Effect of Ownership Structure on Financial Performance (a Case Study of Guarantee Trust Bank Plc)

Effect of Ownership Structure on Financial Performance (a Case Study of Guarantee Trust Bank Plc)

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Chapter One of Effect of Ownership Structure on Financial Performance (a Case Study of Guarantee Trust Bank Plc)

INTRODUCTION

Background to the Study

The question whether the ownership structure influences a firm’s profit has kept researchers busy for many decades now. Most would agree that it started when Berle and Means (1932) started to investigate the subject. In this book, the authors are quite philosophical about the topic. They argue that stock owners are not necessarily engaged with the company anymore. They also find that when a company has many owners, the mangers have more power in the company then when the ownership is held by a low number of individuals. Later on, the question coined above becomes more and more interesting for researchers to look into from various different angles. All of them have in common that the demeanour is corporate performance. What differs it the factors influencing the performance of the companies they have researched.

One of the most common ways to look into the subject is to see whether managerial ownership has an influence on the performance of corporations. Morc et al. (1988) and Coles et al. (2012) for example try to find a relationship between the two without a conclusive result. Park and Jang (2010) find a positive relationship. The main argument between these researches is whether the agency costs can be reduced. In other words, this means that people want to know whether managerial ownership aligns the interests of the owners and the managers. Another way of looking at the problem is to see if family or founder ownership has an influence on the financial performance of a company. Isakov and Weisskopf (2014) find that family ownership diminishes the agency costs and therefore have a higher financial performance. Anderson and Reeb (2003) agree with these findings but did not hypothesized this as they thought that family ownership would disadvantage the smaller investors in the company.

 Also in the field of ownership density and its relation to financial performance there is no clear consensus of the results. Researchers have so far come with different results in terms of direction and significance of the results as well as on the best way to measure them. This study (the one you are reading) is going bring these studies together and try to find a general result. In these studies, the highest number of observations for a single study is 8370 (Elyasiani and Jia 2010). This number is relatively high but statistically relatively insignificant. There is an incredible amount of businesses in the world with all the possible different ownership structures. Arguably the best way of looking at it would be by combining all the results together to make the best possible prediction for businesses in the future.

This study will give a relatively good overview of what the influence of (outsider) ownership is on the financial result of Guaranty Trust Bank Plc. The research will also try to answer the question whether the results are statistically interesting or if the relationship between the two is not directly measurable, meaning that the conclusion will be that there is no statistically significant relationship between the two variables.

Statement of the Problem

Relationship between ownership structure and corporate performance of any company has been a serious agenda for corporate governance and that of performance of a firm. Hence, who has the total control of the firm’s equity and how this control and ownership affect firm performance in term of input and output has been a major issue by researchers for a long period of time. But there is a scanty research works on the effects of ownership structure on financial performance in the banking sector in Nigeria.

Shareholders in the public corporations are countless and small to the extent that they lack effective control of the decisions of the management team, and as a result they do not have the total assurance on the management team that represents their interests. Ways to curb this problem have been developed and advanced, as stated previously i.e. the disciplining effect of the takeover market, the positive incentive effects of the management shareholding stake and the benefits of large monitoring shareholders.

Studies have revealed that negative effects are also found in the studies of Pound (1988) and Hand (1990). One of the arguments that support this is the institutional myopia argument, which reveals that the investors favour short term returns to long term returns and will seize the opportunity persuade managers to pursue short term gains. Wahal (1996) find only short term positive effects of institutional ownership but not long term, as he argues that institutional investors have a time preference for short term result. Other studies illustrate this argument: institutional investors are sensitive to earning news, because they might use current earnings as proxy under the information asymmetry circumstance (Porter 1992); institutional investors consider the investment in a firm as one asset in a portfolio (Coffee 1991); the managers in the investing institutions are measured on short term results by their principals (Badrinath et al 1989). Another argument is strategic-alignment-conflict-of-interest by Pound (1988).

