guide Published by the U.S Department of
Commerce mentions, Nigeria’s Legal Accounting, and Regulatory Systems are consistent
with international norms, but enforcement is uneven.
The Security and Exchange Commission regulates issues of corporate governance especially
with regard to public quoted companies. Security and Exchange Commission monitors and
supervises the activities of public companies in relation to issuance and trading in securities
and sanctions erring practitioners. Security and Exchange Commission also receives and
investigates petitions or complaints from members of the investigative public. It has achieved
a measure of success in ensuring good corporate governance with regards to the protection of
shareholders. Other organizations that are active in corporate governance advocacy in Nigeria
include the Lagos Business School (now pan African University), Institutes of Directors
(IOD) Nigeria, Conventions on Business Integrity (CBI) etc. The IOD and various regulatory
authorities for the professions, such as accounting and auditing, have also been at the
forefront of public enlightenment and advocacy on issues of good corporate governance.
The primary institution that regulates private sector activities in Nigeria is the Corporate
Affairs Commission (CAC) that was established by the Companies and Allied Matters Act
(CAMA), which was promulgated in 1990. The functions of the CAC as set out in section 7
of CAMA include administering the Act, regulating and supervising the formation,
incorporation, management and winding up of companies, establishing and maintaining
companies registries and offices; and arranging and conducting investigation into the affairs
of any company where the interest of the shareholders and the public so demand.
July 2-3, 2013
Cambridge, UK
6
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
A code of best practice for corporate governance in Nigeria was in 2003 approved by the
boards of SEC and CAC. The code is designed to entrench good business practices and
standards for boards and directors, chief executive officer, auditors and the different
stakeholders of listed companies. The code is also to make provisions for the best practices to
be followed by public quoted companies and for all other companies with multiple
stakeholders registered in Nigeria in the exercise of power over the direction of the
enterprise, the supervision of executive actions, the transparency and accountability in
governance of these companies within the regulatory framework and market; and for other
purposes connected therewith. Some of the highlights of the code include: responsibilities of
the board of directors; composition of the board of directors ;compensation of board
members; reporting and control ;shareholders’ rights and privileges, the audit committee;
composition of audit committee; disclosure and financial transparency etc.
3. Methodology
Data and data sources
The study employed secondary data. A data set that includes data on economic value of firms
and covers the period of 2003-2010 was assembled with sources of information being the
firms ‘annual reports whereby the information about corporate governance was readily
available. Data gathered from the annual reports were of various forms ranging from
quantitative like; the number of independent director; number of shares held by each director;
number of board of director to categorical like; list of share holder holding more than 25% of
the company and ending with qualitative data involving the scoring of corporate governance
practice based on wording in the annual report suggesting compliance is being achieved. Data
on financial and accounting information necessary for the computation of firm value and
performance, were sourced from and gathered from the firm annual reports and publication of
Nigeria Stock Exchange (NSE).
Selection of sample
Two hundred and thirty seven (237) firms were listed on the stock exchange at the end of
2010. These firms were first screened for financial data availability during the sample period.
annual ending period. Listed firms that did not have up-to-date published financial data were
excluded from the study. The firms were also screened for corporate governance disclosure
July 2-3, 2013
Cambridge, UK
7
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
for the sample period and firms that did not have corporate governance compliance disclosure
in any of the year of the sample period were excluded in order to allow for consistency and
comparability of data. One of the problems faced in the study of firms in Nigeria is that the
publicly available data is restricted to the relatively few listed firms. The limitation leads to
an unavoidable sample selection bias and the use of a purposive sampling technique. The
sample consisted of firms listed on the Nigerian Stock Exchange excluding all finance-related
firms, banks, and insurance and utilities companies due to their differences in the regulatory
requirements, financial reporting standard and compliance. Also, distressed firms and firms
whose shares were not traded in stock market during the sample period were excluded
leading to a sample consisting of 100 and representing a broad range of industry sectors.
The period chosen and the number of the firms meet the qualification that served the purpose
of this study. The sample firms represented about 67% of the number of firms and
approximately 71% of total market capitalization of NSE (Nigeria Stock Exchange Web site,
2010).
Measurement of variables
The selection of variables was primarily guided by the results of the previous empirical
studies such as Lawrence et al (2006),Parveen et al (2009), Zunaidah Sulong and Fauzias
Mat Nor (2010) The study measured firm value along two dimensions; Relative market
valuation (measured by Tobin’s Q and Market-to-Book Ratio). Tobin’s Q has been used as a
measure of firm value in variety of corporate governance studies including Gompers, Ishi and
Metrick (2003) Brown and Caylor (2004), Lawrence et al (2006), Aggarval et al (2007),
Adetunji et al (2009) and Parveen et al (2009). Specifically, Tobin’s Q is defined as total
assets (TA) plus market value of common stock (MVCS) minus book value of common stock
(BVCS) minus deferred tax (DT) divided by Total assets.
Three measures of Tobin’s Q were used; a simplified measures using the Market Equity-toBook. That is, Equity ratio (Qa) was calculated for each firm and this was done by dividing
the market value of equity by the net tangible assets attributable to shareholders. The market
value is the share price multiplied by the number of ordinary share on issue at year-end. The
market values were used because investors’ valuation of firm goes beyond book values of
assets and liabilities and they give a much better estimate of a company’s equity (John
Garger, 2010). Tobin’s Q was also estimated by determining the market value of the firm’s
equity plus total liabilities over the total assets of the firm (Qb) and this was done annually
for each firm. This measure looks at the firm as a whole and not just equity capital. Book
July 2-3, 2013
Cambridge, UK
8
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
value was used for the debt and other liabilities in the absence of any secondary market for
such claim in Nigeria. Also book value of assets was used rather than replacement cost. This
is an expedient approach as any attempt to capture replacement costs open up considerable
measurement problems (Claessein et al, 1997; Clarkson & Satterly, 1997). Lastly, an average
of Tobin’s Q over eight years was determined based on the market value of the firm’s equity
plus total liabilities over the total assets of the firm. Lang, Stulz, and Walkling (1991)
propose that Tobin’s Q averaged over several years may improve the estimate over a one year
estimate.
