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The sudden announcement of the devaluation of the Nigerian Naira to US Dollar by the Central Bank of Nigeria (CBN) on the 25th November 2014 has created an intense debate and a great deal of mix responses among market analysts and the general populace. However, available opinions on the degree of effects such announcement might have on Deposit Money Banks (DMBs) stock prices can at best be adjudged as a mere presumption and not an outcome of empirical investigation. This study empirically examined Naira devaluation announcement of the 25th November 2014 and share prices of Deposit Money Banks in Nigeria. Employing the standard event study methodology and correlational design on a sample of thirteen out of the sixteen registered DMBs with the Nigeria Deposit Insurance Commission (NDIC) and listed on the Nigerian Stock Exchange that traded on the historic day. The study ascertained the significance of cumulative abnormal return on the fifteen trading days prior to the announcement, day of the announcement and fifteen trading days succeeding the announcement day. The study documented a statistically non-significant cumulative abnormal return of 0.9078 percent on the fifteen trading prior to the announcement. The study also established the presence of statistically significant cumulative abnormal return of 0.6851 percent and 3.0982 percent on the announcement day and fifteen trading days after the announcement. The study concluded that the sudden announcement of Naira devaluation led to positive market reaction by investors of DMBs in Nigeria and the positive trend continued for fifteen trading days succeeding the announcement. The study recommended that import substitution policy should be implemented to ensure persistent of the positive returns as this would encourage an upsurge in the foreign portfolio and increase the liquidity base of the Deposit Money Banks as well as the Nigerian Stock Exchange. This would enhance their readiness to lend to the real sector of the nation‟s economy.
Title page……………………………………………………………………………………………………. Declaration…………………………………………………………………………………………………. i Dedication…………………………………………………………………………………………………. ii Certification …………………………………………………………………………………………… iii Acknowledgement ………………………………………………………………………………… v Table of Contents …………………………………………………………………. vii List of Tables……………………………………………………………………………………………… ix List of Appendices………………………………………………………………………………………. x Abstract………………………………………………………………………………………………………. xi 1.0 INTRODUCTION 1.1 Background to the Study ———————————————————- 1 1.2 Statement of the Problem ———————————————————- 5 1.3 Research Questions —————————————————————– 6 1.4 Objectives of the Study ————————————————————- 6 1.5 Statement of Hypotheses ———————————————————– 7 1.6 Significance of the Study ———————————————————- 7 1.7 Scope of the Study —————————————————————— 8 1.8 Limitations of the study ————————————————————- 9 2.0 LITERATURE REVIEW 2.1 Introduction —————————————————————————– 10 2.2 Concept of Currency Devaluation ———————————————— 10 2.3 Concept of Share Prices Reaction ————————————————- 12 2.4 Determinants of Share Prices Reactions —————————————— 13 2.5 Review of Empirical Studies ——————————————————- 21 2.5.1 Currency Devaluation Announcement and Share Prices ———————- 21
2.6 Theoretical Framework ————————————————————– 31 3.0 RESEARCH METHODOLOGY 3.1 Introduction ————————————————————————– 33 3.2 Research Design ——————————————————————— 33 3.3 Population and Sampling of the Study ——————————————– 33 3.4 Sources and Method of Data Collection —————————————— 35 3.5 Method of Data Analysis ———————————————————– 36 4.0 DATA PRESENTATION AND ANALYSIS 4.1 Introduction —————————————————————- 44 4.2 Data Presentation ——————————————————————– 43 4.3 Data Analysis ————————————————————— 44 4.4 Discussion of Findings —————————————————– 59 4.5 Policy Implication of the Study —————————————————- 61 4.6 Theoretical Implication of the Study ——————————————– 61 5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 5.1 Summary —————————————————————————- 62 5.2 Conclusions ———————————————————————— 62 5.4 Recommendations —————————————————————– 63 5.5 Suggestions for Further Study ————————————————– 63 REFERENCES ——————————————————————– 65 APPENDICES ——————————————————————— 70
1.1 Background to the Study
In all economies, banks are the principal players in financial market for the intermediation of funds from the surplus economic units to the deficit units for productive and investment purposes and as such, the relevance of Deposit Money Banks (DMBs) in the Nigerian financial system cannot be over emphasized. Taylor (1998) posited that globally, a number of nations had at one time or another devalued their currencies. The main motive for devaluation in most of these countries is that fixed exchange rate was upheld by these nations over a period of time which eventually became unsustainable. Theoretical evidence suggests that fixed exchange rates reduce exchange rate risk as far as the exchange rate remains fixed. Thus, if the supply of a country‟s currency surpasses the demand for the currency, the currency will be forced to decline in value. Also, if a country imports more goods than it exports, there will bepressure on the currency to devalue. However, if the deficit in trade is counterbalance by capital inflows into the country for investment purposes, the country can maintain the trade deficit without being forced to devalue. Though, if the capital inflows are no more obtainable, the available option for the country to avoid devaluation is by buying or supporting its own currency in the market through its currency reserves in order to augment the meagre capital inflow, but once currency reserves run out then devaluation becomes unavoidable (Taylor, 1998).
