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ABSTRACT

Shareholders’ value creation is the main objective of business organizations, but few studies use it as the measure of performance. Companies that are conscious on shareholders’ value creation with large amounts of excess cash at their disposal try to create value for their investors. This study examined the determinants of shareholders’ value of listed industrial goods firms in Nigeria using multiple regression. The data of the study was obtained from the annual reports and financial statements of the selected listed industrial goods firms in Nigeria for a period of ten years (2007 – 2016). The data was analysed using Generalized Lease Square method where fixed method of estimation was chosen as the best model of the study. Shareholders’ value is proxied by market to book value ratio while dividend payout, working capital, sales growth, return on equity and debt are used as the determinants of shareholders’ value. The findings show that dividend payout ratio, sales growth rate and return on equity have significant and positive relationship with the shareholders’ value of listed industrial goods firms in Nigeria while negative and insignificant relationship between working capital ratio, debt and shareholders’ value of listed industrial goods firms in Nigeria was found. The study concludes that dividend payout ratio, sales growth rate and return on equity play a vital role in determining the shareholders’ value of listed industrial goods firms in Nigeria. Based on the findings, the study recommends that listed industrial goods firms in Nigeria should maximize the payment of dividend to their shareholders, sales growth and return on equity in order to improve the shareholders’ value of the firms.

 

 

TABLE OF CONTENTS

Title Page – – – – – – – – – – – i
Declaration – – – – – – – – – ii
Certification – – – – – – – – – iii
Dedication – – – – – – – – – – iv
Acknowledgements – – – – – – – – v
Abstract – – – – – – – – – – vii
Table of Contents – – – – – – – – viii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study – – – – – – – 1
1.2 Statement of the Problem – – – – – – – 4
1.3 Research Questions – – – – – – – – 7
1.4 Objectives of the Study – – – – – – – 8
1.5 Research Hypotheses – – – – – – – – 8
1.6 Scope of the Study – – – – – – – – 9
1.7 Significance of the Study – – – – – – – 9
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction – – – – – – – – – 11
2.2 Concept of Shareholder Value and Shareholder Value Creation – – 11
2.2.1 Determinants of Shareholders Value Creation – – – – 14
2.2.1.1 Working Capital to Total Asset – – – – – – 15
2.2.1.2 Sales Growth Ratio – – – – – – – 16
2.2.1.3 Return on Equity – – – – – – – – 17
2.2.1.4 Debt to Equity Ratio – – – – – – – – 18
2.2.1.5 Dividend Payout – – – – – – – – 18
2.3 Review of Empirical Studies on the Determinants of Shareholder Value – 19
2.4 Theoretical Framework – – – – – – – 32
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2.6 Summary – – – – – – – – – 34
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction – – – – – – – – – 36
3.2 Research Design – – – – – – – – 36
3.3 Population of the Study – – – – – – – 36
3.4 Sample Size and Sampling Techniques – – – – – 36
3.5 Sources and Method of Data Collection – – – – – 37
3.6 Techniques of Data Analysis and Justification- – – – – 37
3.7 Variable Measurements and Model Specification – – – – 38
3.8 Summary – – – – – – – – – 39
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction – – – – – – – – – 40
4.2 Descriptive Statistics – – – – – – – – 40
4.3 Correlation Matrix – – – – – – – – 43
4.4 Robustness tests – – – – – – – – 44
4.5 Test of Hypotheses – – – – – – – – 46
4.6 Discussion of Results – – – – – – – 50
4.7 Policy Implication of the Results – – – – – – 51
CHAPTER FIVE: SUMMAARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary – – – – – – – – – 52
5.2 Conclusion – – – – – – – – – 53
5.3 Recommendations – – – – – – – – 54
5.4 Limitations of the Studies – – – – – – – 55
References – – – – – – – – – – 56
Appendix – – – – – – – – – 63
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CHAPTER ONE

 