Corporate Governance Index
From an empirical point of view, there has been a long debate in the literature on how to
measure the quality of firm corporate governance. This study used a broad corporate
governance index, instead of looking at a single control mechanism, to provide a
comprehensive description of firm level corporate governance for a broad sample of listed
firms in Nigeria. The major areas of internal corporate governance mechanism in Nigeria
based on the specific recommendation of 2003 code of best practice by the Board of the
Security and Exchange Commission and Corporate Affair Commission are; board structure,
executive compensation, ownership structure, shareholders right and interest and financial
disclosure and transparency.
In consistency with these five areas and the recommendation, this study constructed general
corporate governance index representing overall corporate governance in Nigeria and ranked
the listed firms in Nigeria. This approach has become very popular in the literature (Black,
Jang and Kim (2003), Klapper and Lover (2003) Drobetz, Schillhofer, and Zimmermann
(2004), Beiner, Drobetz, Schmid, Zimmermann (2004) Andre L et al (2004) and Lawrence et
al (2006) etc The corporate governance index was constructed and designed to capture
corporate governance commonly practiced by firms. The index was not survey-based. All
questions were answered from public information disclosed by listed companies and not by
means of potentially subjective or qualitative interview. Sources of information are company
filings and annual reports.
Basically each research possesses it own way of constructing CG score as it is contingent on
the researcher’s approach. Most part of the research done in this field have focused on the
available rating constructed by several rating agencies e.g, Klapper and Love (2004) made
use of Credit Lyonnais Securities Asia to build up their governance index. Brown and Caylor
(2004) adopted the Institutional Shareholder Services database. However, these ratings are in
the ogle of international debate as they are sometimes argued not to be related with
July 2-3, 2013
Cambridge, UK
9
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
performance or if so only to limited extent due to significant factors being overlooked,
thereby encouraging the construction of own index. Therefore the scoring of corporate
governance is subjective and particular to the researcher and country and that is why this
study constructed a suitable index for the purpose of this study
The corporate governance index was composite of 30 questions, covering 5 broad categories;
board characteristics, ownership and controlling structure, executive compensation and
shareholders right and interest and financial transparency standard. The number of the
questions was set so that it would not be neither too small that would not capture the
multivariate nature of corporate governance, nor too large, that would render data gathering
difficult and subjective. Each question corresponds to yes or no answer. If the answer is
“yes”, then the value of 1 is attributed to the question; otherwise the value is 0. The index was
the sum of the points for each question. The maximum index value was 30. Index categories
were simply for presentation purpose and there was no weighing among questions. The
corporate governance index questions that were applied in this study are shown in the
appendix i.
The disclosure category contains six (6) governance attributes: disclosure date of
financial reports, the utilization of an International Accounting Standard or Statement of
Accounting Standard and the quality of the auditing firm. Firms adopting international
accounting standards must meet a number of requirements that make them disclose more
information and be more transparent. Greater disclosure in general leads to more value
(Klapper & Love (2003)). Michaely and Shaw (1995) find that more prestigious auditors are
associated with US IPO´s that are less risky and that perform better in the long run. Coffee
(2003) presents a thorough legal and economic discussion about the role of the external
auditor. Therefore, the hypotheses are that firms which produce financial reports by the
legally required date, use an international accounting standard and one of the leading global
auditing firms are considered to have “good” corporate governance disclosure.
The second category is related to board composition and functioning. The board size
is an important control mechanism, because the board of directors´ role is to monitor and
discipline firm´s management. Lipton and Lorsch (1992) and Jensen (1993) argue that large
boards may be less effective than small boards, because large boards can make coordination
and decision making more cumbersome. Yermack (1996) finds an inverse relationship
between board size and firm value in the U.S. On the other hand, a small board size may
prevent minority shareholders´ access to the board of directors, and may have a negative
July 2-3, 2013
Cambridge, UK
10
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
effect on firm valuation, because of the potential expropriation. Jensen (1993) suggests an
optimal board size of 7 to 8 directors, while the Nigerian code of best practice on Corporate
Governance suggests an ideal board size of 5 to 15 directors.
The Security and Exchange Commission recommends one-year consecutive terms for
board members, suggesting that shorter terms are more effective than longer terms, because
shareholders are more flexible in changing board members if they are not effective in
monitoring firm´s management. Moreover, when there are short consecutive terms, if board
members are pursuing shareholders´ interests, they probably will be re-elected. On the other
hand, if board members have poor performance, new directors will replace them. It is
therefore believed that one-year consecutive terms create an incentive to prevent severe
governance malfunctions.
The independence of the board is related to the presence of outside directors on the
board. Since the board of directors is responsible for evaluating senior management and
replacing it if it does not pursue shareholder´s interests, an independent board is considered a
mechanism to prevent governance malpractices. Rosenstein and Wyatt (1990), and Agrawal
and Knoeber (1996) find that there is a relationship between the representation of outsiders
on the board, and firm valuation. Thus the study analyzed if the CEO and the Chairman of the
Board of Directors are the same person, suggesting that these firms are less likely to remove
the CEO, because he may have influence not only on senior management, but also on other
board members. Therefore, it is believed that firms where the CEO and the Chairman of
Board of Directors are the same person have a low valuation.
The ownership and control structure category is related to the recent literature
(Shleifer and Vishny (1997), La Porta et al (1998, 1999, 2000, 2002), Morck et al (1988) and
Claessens et al (2000a, 2000b)) suggesting that the concentration of voting rights and the
separation of voting from cash flow rights have a negative effect on firm valuation, because
of the potential expropriation of minority shareholders. Such companies are unattractive to
small shareholders and their shares have lower valuation.
In this study, ownership attributes related to “good” ownership and control structures
are: the largest shareholder has less than 50% of the voting capital; the controlling
shareholders’ ratio of cash-flow rights to voting rights is greater than 1; the percentage of
voting shares in total capital is more than 80%, and the executives and director subject to
stock ownership
The shareholder rights dimension contains three (3) attributes, all of which related to
rights granted by the company charter, beyond what is legally required, to its shareholders,
July 2-3, 2013
Cambridge, UK
11
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
especially minority shareholders. Nenova (2001) reports that when the law state more rights
to shareholders (for example, tag along rights), corporate values tend to rise. Our questions
are related to the use of arbitration as the vehicle to resolve corporate conflicts, additional
voting and tag along rights granted for the minority shareholders, beyond what is legally
required.