Locally, Ndemo (2009) found out that since the early 1990s, the Kenyan Government has pursued a deliberate policy of divestiture, aimed at reducing state ownership of corporations with a view to attracting private sector participation in management of the fledgling state corporations. It was assumed that this policy would serve as a driver that will bring modern management styles into the public sector which will undoubtedly improve the financial performance of these organisations. Obviously, government ownership of firms was aimed to still impact firm performance negatively and this is an indication that the divestiture program in the banking sector in Nigeria is yet to reach a critical level where its value can begin to reflect on corporate performance. To meet the main objectives of this study, the relationship between ownership structure and corporate performance will be investigated.

 Research Questions

This study will be carried out to answer the following questions:

i)             What are the effects of ownership structure on the financial performance of Guaranty Trust Bank?

ii)           Do the family ownership structure effects banks financial performance?

iii)         What is the prevalence of ownership structure on the financial performance of Guaranty Trust Bank?

Research Objectives

The study has both general objective and specific objectives. The general objective or main objective of this study is to investigate the effects of ownership structure on the financial performance of Guaranty Trust Bank Plc. The specific objectives are:

i)  To examine the effects of institutional ownership structure on the financial performance of Guaranty Trust Bank

ii)   To ascertain whether family ownership structure have effects on banks financial performance

iii)    To study the prevalence of ownership structure on the financial performance of Guaranty Trust Bank

Research Hypothesis

The followings are the research hypotheses to be tested in this study:

i)    There is no significant relationship between private ownership structure and financial performance

ii)  There is a significant influence of government ownership structure and financial performance

Significance of Study

This study is of help to the government of Kenya and policy makers as they seeks to create a conducive environment and design policies to strengthen and build confidence across all categories of investors to build an economy that is inclusive. One of the key drivers of growth in a developing economy like Nigeria is inclusion of both large and small scale investors in mobilizing the scarce resources. Through the findings of the study, the government of Nigeria is able to appreciate mobilization of resources across the divide by all categories of investors in support of economic development to achieve the vision 2020 either by reducing information asymmetry or increasing investors’ awareness campaign through trainings workshop and seminars.

The study findings can help organisations’ management and shareholders in evaluating the importance of contribution by different categories of investors on their financial performance in terms of reducing agency costs and bolstering the relationship between the principals and the agents. Further firm management will benefit from the study as they will acquire information that directly relates to their decision-making paradigm and be able to carry out their day-to-day operations.

Other companies in developing countries will learn from this Nigerian study and understand the diversity in ownership structure that they can replicate in their companies in order to improve their financial performance. The study findings inform them on which ownership structure have better link to financial performance and hence save on the costs of conducting cost benefit research in their companies.

To the scholars, the study is value-added to the existing body of knowledge as it recommends ways for improvement of financial performance by having inclusive investors who reduce agency costs and fosters empowering structures to all stakeholders in participating in decision making and stewardship of the companies’ resources in enhancing financial performance. Nevertheless, this study serves as a stepping stone for newer research on ownership structures and financial performance of listed firms

Scope of the Study

The study investigated the effect of ownership structure on financial performance of Guaranty Trust Bank Plc. According to Guaranty Trust Bank Plc Act, it is a legal requirement for all organisations to submit audited published final accounts on yearly basis and this made this study to have access to the required data.

Limitations of the Study

The Major Limitations of the study will be:

Cost Limitation: There will be a cost limitation. This means that the researcher will not offer any gift or monetary incentives for the respondents to answer the questionnaire. This might result in certain prospective respondents choosing not to respond to the researcher. Time Limitation: There are two types of time limitation that will be faced during the study. The study will be done for a period of four weeks. Hence the results would reflect the impact of the time constraint. The insights of the respondents will be observed during the period of the study. A more extensive study conducted over a larger time period or during a special period of time like when there will be higher numbers of issues, can include insights from respondents over a broader time period and can bring in further depth into the research.

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