INTRODUCTION
1.1 Background to the Study
Public companies typically have ownership divested from management (Mullins and Christy, 2013). The owners of the companies (called shareholders) vest their management of the firm in the hands of management team (called the Board of directors), with the expectation and understanding that the Directors will run the company in such a manner that value is created for the owners. A firm’s management creates value for shareholders if the Market Value(MV) of ordinary shares surpasses the par or Book Value (BV) of ordinary shares (that is, MV is greater than BV), but destroys value if MV is less than BV and maintains value if MV equals to BV (Pandey, 2002 and Akinsulire, 2010).
The fiduciary duty which devolves upon the management of the firm requires that management should have a thorough understanding of the dynamics of underlying factors which may create or destroy value for owners, as such, the subject of value creation is too critical and important not to be ignored by any management seeking to fulfill its fiduciary duties. The theory of shareholder value, traditionally suggests that every company’s primary goal is to maximize the wealth of its shareholders (Jensen, 2002; Pandey, 2005; Chikwendu, 2009; and Madan, 2013). Considering that stakeholders (including shareholders) are increasingly holding management to greater accountability by requiring the latter (management) to demonstrate how they are creating value (CIMA, 2014), the shareholders’ value creation discourse has become very vital.
In spite of the vast number of studies conducted in foreign countries related to shareholders’ value, the debate as to the factors determining value creation is unsettled; this is evidenced by the number of studies that have been carried out on the subject in different
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parts of the world. The identification of financial factors which have the highest impact on value creation in a business can facilitate establishment of criteria for appropriate strategies selection in that direction (Marangu & Ambrose, 2014).
Finance theory contends that the ultimate goal of a company is to maximize shareholder wealth (Jensen, 2002 and Madan, 2013) this is because shareholders provide funds to the company. This means that the shareholders’ wealth will be reflected in the value of the company, which is indicated by the relevant company’s share price on the stock market. Shareholder wealth maximization as the goal of the company will facilitate the measurement of the performance of a company. If the stock price of a company shows an increasing trend in the long run, it indicates that the shareholders’ value created is good.
Besides stock market price, shareholders usually see the company’s success by its financial performance. The common question asked by the shareholders is, how does management generate adequate profits on the company’s assets? How does the company finance its assets? In this respect, Van and Wachowicz (2008) contend that profitability ratio is a popular determinants of the shareholders’ value creation (company’s performance).
The ability of a firm to create value by paying out dividend to its shareholders depends on its ability to generate cash from its operating activities and access of additional funds through external financing (Vazakidis and Adamopoulos, 2009). The shareholder returns basically depends on prices, costs, investments, volume of products sold and riskiness of firms in an industry (Osinubi and Amaghionyeodiwe, 2003; Soyede, 2005). The variables representing these factors can be considered as determinants of shareholders’ value. Working capital and fixed capital investment are the two components of investment value drivers (Rajesh, 2015). Management’s investment choices and financial policy are also value drivers
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in the context of riskiness of cash flows for the company (Olokoyo, Oyewo and Babajide, 2014).
Companies that are conscious of shareholders’ value creation with large amounts of excess cash at their disposal but with limited value-creating investment opportunities, they return the money to shareholders through dividends and share buybacks. Not only does this give shareholders a chance to earn better returns another investment option, but it also reduces the risk that management will use the excess cash to make value-destroying investments in particular, as well as ill-advised, overpriced acquisitions (Alfred, 2006).
Economies of scale for firms in purchasing, manufacturing, distribution and research, operating margin, working capital investment and fixed capital investment can generate values for firms (Hansen and Mowen, 2000; Horngren, Datar and Foster, 2006). The link between value chains and value drivers as reflected by sales growth rate, operating profit margin, income tax rate, working capital investment, fixed capital investment and cost of capital are basic building blocks of shareholder value creation (Akinsulire, 2010; Okwo and Ugwunta, 2012; CIMA, 2014). It is in light of the above that the study examined the relationship between the variables of the study (determinants of shareholder value of listed industrial goods firms in Nigeria).
Furthermore, value delivered to shareholders as a result of management ability to increase sales rates of the products of an organisation is referred to as shareholders’ value creation (Mohd, Sam, & Yasuo, 2013). Sales growth is considered as control lever of shareholder value creation (Mohd et al., 2013). Managers of organisations pay more attention to growth of the sales and based on the responsibility reposed on them by the owners of the firms called the principal, are expected to maximize the shareholders’ value creation. Firms revenue is a function of the size of the sales of the company, the managers will strategize
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their activities towards maximizing the sales amount in order to strengthen the shareholders’ value. Therefore, the study expects that the shareholder value creation is positively influenced by the sales growth rate (Mohd, Sam, & Yasuo, 2013).
Ramezani, Soenen and Jung (2002) explore the relationship between sales growth and shareholder value creation. They use Jensen’s alpha as a measure of shareholder value and find that beyond a certain point, growth has an adverse effect on shareholder value. The growth is considered as one of the control lever of shareholder value creation. The growth of the sales constitutes a priority objective for the managers. The managers of companies maximize the shareholder value creation through sales growth that will strengthen the prestige of the companies (Ben, 2012).
1.2 Statement of the Problem