4. Descriptive Result
Descriptive statistics were employed to analyse the basic features of the corporate governance
and firms value variables. The frequency distribution consists of 100 firms with stocks traded
on Nigerian Stock Exchange from 2003 to 2010. This represents all firms that had available
data to construct the variables used in this study during the sample period. The frequency
distribution year by year for the sample, demonstrated in Table i, panel A (see appendix: ii)
indicates no clustering in any specific year. The sample is an unbalanced panel with annual
data. The study includes observation in the sample if in a year, a firm has at least one
corporate governance score and firm’s stocks were traded at least once in a year and have
financial data for this firm in the year. While panel A shows the distribution of firms by year,
Table i panel B (see appendix: iii) presents the distribution of firms by industry as defined by
Nigeria Stock Exchange.
Insert Table i Panel A and Panel B
Table ii presents descriptive statistics on Corporate Governance Index (see appendix: iv). A
review of Table ii panel A reveals that a firm can achieve a composite score from 0 to 30.
The mean composite governance score increased by approximately 1.25 from 2003 to 2010,
the standard deviation and variance declined by 0.198 and 0.533 respectively and the range of
scores was 9. This indicates that both the absolute and relative variation in the composite
governance score is declining.
Insert Table ii Panel A
The study examined further in Table ii Panel B (see appendix v), the scores of the governance
components. The maximum scores of the components vary overtime making comparison
difficult. As a result this study presented both the raw scores and standardised scores,
calculated by dividing the raw scores by the maximum possible value for the component.
Insert Table ii Panel B
July 2-3, 2013
Cambridge, UK
12
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
From table ii Panel B, both the mean raw score and standard value for board structure /
composition and functioning increases overtime as the maximum score is unchanged. The
raw value for the executive compensation category stays approximately the same but the
standardized score increases by 4%. Both the mean raw value and standardized score for
Shareholder’s Rights decreased in 2005 and 2006. The mean value for ownership structure
and control increased in terms of raw value and especially the standardised value. Overall, the
data presented in the Table ii, Panel A and B suggest that some structural shifts are occurring
in the corporate governance structure and processes within Nigerian firms. These changes
might be driven by the firms’ desire to improve their reported rating in the media or genuine
desire of the management of the firms to improve the overall state of corporate governance in
these firms.
The summary statistics of the five (5) corporate governance components and the corporate
governance index for the sample period are shown in the table iii (see appendix vi),. These
also depict a number of features about governance structure of Nigerian firms. The table
gives a clear descriptive analysis of the structural shift in the corporate governance processes
among the non-financial firms in Nigeria. It shows the level of changes and improvement
year by year and average level of compliance. From the reported statistics on Table iii, the
mean of corporate governance index (pool data) is 21.996; the maximum is 26, while the
minimum is 15. This suggests that average firm score is 21 of all the corporate governance
questions and the maximum score is 26 recorded by a firm in 2009 (see Table ii Panel A).
The mean of ownership and control structure is 2.77 while the maximum is 4.00. This means
that the ratio of the Shareholders’ voting right, percentage of voting share in total capital and
share owned by directors to the total shares outstanding is high. The mean, maximum and
minimum of disclosure and financial transparency are 5.88, 6.00, and 3.00 respectively.
These also reveal that the ratio of disclosure requirement, the use of accounting standard and
the use of audit committee among firms Nigeria is high.
Insert Table iii
July 2-3, 2013
Cambridge, UK
13
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Non-governance Variables
The principal financial variables used in this study are defined and described in Table iv
panel A (see appendix: vii), The variables were measured as described in section three of this
study
Insert Table iv Panel A
Table iv panel B (see appendix: viii), shows the summary statistics of the firms’ value
variables used in the study. The mean (median) of tobin’s q is 6.23 (3.80) that is, market
value of the average (median) firm is slightly greater than the book value of its assets.
Insert Table iv Panel B
Evaluation of corporate governance practices.
Corporate governance practices among listed firms in Nigeria were analyzed to determine the
level of compliance in the sample period. A corporate governance index was constructed to
represent Nigerian corporate governance standard and listed firms were ranked according to
the index. The level of compliance was analysed based on individual firms.
Thirty (30) firms’ attributes that are often believed to correspond to good governance and on
which reasonably, data are complete and there is a reasonable variation across firms and
sufficient differences from another element are identified and included in the construction of
the corporate governance index. Each is coded “1” if a firm has the attribute, “0” otherwise.
The elements of corporate governance are grouped into indices as follows; Board structure
(with sub-indices of board independence and board committee); Disclosures / financial
transparency (with sub-indices for disclosure substance and reliability; Shareholders’ right;
ownership structure and control; Executive compensation
Table v (see appendix: ix), describes the components used to construct the corporate
governance index for 100 non-financial listed firms in Nigeria. All variables are coded yes =
1, no = 0. In the scores column, numerator is number of “1”, while the denominator is the
total number of variables.
Insert Table v
There are five categories that comprises the composite score index as shown in Table v. The
maximum composite score that a firm can achieve is thirty (30) points. Out of 30 points, a
July 2-3, 2013
Cambridge, UK
14
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
firm could score six (6) points in the disclosure and financial transparency, eight (8) points on
the board structure, four (4) points on the ownership structure, nine (9) points on executive
compensation and three (3) points on shareholders’ rights. The philosophical principle
underlying the codes is that the disclosure of information about corporate governance
practices and investors’ protection by the firms allows the market to perceive the differences
among the policies followed by various firms. Information allows shareholders to distinguish
those that adhere to investors’ protection and in turn, making shareholders more willing to
give the firms funds. Thus, those firms with better practices should find it easier to access
capital and at a lower cost as they provide a more certain environment for the investors.
The adoption of the principles of the code of best practice in Nigeria as in most other
countries is voluntary but the disclosure by firm in their filings in the NSE is compulsory. All
publicly traded firms in the NSE must state in their annual report to the shareholders which of
the rules of the code they follow. The disclosed information about the corporate governance
practices indicates the mechanisms that firms have for the protection of investors. From the
corporate governance questionnaires, the study constructed a firm- level corporate
governance index by adding one point for every question where the firm meets the
recommendation of the code. The study standardized the index to lie between 0 and 1 by
dividing the numbers of positive answers by the total numbers of question in the
questionnaire.