Emerging economies such as the Nigerian economy is not an exemption from the above global scenario, as the Nigerian government was forced to devalue its Naira due to the sharp decline in the global oil prices which serves as the major source of capital inflow for the nation. Moreover, the inability of the apex monetary authority to sustain her defence of the Nigerian Naira via the nation‟s external reserves which was on a serious decrease also precipitates the devaluation. In this regard,Emefiele (2015) argued that the Central Bank of Nigeria (CBN) had to devalue the naira to protect the reserves. This is due to the fact that the CBN has spent a substantial amount of its reserves in shoring up the naira and in contrast, inflow of foreign exchange(FOREX) into the banks or the country has been less than anticipated in view of dwindling oil prices. Thus, the CBN took the decision that it would be sub-optimal to continue to heavily deplete the country‟s reserves in defending the naira.This is because the magnitude of a nation‟s reserve also serves as one of the indicators usually considered by foreign investors as to whether to direct their investment into such nation‟s stock market or not. Market price of the share is one themost vital factor which influences investment decision of investors.It has also been theoretically established that market price of share depends upon many factors, such as earning per share, dividend per share, pay-out ratio and major corporate announcement such as the naira devaluation among others. Mbutor (2010) opined that the stock market tends to signal the level of confidence in the economy in general and the financial system in particular. It reflects the strength of the productive sector and expectations about the stability of the financial system. Persistent increase in the stock indices would encourage banks to increase advances, both for direct investment in the stock market and other productive sectors of the economy. Foreign investors cash in on the higher returns at the stock market and direct the inflow of foreign portfolio investment to that economy. This further boosts the capital base of banks and induces further increases in their intermediation activities. In this respect, a number of models have been postulated to establish the nexus between stock or asset prices and devaluation of a nation‟s currency.
For instance, Models of international asset pricing such as those developed byAdler and Dumas (1984) and Stulz (1981) predicted that devaluation will have a significant impact on asset prices of countries, and to the extent that the real cash flows of the firms in these countries are affected by the devaluation, the security prices will also change. This connotes that the announcement of currency devaluation of a country will have market repercussions. This is particularly true for deposit money banks who are the principal actors of financial intermediation and implementing agents of most monetary policies of apex banks. Previous studies such as Yalcin (2010), Malkiel (2005) and Fama (1970, 1991) have shown that the extent of responsiveness of stock market to immediately incorporate new information into stock prices determines its efficiency. Therefore, studies on response of stock prices to major events announcement such as the Naira devaluation can be linked to efficient market hypothesis. Consequently, in an efficient market, current stock prices fully reflect all available information such that there is no way to earn excess return by using this information, such as the Naira devaluation announcement. Accordingly, Fama (1970) recognized three forms of efficiency in connection with stock market i.e. weak-form of efficiency is said to exist when current price fully incorporates information contained in the past history of prices only, semi-strong when the current price fully incorporates all publicly available information and strong-form when the current price fully incorporates allexisting information, both public and private (insider). Thus, examining the reactions of deposit money banks‟ stock prices to Naira devaluation announcement can be adjudged as a test of the semi-strong form efficiency of the stock market. Similar to other relevant announcements such as mergers and acquisition, CEOs suspension, dividend, stock split and regulatory change among others; event study approach has also been used to study stock price reaction to the announcement of currency devaluation. For instance, Patro, Wald and Wu, (2014) investigated the response of stock market to currency devaluation using the event methodology. This methodology entails a technique of empirical financial research that permits a researcher to assess the financial impact (positive or negative) of a particular sudden event (MacKinlay, 1997; Rao & Sreejith, 2014) on a company‟s share price. The assessment is usually for a definite event window-i.e. a time period around the day of