CORPORATE GOVERNANCE MECHANISM AND FIRM VALUE

Abstract

This study was on corporate governance mechanism and firm value. Three objectives were raised which included: To ascertain the effect of corporate governance in Bua cement, to examine the effect of managerial ownership and value of Bua cement and to ascertain the relationship between corporate governance and the return  on  investment  to  the shareholders. The total population for the study is 75 staffs of Bua cement company in Lagos. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. The data collected were presented in tables and analyzed using simple percentages and frequencies. The study recommended that companies should increase the size of their boards since it’s related to firm performance. However, this increase should be to the extent of fifteen based on the optimal value of partial derivatives. Also, companies may increase outside directors on its board especially independent directors. This may add economic value and enhance transparency.

Chapter one

Introduction

1.1Background of the study

In the past few decades, there has been impressive body of empirical evidence and theory about the ownership of the modern public corporation. Economists have invested significantly into researching the issue of separation of ownership and control. When there is separation of ownership and control problems arise between owners and those managing their wealth (Fama and Jensen 1983). This is what is known as the principal-agency conflict (Aguilera and Crespi-Cladera 2016; Zhang et al. 2016). Circumstances where interests of both parties fail to converge are fertile for principal agency conflicts. This type of conflict normally manifests itself in governance systems with widely dispersed ownership, though they can be mitigated by high levels of investor protection (Shleifer and Vishny 1997). In particular if both principal and agent are utility maximizers, the agent may not always act in the interest of the principal (Jensen and Meckling 1976). As such the agent pursues objectives that are not aligned to the firm value maximization goal of shareholders for instance status, growth, permanence in the company and greater salaries (Lozano et al. 2016). This behavior is detrimental to the shareholder’s wealth, and therefore, to the firms’ wealth. As such, shareholders must install mechanisms to control it.

The  desirability  of  maximizing  shareholders wealth and protecting the  stakeholder’s  interest has  been  the  quest  of  corporate  entities. The going concern concept of a corporate body is a function  of  the  extent  to  which an entity  can create   value  substantially   for  relevant stakeholders.  Hence,  for  corporate  entities  to fulfilled corporate objective of maximizing wealth through value creation, relevant  corporate governance   mechanisms   are   strategically required for value creation. Fundamentally, there are   different mechanisms  of  corporate governances  upon  which  firms  can  utilize  to enhance their economic value which implied the extent   to   which   corporate   governance mechanisms  constitutes  an important determinant of the value of firms (Khan A, Tanveer T, 2017)

From the perceptive of the fundamental analysis, the  concept  of  corporate  governance  as determinants of corporate value is well grounded. Another study examines the impact of corporate governance  practices  on  firm  value.  Those studies were able to highlight  a management process whereby firms considered the interests of stakeholders and operate based on fairness, accountability, transparency, and responsibility in order to enhance  the  value  of  firms.  The mechanisms of corporate governance encapsulate stakeholders’ right and responsibility by organizing the relationship   between management,  shareholders,  creditors, investors and other stakeholders. The study of corporate governance also  involves   the   field   of management   study   which   encompasses organizational  complexities  in  areas  such  as management  practices,  board  composition, board power  and  other  areas  of  corporate management (Smith WK, 2014)

Statement of the problem

Ideally, corporate governance is at the heart of unravelling how  the  owners  of  capital  and relevant  stakeholders  can  monitor  the  activities of management in order to safe guide investment for  enhancement of  corporate  valuation highlight corporate governance as a mechanism of  getting  a  return  on  investment  to  the shareholders.  The  main  concern  of  corporate governance is to provide protection to investors and  stakeholders  and  to  ensure  corporate efficiency,  transparency, and  accountability  and to  mitigate  arising  conflicts  in  order  to  create value for owners, managers and relevant parties . To pursue these objectives many corporate governance  mechanisms  are  designed  to monitor  the  activities  of  the  managers  and  to alleviate the conflict of interests between relevant stakeholders .  Through  this  study,  corporate governance  practices  as  a  panacea  for determining  the  value  of  corporate  entity  will enrich existing literature on the impact of different characteristics of corporate governance such as concentrated ownership,  managerial  ownership, and foreign ownership, the board size, and board independence

Objective of the study

The objective of this study is to investigate Corporate Governance Mechanism and Firm Value. Using Bua cement as a case study. The specific objectives are;

1. To ascertain the effect of corporate governance in Bua cement
2. To examine the effect of managerial ownership and value of Bua cement
3. To ascertain the relationship between corporate governance and the return on  investment  to  the shareholders

Research question

The study formulated the following research question;

1. What is the effect of corporate governance in Bua cement?
2. What is the effect of managerial ownership and value of Bua cement?
3. What is the relationship between corporate governance and the return on  investment  to  the shareholders?

Research hypotheses

The following research hypotheses were formulated

H0: there is no effect of corporate governance in Bua cement

H1: there is effect of corporate governance in Bua cement

H0: there is no effect of managerial ownership and value of Bua cement

H2: there is effect of managerial ownership and value of Bua cement

H0: there is no relationship between corporate governance and the return on  investment  to  the shareholders

H3: there is relationship between corporate governance and the return  on  investment  to  the shareholders

Significance of the study

The study will be beneficial to students and organizations. the study will give a clear insight on the corporate governance mechanism and firm value. The result of the study will be of benefit to Bua cement company and other companies on the managerial ownership and the value in their companies. The study will also serve as a reference to other researcher that will embark on the related topic

Scope and limitation of the study

The scope of the study covers corporate governance mechanism and firm value. The study will be limited to Bua cement company in Lagos state

Limitations/constraints are inevitable in carrying out a research work of this nature. However, in the course of this research, the following constraints were encountered thus:

1. Non-availability of enough resources (finance): A work of this nature is very tasking financially, money had to be spent at various stages of the research such resources which may aid proper carrying out of the study were not adequately available.
2. Time factor: The time used in carrying out the research work is relatively not enough to bring the best information out of it. However, I hope that the little that is contained in this study will go a long way in solving many greater problems.

 Definition of terms

Corporate governance: Corporate governance is a system of rules, policies, and practices that dictate how a company’s board of directors manages and oversees the operations of a company; Corporate governance includes principles of transparency, accountability, and security.

Mechanism: a system of parts working together in a machine; a piece of machinery.

Firm value: A firm’s value, also known as Firm Value (FV), Enterprise Value (EV). It is an economic concept that reflects the value of a business.

Related Project Topics :