Aggregating the five components constituting the provision of the corporate governance, it is
encouraging to note that above 50% of the sample has excellent corporate governance
framework in place covering the governance issues and thus, most firms are implementing
the requirements of the code. Moreover, on average 74.97 percent of the firms depict clearly
the enthusiasm and firms’ commitment towards upholding of the wide spectrum of the
provision of the 2003 code of best practice. However, there are still some firms found lagging
behind in the pursuance of their compliance with much improvement needed to meet the
intent of corporate governance practice. Table vi and Figure i (see appendix x & xi), show the
level of CGI compliance. The highest level of compliance is 80 percent while the lowest level
of compliance is 52.2 percent of the codes. It is interesting to report that only five firms out of
the 100 firms met 80 percent on average. Also, 66 firms in the sample met more than 70
percent of the code. Another 29 firms met between 52.5 and 70 percent of the code bringing
cumulative percentage of the level of non-compliance with certain aspect of the code to 27.85
percent
July 2-3, 2013
Cambridge, UK
15
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Insert Table vi/Figure i Here
The study also analyzed further the level of corporate governance compliance year by year.
Figure ii and table vii (see appendix xii & xiii), show that level of compliance with the
recommendation of the 2003 code of best practices has increased by 5.83 percent in 2010.
Insert Table vii/Figure ii Here
In 2003, firms with publicly traded securities in Nigeria met 69.1 percent of all the codes
while that number was 71.73 percent two years after. The sample period 2003 - 2010 saw
smaller increase leaving the total compliance close to 75 percent at the end of the period.
Compliance increased only by 3.87 percent from 2003 – 2006, suggesting a slow-down in
change of corporate governance practice. The seemingly large level of compliance in 2003
could mean some firms may have been confused on the exact meaning of the code or that the
code introduced some pressure for firms to change quickly.
Table viii and Figure iii (see appendix xiv & xv), go into the details of the data gathered,
showing the level of compliance each year and the percentage of firms that met each specific
recommendation for the year separately. The 30 questions of the index were grouped in five
sections from which sub-indices were created. The five sub-indices and the percentage of
compliance level which ranges from 67.42 to 97.69 percent compliance level are shown in
the Figure iii
Insert Table viii/Figure iii Here
Level of structural change
Table viii shows the level of structural changes in the corporate governance practices and
processes in Nigeria firms. In 2003, five (5) firms complied with 80 percent or more of the
principles while 24 firms complied with less than 70 percent. The level of compliance
increased overtime as the number of firms with more than 80 percent level of compliance
increased to 26 firms by year 2010 while less than 7 firms had compliance level of a range
between 50 and 70 percent. This suggests that corporate governance practice which has
gained substantial ground in developed economies has begun to make inroads into emerging
market like Nigeria. Today, it has become a part of the regulatory framework for Nigeria
listed companies.
July 2-3, 2013
Cambridge, UK
16
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
An analysis of the specific component of the corporate governance reveals several interesting
corporate governance patterns of Nigeria firms. Figure iii shows the average level of
compliance with the specific components. On average, 97.69 percent of the firms followed
the recommendation of the 2003 codes of best practice in disclosure and with respect to
financial transparency requirements while 67.53 and 67.42 percent of the firms met the
ownership and control structure and the protection of the shareholders’ right respectively.
The disclosure and financial transparency requirement which has the object substantial
means of communicating the required information to all stakeholders is an area which most
firms meet best corporate governance practice as specified in the code. The assumption here
is that firms adopting international accounting standard and using a leading global auditing
firm must meet a number of requirement that make them disclose more information and be
more transparent. It is encouraging to note that a good number of the firms in the sample (on
average 97.69 percent, Fig, iii) adopted and complied with the components of good corporate
governance practices. This suggests that the vast majority of Nigerian firms produce their
legally required financial report by the required date and make use of leading global/ local
auditing firms. The audit committee which was also the object of substantial changes in
regulation is another area where most firms meet good corporate governance practices. Over
97.69 percent of firms disclose director’s total emoluments and those of the chairman and the
highest paid directors.
Another area where most firms had followed the suggested principles is the operation or
internal workings of the board. The analysis shows that an average 67.27 percent complied
with the recommendation of the 2003 codes. In terms of board structure/ composition and
functioning, Nigerian firms have substantially reduced the size of their board in the last ten
(10) years. As at 2010, over 62.27 percent of the firms that issue equity have boards between
5 and 15 members specified or disclosed in their annual reports. Also, classification of
directors as independent owner and related is properly done in the annual report. Also, listed
firms comply with the code dealing with the functions of the board and the general structure
of the specialized board committees. More importantly, it was found that with close to 80
percent of all firms meet the target in terms of seeking shareholders’ approval to change
board size.
Another area of the code deals with shareholders’ right. As previous work has shown firms
rarely deviate from the package of shareholders’ right that is mandated by law and regulation.
July 2-3, 2013
Cambridge, UK
17
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
This analysis shows that over 67.42 percent level of compliance with best corporate
governance practice as suggested in the 2003 code was achieved among Nigerian firms. The
evaluation of the ownership and the control structure shows that on average 67.53 percent of
all the firms have the percentage of voting share in total capital and the ratio of the cash flow
right to voting right of the controlling shareholders greater than 1. Cash flow rights were
defined as the percentage of outstanding shares held by the controlling shareholder while the
voting rights were defined as the percentage of voting shares held by the controlling
shareholders. For the purpose of constructing the corporate governance index, this variable
(cash flow to voting right) takes a value of 1 and 0 otherwise. Also, the analysis of ownership
structure and control was also based on the stock free float which refers to the shares of the
firms that are not directly or indirectly owned by the controlling shareholder. A minimum
free float of 25 percent indicates that the percentage of outstanding shares controlled by the
main shareholder and related entities is equal or less than 75 percent. The minimum free float
variable in corporate governance index takes a value of 1 if free float is greater than or equal
to 25 percent and 0 otherwise. Overall, the level of compliance with the attributes related to
good ownership and control structures is 67.53 percent as shown in Figure iii
The question of the compensation and evaluation committee show one of the largest
deficiencies in Nigerian corporate governance practice. Though the compliance with the
recommendation of the code on average shows 63.38 percent, more than half of the listed
firms do not disclose the policies employed in this area.