announcement. However, Glen (2001) argued that devaluation events both reflect the environment in which they occur, as well as set thestage for what is about to take place. In many cases, devaluations are the result ofa series of poor policy decisions and represent the only option for an embattled monetary authority. Without a change in the underlying policies, devaluations by themselvesare unlikely to solve the problem. More likely, inflation and economic stagnation will follow. But, when devaluation is accompanied by improved policies, one can seemiraculous results. Despite the enormous benefits envisaged by the monetary authority on the 25thNovember, 2014 devaluation pronouncement, the phenomenon has not received enough attention by researchers. Consequently, the preciseeffect the devaluation announcement of the 25th November has on financial sectors of the Nigerian economy especially the banking sector to the best of our knowledge has not been thoroughly studied. This study is therefore motivated by the importance of examining the reactions of share prices of Deposit Money Banks (DMBs) in Nigeria to the Naira devaluation announcement, and the dearth of research in the subject area since the announcement was made despite the strategic importance of the banking sector and the dominance of its share trading in the capital market.
1.2 Statement of the Problem
Currency devaluation has come to be regarded as a measure of the last resort, with countless partial substitutes adopted before devaluation is finally undertaken. This is due to the associated trauma which arises because so many economic adjustments must be put in place due to a discrete change in the exchange rate within a relatively short period(Cooper, 1971). In line with the above, the sudden announcement of the devaluation of the Nigerian Naira to US Dollar exchange rate on the 25th November, 2014 created an intense debate and a great deal of mix responses among market analysts and the general populace as to the probable repercussions of such an action on the market value of listed firms, especially, the banking industry which is the key player in the financial intermediation and in the implementation of the CBN‟s monetary policy. For instance, Boyo (2014)argued that the eight per cent devaluation of the naira was “a big mistake”. He noted that the policy shift remained a wrong concept that will persist because the CBN has learnt nothing from history. He further opined that the devaluation will even move to 20 per cent as the black market continues to outstrip the official rate and mopping up the naira to achieve exchange rate stability is wrong. In contrast, Emefiele (2015) opined that devaluation of the naira is inevitable in order to protect the nation‟s reserves. Owing to the fact that large amount of the reserve has been spent in defending the naira. Therefore, the Apex bank took the decision that might be healthy for the nation; as itwould be counter-productive to continue to heavily deplete the country‟s reserves in defending the naira.
Theoretically, devaluation announcement is likely to make export cheaper, import dearer, trigger inflation, stock being over sold and investors‟ panic as regards to the future trend of the devalued currency may induce them to sell stock at any price, consequently, stock prices decline to irrational low levels which make stock bargaining for bottom fishers(Taylor,1998).However, varied reactions among stakeholders have greeted the policy shift that policy maker could pronounce such a sudden decision without resort to the possible outcomes such a pronouncement may have on the financial market in particular and the Nigerian capital market as a whole. ` Despite the fact that a number of views exist on the degree of effects the 25th November, 2014 devaluation announcement might had on DMBs stock prices, none of these views to the best of our knowledge has been empirically proven, therefore, they can at best be adjudged as a mere presumption and not an outcome of empirical investigation. Also, prior to the devaluation announcement, there was a prevailing market price of DMBs shares in the stock market. However, the announcement might have altered the prevailing market price of the shares either positively or negatively depending on the investors‟ reaction to the announcement in which case giving rise to abnormal return or the market price of the shares remain the same despite the announcement. Therefore, the need to investigate the investors‟ reaction to the devaluation announcement so as to recommend its appropriateness to DMBs investors and other stakeholders around the announcement period necessitates an empirical research. 1.3 Research Questions In line with the above statement problem, the study is guided by the following basic questions:
(i) To what extent do share prices of DMBs in Nigeria exhibit significant cumulative abnormal return from fifteen trading days before the announcement day?