Analysis of the Patterns of Firms Value between 2003 and 2010
The study analyzed the value of the firms within the sample period. The pattern of the firms
is reported in Table ix and Figure iv (see appendix xv &xvi),. The study measured firm value
along two dimensions; Tobin’s Q and market-to-book ratio. In the analysis, three measures of
Tobin’s Q were used; firstly a simplified measure using the market equity to book (qa);
secondly Tobin’s Q was determined dividing the market value of firm’s equity plus total
liabilities by the total assets (qb); (This was done annually for each firm); thirdly an average
of Tobin’s Q over eight (8) years was used (q3) and determined based on the market value of
the firm’s equity plus total liabilities over the total assets of the firm divide by the number of
years.
Analysis of the specific value of firms within the sample period using variables described
above reveals several interesting value pattern of Nigerian firms. Although, the study does
July 2-3, 2013
Cambridge, UK
18
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
not have firm-by-firm disaggregated data for previous years that is data on firms’ value prior
to 2003. Table ix and Figure iv show the pattern and percentage of value of firm year-byyear. Using the three measures of value, qa, qb, and qc, the value of firms increased in year
2003 to 2004 by 1.74, 3.05, and 1.63 percent respectively. This suggests that the introduction
of the codes in 2003 and the adoption by firms sent a signal to the capital market of the
existence of good corporate governance practices among the listed firms. The pattern show an
upward movement in the value of firm between 2005 and 2008. The values of firms were at
the peak in 2008 across the three measures of value (qa, qb, and qc). Figure iv shows a
graphical representation of the value of firms within the sample period. It is interesting to
report that the value of firm measured by market-to-book ratio (as a sensitivity check) also
moves in the same direction with Tobin’s Q.
Insert Table ix/Figure iv Here
From the table and graphical representation, the pattern of the value of firms in Nigeria
between the period of 2003 and 2010 can be described as downward and upward slope. The
rising pattern and the downward slope of both measures of value (Tobin’s Q and market-tobook) look similar and are almost at the same rate. However, there are variations, though not
significant, in the rate and level of progress. The increasing values from 2003 to 2008 for all
measures (qa, qb, and qc, market-to-book) by 6.49, 16.61, 6.36 and 10.27 percent
respectively began to decline in 2009 and 2010 by 8.42 (qa), 14.51 (qb), 8.4 (qc) and 10.75
(market-to-book ratio) percent. The pattern reflects and conforms to the behaviour of the
value of firms in Nigerian capital market. The Nigerian capital market witnessed a drastic fall
in the share prices of firms in 2009 and 2010. This fall has been linked with the global
financial crisis and poor corporate governance by the operators in the capital market. Though,
the pattern of the value conforms with the theoretical prediction that good corporate
governance leads to an increase in the value of firms. Figure v (see appendix xvii), shows a
graphical representation of the rate of changes in both corporate governance index and
market value.
Insert Figure v Here
It is interesting, though not surprising to note that both corporate governance index and
market value show the same pattern and movement graphically. This may suggest the
July 2-3, 2013
Cambridge, UK
19
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
existence of relationships between the two variables as predicted by the theory, but then the
subsisting relationships can only be determined by using econometric model in which other
firms’ characteristics will be controlled.
Concluding remarks
This study analyse corporate governance practices and market valuation among the nonfinancial listed firms in Nigeria using time series and cross-sectional data between the year
2003 and 2010.The main objective of the study is to provide answers to the following
questions; firstly, does the adoption of good corporate governance relate to market valuation
or similar measures of financial performance? Secondly, what is the corporate governance
structure of firms in Nigeria viz a viz the level of compliance? And what is the pattern of the
value of non-financial listed firms in Nigeria during the sample period.
The study used secondary data. Data set that include data on economic value of firms, data on
corporate governance mechanism and related stock price were sourced and obtained from the
website and the publication of the Nigeria Stock Exchange (NSE), website of the firms, and
the annual financial report of the selected firms. The study also constructs corporate
governance index based on the list of corporate governance mechanisms recommended by a
combined board of CAC and SEC in 2003.
The study employed descriptive analysis method and the primary assumption is that good
corporate governance will improve performance of firms and investors will expect an
increase in future profitability and hence, an improved value. Although, many other firms
specific characteristics are critical to market valuation but the lack of good governance will
limit the contribution and effects of other variables on market valuation and firm’s
performance. The result shows that firms in Nigeria that were observed between 2003-2010
have embedded corporate governance initiatives and mechanisms that exist at the firm level.
Their initiatives and mechanisms have evolved overtime to reflect compliance with national
and international as recommended by the combined board of CAC and SEC and the OECD
respectively. An interesting extension of this result is the conclusion reached from the
findings that investors in Nigeria are willing to pay a significant premium to better-governed
firms. This casts doubt on the popular view that the Nigerian stock market is full of
speculative investors who fail to value firm’s fundamentals and their governance structure.
July 2-3, 2013
Cambridge, UK
20
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
References
Adetunji Babatunde M. and Olawoye Olaniran (2009) “The effects of internal and External
Mechanisms on Governance and Performance of Corporate Firms Nigeria” Corporate
Ownership and Conrol/ Vo/ 7, issue 2 winter 2009
Aggarwal, R., Erel. I., stulz, R.., and Williamson. R (2007). “Do US firm have the best
Corporate Governance? A Cross- Country Examination of the relation between Corporate
Govdernance and Shareholder Wealth” Final Working Paper No 145/2007 of the European
Corporate Governance Institute.
Agrawal, A and Knoeber C.R (1996). “Firm Performance and Mechanisms to control agency
problems between managers and shareholders”. Journal of Financial and Quantitative
Analysis, Vol.31 pp. 377-397
Ahmadu Sanda, Aminu, S. Mikailu and Tukur Garba. (2005). Corporate Governance
Mechanisms and Firm Financial Performance in Nigeria. AERC Research paper 149 African
Economic Research Consortium, Nairobi.
Alberto Chong, Florencio lopez-De-Silanes (2006) “Corporate Governance and Firm Value
in Mexico. Inter American Development Bank Bango Internamericano De Desaeeollo (BID)
Research Department working paper no 564
Andre,Paaul, Maher Kooli and Jean- Francosis L’ Her (2004). The Long run performance of
mergers and acquisitions: evidence from the Canadian stock Market Financial Management
33, pp 27-43
Ang, James,S, Rebel, A Cole and James Wish Lin (2000) “Agency Costs and Ownership
Structure” The journal of Finance, LV: 1 pp. 81-105.
Beiner, S. Drobetz, W. Schmid, F. and Zimmermann, H. (2004) “Is board size an independent
corporate governance mechanism? Kyklos, Vo. 57, no. 3 pp. 327-356.
Black, B. S. (2001): “The Corporate Governance Behaviour and Market Value of Russian
Firms Emerging Market Review 2, pp. 89 – 108.
Black, B.S., H. Jang and W. Kim. 2003. “Does Corporate Governance Affect Firms’ Market
Values? Evidence from Korea.” Stanford Law and Economics Paper 237/Texas Law and
Economics Paper 26. Stanford and Austin, United States: Stanford University and University
of Texas. Available at http://ssrn.com/abstract=311275
Brown, L.D and Caylor, M.L. (2004). “Corporate Governance and Firm Performance
Available at SSRN: http// ssrn.com/abstract= 586423
Brown, L.D and Caylor, M.L. (2004). “Corporate Governance and Firm Performance
Available at SSRN: http// ssrn.com/abstract= 586423
Claessens, S. Djankov, S. And Lang, L (2000a) “Ultimate Controlling Owners of East Asian
Corporations and Expropriation of Minority Shareholders’ Mimeo,Word Bank, Washington
D. C.
Claessens, S. Djankov, S. and Lang, L. (2000b), “The Separation of Ownership and Control
in East Assian Corporation”Journal of Financial Economics vol. 58, pp.81-112.
July 2-3, 2013
Cambridge, UK
21
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Claessens, S. Djankov, S. and Pohl, G. (1997), “Ownership and Corporate Governance:
evidence from the Czech Republic, World Bank policy Research working paper no. 1737
Washington D.C.
Clarkson, P.M. and A. Satterly, 1997. "Australian Evidence on the Pricing of Estimation
Risk", Pacific-Basin Finance Journal, July, 281-299.
Coffee, J. (2003). The future as history. The prospects for global convergence in corporate
governance and its implications. Northwestern University Law Review, 93. 641-708
Drobetz, W. Schillhofer. A and Zimmermann,H (2004). “Corporate Governance an Expected
stock Returns: Evidence from Germany: European Financial Management, 10 (2) pp. 267293
Gompers, P. L. Ishii and A. Metrick (2003): “Corporate Governance and Equity Prices
Quarterly journal of Economics 118, pp. 107 – 155.
Jensen Micheal (1993) “ The modern Industrial Revolution Exit, and the Failure of Internal
Control System.” Journal of Finance, 48: pp.831-880
John Garger (2010) “Equity and Market value: How much is a Company Worth to an
Investor? Edited and published by Michele McDonough (189,436pts). Available at
www.brighthub.com/office/ finance/articles/ 19318.aspx
Kashif Rashid (2008). “A Comparison of Corporate Governance and Firm performance in
Developing (Malaysia) and Developed (Australia) Financial Markets
Klapper, L. F., and I. Love (2003), “Corporate Governance, Investor Protection, and
Performance in Emerging Market” Journal of corporate Finance. 195-564
Klapper, L. F., and I. Love (2003), “Corporate Governance, Investor Protection, and
Performance in Emerging Market” Journal of corporate Finance. 195-564
La porta, L… Lopez –de- Silanes, F. Shleifer, A and Vishny (2000) “Investor Protection and
Corporate Governance. Journal of financial economics, 58, pp. 3-27
La Porta, R. Lopez-de-Silanes, F. And Shleifer A. (1998) “Corporate ownership around the
world” NBER working paper no. 6625, National Bureau of Economic Research Cambridge.
La Porta. R. Lopez-De-Silanes, F and Shleifer, A (1999). “Corporate Ownership Around the
world “The journal of Finance, Vol.54, no 2 pp. 471-518
La Porte, R. F. Lopez-de-Silanes, A shleifer, and R. Vishny (2002): “Investor protection an
corporate valuation” Journal of Finance 57, pp. 1147-1170
Lang, L.. R . Stulz and R . Walkling (1991). “ A Test of the Free Cash Flow Hypothesis: The
Case of Bidder Returns. Journal of financial Economics, 29 pp. 315- 336
Lawrence D, Brown and Marcus L. Caylor (2006) “Corporate Governance and Firm
Valuation”Journal os Accounting and Public Policy 25 PP. 409-434. Available at
www.elsevier.com/locate/jaccpubpol
July 2-3, 2013
Cambridge, UK
22
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Leora F. Klapper, Inessa Love (2004) Corporate governance, investor protection, and
performance in emerging markets Journal of Corporate Finance, Volume 10, Issue 5,
November 2004, Pages 703-728
Lipton, M. and J.W. Lorsch, (1992), A modest proposal for improved corporate governance.
Bus. Lawyer,48: 59-77
Martin Hovey, Larry Li Tony Naughton (2003) “The Relationship between Valuation and
Ownership of Listed Firms in China Corporate Governance: An international Review. Vol II
Issue 2, pages 112-122
Michaely. R. and Shaw, W. (1995). Does the chouce of auditor convey quality in an initial
public offering? Financial Management, 24: 15-30
Morck, R..,A Shleifer, and R. Vishny (1988) “ Management Ownership and Market
Valuation: An Empirical Analysis:” Journal of Financial Economics 20:pp.293-316
Nenova, T. (2001). Control values and changes in corporate Law in Brazil. World Bank
working paper. Washington
Parveen P. Gupta, Duane B. Kennedy and samuael C. Weaver (2009). “Corporate
Governance and Firm Value: Evidence from Canadian Capital Markets
Rosenstein S. and Wyatt, J.G (1990) “Outside Directors, Board Independence, and
Shareholder Wealth. Journal of Financial Economics 26, pp.176-191
Shleifer, A. and R. W. Vishny (1997): Ä Survey of Corporate Governance” Journal of
Finance 52. Pp. 737 – 783.