(ii) To what extentdo share prices of DMBs in Nigeria exhibit significant cumulative abnormal return on the day of Naira devaluation announcement?
(iii)Do share prices of DMBs in Nigeria exhibit significant cumulative abnormal return fifteen trading days after the announcement day of currency devaluation?
1.4 Objectives of the Study
The primary objective of the study is to empirically examine the impact of currency devaluation announcement on the share prices of DMBs in Nigeria. Specifically, the study seeks to:
(i) Establish the significance of cumulative abnormal return of DMBs fifteen trading days before the announcement of currency devaluation in Nigeria.
(ii) Determine the significance of cumulative abnormal return of DMBs on the announcement date of currency devaluation in Nigeria.
(iii) Ascertain the significance of cumulative abnormal return of DMBs fifteen trading days after the announcement of currency devaluation in Nigeria.
1.5 Statement of Hypotheses
The hypotheses tested in this study are stated in null form as follows: H01= There is no significant cumulative abnormal return fifteen trading days before the currency devaluation announcement in Nigeria. H02= There is no significant cumulative abnormal return on the date of currency devaluation announcement in Nigeria. H03= There is no significant cumulative abnormal return fifteen trading days after the currency devaluation announcement in Nigeria.
1.6 Significance of the Study
This study empirically revealed the extent of effect the currency devaluation announcement of the 25th November, 2014 has on the share prices of DMBs in Nigeria which no prior studies to the best of our knowledge has placed on record the degree of such effect. The study is alsoof importance to portfolio managers and investors, regulators, policy makers, and researchers. Thus, the study is useful to these stakeholders in a number of ways as discussed below: Portfolio managers and investors who are eager in maximising their portfolio return and minimising the associated risks would be interested in discovering opportunities for profit making or otherwise by trading around currency devaluation announcement dates in emerging markets like the Nigeria stock market. For policy makers and regulatory bodies of the stock market, it will avail them an empirical evidence of the appropriateness or otherwise of the announcement event within the period of the study. Likewise, findings from examining stock price changes to currency devaluation announcements in an emerging market like that of Nigeria may empirically bring to light the efficiency or otherwise of these markets. In other words, the study will serve to fill this gap by examining the informational efficiency of the Nigeria stock market with respect to currency devaluation announcement of the 25th November, 2014 so as to assist in policy formulation. Lastly, it would be of major interest to researchers and academia, as it will contribute to the dearth of literature on the subject matter and act as a source of reference for those that may be interested to carry out researches in the area.
1.7 Scope of the Study
This study is aimed at examining the impact of currency devaluation announcement of the 25th November, 2014 on the share prices through the periods (-15 to +15 days) around the announcement period. That is, the period of the study covered the 32 days event window which constitute 15-days pre-announcement day, the 2-days announcement day and the 15-days post announcement days. The constituent population of the study is made up of the Thirteen (13) listed DMBs that traded on the floor of the Nigerian Stock Exchange on the historic day the announcement was made. 1.8 Limitations of the Study The study islimited in terms of scope and the methodology adopted. In terms of the scope, only the thirteen sampled listed DMBs that traded on the fateful day the announcement became public were considered. Whereas in terms of methodology, event study methodology depends on the assumption of an efficientmarket. This assumption is not valid in many situations. The length of time required forindividual investors to respond to event signals is random and therefore, the implicationis that markets could exhibit market inefficiencies because prices do not instantly or fullyreflect all available information. Individual stock prices usually increase in series of stepsas investors normally respond in waves(as in the Elliot wave theory). Also, the methodology provides estimates of the short-run impact on shareholders only and fails to consider many other effects of the event. Concurrent events in different stocks might weaken or reinforce one another, resulting in abnormal returns that are not caused by the specific event of interest.
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