Valuation in Malaysian Listed Firms: A Panel Datal Analysis. Journal of Modern
Accounting, ISSN 1548- 6583 USA Vol. 6 No1 (Serial No 56)
William, Sun (2009) “How to Govern Corporations so they serve the public good: A theory
of corporate Governance Emergency, New York Endwin Mellen: ISBN: 9780773438637
Yermack, D. (1996): “Higher market valuation of companies with a small board of directors”
Journal of financial economics 40, pp, 185 – 211.
Zheka, Vitaliy (2006) “ Corporate Governance and Firm Performance in Ukraine. Discussion
paper Centre for Economic Reform and Transformation, School of Management and
Languages. Available at www.sml.hw.ac.uk/cert
Zunaidah Sulong and Fauzias Mat Nor (2010) “Corporate Governance Mechanism and Firm
Valuation in Malaysian Listed Firms: A Panel Datal Analysis. Journal of Modern
Accounting, ISSN 1548- 6583 USA Vol. 6 No1 (Serial No 56)
July 2-3, 2013
Cambridge, UK
23
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Appendix:i
Corporate governance index questions
Disclosure and Financial transparency
1. Does the company produce its legally required financial reports by the
required date?
2. Does the company use an international accounting standard?
3. Does the company use one of the leading global auditing firms?
4. Does the company have audit committee?
5. Does audit committee have a written charter or terms of reference?
6. Does the company clearly and fully disclose directors total emoluments and
those of the chairman and highest paid directors including pension
contribution and stock options where the earnings are in excess of
500,000naira?
Board Structure / Composition and Functioning
7. Are the chairman of the board and chief executive officer not the same?
8. Is the board clearly not made up of corporate insiders and controlling
shareholders?
9. Do members include at least one director representing minority shareholder?
10. Do board members serve consecutive one-year term as recommended by the
security and exchange commission?
11. Does annual report indicate the position and function of each board
member?
12. Is the classification of directors as independent, owner and related included
in the annual report?
13. Is the board size between 5 and 15 as recommended by the security and
exchange commission?
14. Is shareholder approval required to change board size?
Ownership and Control Structure
15. Do controlling shareholders own less than 50% of the voting right?
16. Is the percentage of voting share in total capital more than 80%?
17. Is the controlling shareholders ‘ratio of cash-flow rights to voting rights
July 2-3, 2013
Cambridge, UK
24
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
greater than 1?
18. Are the executives and directors subject to stock ownership structure?
Executive Compensation
19. Does company have a remuneration committee?
20. Does the chief executive officer not the chairperson of the committee?
21. Were stock incentive plans adopted with shareholders approval?
22. Are the goals used to determine incentive awards
aligned with the
company’s financial goals?
23. Is remuneration committee wholly composed of independent board
members?
24. Are non-executive board members paid in cash and some form of stocklinked compensation?
25. Are non-executive board members paid entirely in some form of stocklinked compensation?
26. Does company remuneration committee have written charter or terms of
reference?
27. Non-executive directors do neither participate in share option schemes with
the company nor be pensionable by the company?
Shareholder Right
28. Do all common or ordinary equity shares have one-share, one vote with no
restriction?
29. Does the company charter grant additional voting rights beyond what is
legally required?
30. Does the company charter establish arbitration to resolve corporate
conflicts?
July 2-3, 2013
Cambridge, UK
25
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Appendix: ii
Table i : Panel A, Distribution of Firms
Year
No of firms
Percentage of sample
2003
96
96
2004
97
97
2005
100
100
2006
100
100
2007
100
100
2008
100
100
2009
100
100
2010
100
100
Source: Based on computation of data from NSE Publication (2003- 2010)
Appendix: iii
Table i: Panel B Sample breakdown by Industries
Industry
No of observation
Percentage of sample
Agric
3
0.03
Airline
1
0.01
Automobile
4
0.04
Breweries
3
0.03
Building
6
0.06
Chemical
3
0.03
Commercial services
1
0.01
Computer and office Equipment
4
0.04
Conglomerate
8
0.08
Construction
5
0.05
Emerging market
4
0.04
Engineering
2
0.02
Food, Beverages and Tobacco
14
0.14
Health care
8
0.08
Hotel and Tourism
2
0.02
Industrial/ domestic
5
0.05
Machinery
1
0.01
July 2-3, 2013
Cambridge, UK
26
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Packaging
9
0.09
Telecommunication
2
0.02
Petroleum
8
0.08
Printing
3
0.03
Real estates
2
0.02
Textiles
2
0.02
100
100
Source: Based on computation of data from NSE Publication (2003- 2010)
Appendix: iv
Table ii: Panel A:
Descriptive Statistics CGI (Analysis year by year)
2003
Mean
2004
2005
2006
2007
2008
2009
2010
21.39 21.36 21.45 21.73 22.10 22.53 22.71 22.64
Standard Deviation 1.51
1.50
1.51
1.38
1.31
1.27
1.17
1.32
Variance
2.28
2.25
2.27
1.89
1.73
1.60
1.38
1.74
Median
21.50 21.00 21.50 22.00 22.00 23.00 23.00 23.00
Maximum
24.00 24.00 24.00 24.00 24.00 25.00 26.00 26.00
Minimum
15.00 15.00 15.00 17.00 18.00 18.00 19.00 17.00
Range
9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00
N
96
97
100
100
100
100
100
100
Source: Based on computation of data from NSE Publication and firms annual reports
(2003- 2010)
Appendix: v
Table ii: Panel B Components Score (N = 100)
Mean
value
DSFT
BOD
OWN
EXC
SHA
Std
values
DSFT
2003
2004 2005
2006
2007
2008
2009
2010
5.98
5.30
2.56
5.61
2.06
5.90
5.24
2.57
5.62
2.06
5.86
5.21
2.57
5.59
2.00
5.90
5.29
2.66
5.69
2.02
5.92
5.43
2.78
5.74
2.03
5.91
5.59
2.88
5.88
2.05
5.92
5.69
2.90
5.94
2.05
5.92
5.70
2.87
5.95
2.05
99%
98%
97.6% 98%
July 2-3, 2013
Cambridge, UK
% 2003
- 2010
-0.06
0.40
0.31
0.34
-0.01
98.6% 98.5% 98.5% 98.6% -0.004
27
2013 Cambridge Business & Economics Conference
BOD
66%
65% 65%
OWN 64%
64% 65%
EXC
62%
62% 63%
SHA
69%
69% 67%
Source: Based on computation of
(2003- 2010)
ISBN : 9780974211428
66%
68%
64%
69.5%
62%
64%
66.7% 67.6%
data from NSE
70%
71%
72%
72.5%
65%
66%
68%
68%
Publication and
71%
0.05
72%
0.08
66%
0.04
68%
0.01
firms annual reports
Appendix: vi
Table jjj : Summary of Descriptive Statistics
N
Minimum
Maximum
Mean
Standard deviation
CGI
769
15.000
26.000
21.996
1.474
DSFT
769
3.000
6.000
5.886
0.400
BOD
769
4.000
7.000
5.495
0.661
OWN
769
2.000
4.000
2.775
0.467
EXC
769
3.000
7.000
5.858
0.737
SHA
769
1.000
4.000
2.026
0.208
Source: Based on computation of data from NSE Publication and firms annual reports
(2003- 2010)
Appendix: vii
Table iv: Panel A: Variable Definitions
Variable
Description / Measurement
Tobin’s q
Widely used to measure the valuation of listed firms
Market-to-
A ratio of market value to book value of total asset/
book
market value of common stock+ book value of debt
Ratio
book value of total asset
ROA
return on asset/ net profit after tax divided by total asset
ratio of book value of debt/ total asset
Appendix: viii
Table iv: Panel B: Summary of Descriptive Statistics of Valuation Variables. Based on
all available observation of each variable.
Variable
No
observation
Tobin’s Q.
of Mean Median Standard
Minimum Maximum
Deviation
Qa
July 2-3, 2013
Cambridge, UK
28
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
781
6.23
3.80
7.89
0.08
77.24
Qb
781
7.92
2.27
27.67
-23.36
49.00
Qc
781
0.77
0.47
0.98
0.01
9.65
Market-to-
781
4.39
2.10
7.06
0.00
73.68
book
Source: Based on computation of data from NSE Publication and firms annual reports
(2003- 2010)
Appendix: ix
Table v:
Corporate Governance Index
Corporate governance attribute
Scores
Mean%
Disclosure and financial transparency
4689/4800 97.69
Board structure / compensation and function 4305/6400 62.27
Ownership and control structure
2161/3200 67.53
Executive compensation
4563/7200 63.38
Shareholders’ Right
1618/2400 67.42
Source: Based on computation of data from NSE Publication and firms annual reports
(2003- 2010)
Appendix: x
Table vi: CGI %
No of Firms
Level of Compliance on average
Level CGI
Range %
5
80 percent
66
> 70 percent
79.58 – 70.83
29
< 70 percent
52.50 – 70
Source: Author’s Computation from CGI Question 2012
July 2-3, 2013
Cambridge, UK
29
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Appendix: xi
Fig i
Pie chart on CGI Compliance level
Appendix: xii
Table vii: CGI Compliance on average
Year
2003 2004
2005
2006
GCI
69.1 70.83 71.73 72.97
2003-2010
2007 2008
2009
2010
74.4 74.97 74.73 74.93
%
3.87
5.83
Source: Based on computation of data from NSE Publication and firms annual reports
(2003- 2010)
July 2-3, 2013
Cambridge, UK
30
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Appendix: xiii
Fig ii
76
CGI COMPLIANCE
74
72
70
68
66
64
2003
July 2-3, 2013
Cambridge, UK
2004
2005
2006
2007
2008
2009
2010
31
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Appendix:xiv
CGI COMPLIANCE
100.00
90.00
80.00
70.00
60.00
DSFT
50.00
BOD
40.00
97.69
67.27
67.53
63.38
67.42
30.00
OWN
EXC
20.00
SHA
10.00
0.00
DSFT
BOD
OWN
EXC
SHA
Fig iii: Histogram Component of Corporate Governance
Appendix xv
Table: viii:
CGI Compliance Level by Firm
% Range
 80
 70 < 80
 50 < 70
Firms (year)
Number
Number
Number
2003
5
68
24
2004
5
68
24
2005
6
72
22
2006
8
79
13
2007
15
77
8
2008
23
72
8
2009
25
70
5
2010
26
60
6
Source: Based on computation of data from NSE Publication and firms
(2003- 2010)
July 2-3, 2013
Cambridge, UK
Total
97
97
100
100
100
100
100
100
annual reports
32
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Appendix xvi
Table: ix:
Pattern of Firms Value (2003-2010)
Year
2003
Tobin’s Q
%
2004
2005
2006
%
%
%
2007
2008
2009
2010
%
%
%
%
15.68
17.11 11.35 8.69
Qa
10.62 12.36 10.85 13.34
Qb
5.48
Qc
10.71 12.34 10.85 13.35 15.67 17.07 17.33 8.67
Market
8.96 11.73
8.33
6.74
9.75
12.75 19.89
22.09
17.15 7.58
13.86 16.48 19.23
11.51 8.48
Source: Based on computation of data from NSE Publication and firms annual reports
(2003- 2010)
Appendix xvi
PATTERNS OF FIRMS VALUE
80
70
60
50
40
30
20
10
0
mkt value
qc
qb
qa
2003 2004 2005 2006 2007 2008 2009 2010
Fig. iv Graphical representation of firms value
July 2-3, 2013
Cambridge, UK
33
2013 Cambridge Business & Economics Conference
ISBN : 9780974211428
Appendix xvii
Fig v:
CGI/MKT VALUE
45
40
35
30
25
20
15
10
5
0
mkt value
CGI
2003 2004 2005 2006 2007 2008 2009 2010
July 2-3, 2013
Cambridge, UK
34