Shareholders’ value creation is the main objective of business organizations but few studies use shareholder value creation measures as performance indicator (Rajesh, 2015 & Fiordelisi, 2010). This makes identifying and selecting strategies that create value for shareholders a major challenge facing management in the Nigerian economy (Burlacu, 2013; Mehrnaz, 2013; Jodlbauer, 2012 and Enekwe, Nweze, & Agu, 2015).
Capital means ready funds which are necessary for the working of any concern. Basically, manufacturing companies are expected to have more current assets than fixed assets. If the firms have no adequate current assets then they have to face shortage and cannot perform their day to day operations smoothly.
Every organization whether profit oriented or not, irrespective of size and nature of business requires necessary amount of working capital which is more important factor to maintain existence, liquidity, solvency and profitability which later create more value to the
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shareholder. If the firms have greater proportion of liquid assets, then there is no risk of shortage. But this will affect profitability on the other hand. Furthermore, by managing the working capital management can create value for shareholders because they are preserving the liquidity and increasing the profitability of the companies. In a situation where determining factors and their proportion of participation are not explained fully then adequacy of working capital will be undetermined which will lead to company’s’ bankruptcy (Robert, Mark, & Rabhi, 2008).
Studies on shareholders’ value have predominantly been conducted in foreign countries (Marangu & Ambrose, 2014; Habib, Faisal, & Muhammad, 2016; Mohammad Hashemijoo, Ardekani, & Younesi, 2012 and Damar & Umar-Farouk, 2016) but very few studies were carried out in Nigeria (Chikwendu, 2009; Kolawole, 2013; Ya’u, Abdulrasheed, & Emmanuel, 2015; Oladipupo & Okafor, 2013; Asogwa, 2009 and Enekwe, Nweze, & Agu, 2015) . There are a many studies which were conducted to investigate the interaction between shareholder values and its determinants (dividend payout, working capital, Sales Growth rate, return on equity and debt) in different countries of the world which are mostly developed economies which have different peculiarities from our own developing economy and the findings of the studies documented mixed results.
The few studies on shareholders’ value that have been conducted in Nigeria have focused on financial service sectors (Kolawole, 2013) leaving out listed industrial goods firms in Nigeria. However, this study focuses on industrial g goods firms as it is one of the emerging sectors in the Nigerian economy. It is of paramount importance to examine the determinants of shareholders’ value creation within the Nigerian economy using the most recent data of listed industrial goods firms in Nigeria. The extant empirical literature on the determinants of shareholder value in industrial goods firms appears somehow limited
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The finance literatures acknowledge various determinants of shareholders value creation. In terms of sales growth, (Davidson, Steffens & Fitzsimmons, 2009 and Amidu & Abor, 2006) suggest that sales growth has a negative relationship with company shareholder value, while Mbuvi, 2015 and Sakthivel, 2011) argue that, the sales growth is positively related to company shareholder value.
In terms of leverage (debt), Burja (2011) suggests that leverage have positive impact towards company shareholder value, meanwhile Kaplan, Ozmen and Yalcin (2006), Zeitun and Tian (2007), and Nicolescu (2010) provide evidences that leverage have negative impact on shareholders’ value. On the other hand, working capital which is also part of determinant of company shareholder value has a positive impact on shareholders’ value as reported by several empirical studies (Goddard, Tavakoli and Wilson, 2005; Chander and Priyanka, 2008; and Mihajlov, 2014). Conversely, Rajčaniova and Bielik (2008) and Serrasqueiro and Nunes (2008) provide evidences that working capital has a negative impact to company shareholders’ value.
On dividend payout as determinant of company shareholder value, Marak and Chaipoopirutana (2014) conclude that there is a positive relationship between dividend payout and company shareholder value. In contrast, Mohd, Sam and Yasuo (2014) find that the dividend payout is negatively or not significant at all to company shareholder value.
Return on equity as determinant of company shareholder value. Damar and Umar-Farouk (2016) indicate that there is a positive relationship between return on equity and company shareholder value. In contrast, Jami and Bahar (2016) find that return on equity is negatively or not significant at all to company shareholder value.
The mixed findings of the above studies left interesting questions relating to possible factors that determine the shareholder value creation in the listed Nigeria industrial goods
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firms. Do dividend payout, working capital growth, return on equity and debt influence shareholder value creation in the listed Nigeria building companies?
It is against the backdrop that this study is conducted to determine the factors that affect shareholders’ value of industrial goods firms in Nigeria. It is of paramount importance to investigate the determinants of shareholders’ value of industrial goods sector given that the firms are among the major contributors to economic development of any nation. The creation of such value of firms should expectedly translate to more economic development, this is because if more dividend are paid, sales growth are increased and return on equity are improved will lead to increase of disposable income which will bring more revenue to the government that will be used for economic development.
1.3 Research Questions
The study will provide answers to the following research questions:
i. To what extent does dividend payout affect shareholders’ value of listed industrial goods firms in Nigeria?
ii. To what extent does ratio of working capital to total assets affect shareholders’ value of listed industrial goods firms?
iii. To what extent does sales growth affect shareholders’ value of listed industrial goods firms?
iv. To what extent does return on equity affect shareholders’ value of listed industrial goods firms?
v. To what extent does ratio of debt to equity affect shareholders’ value of listed industrial goods firms?
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1.4 Research Objectives
The study will assess the determinants of shareholders’ value creation in Nigeria industrial goods firms. The specific objectives are to:
i. Determine the effect of dividend payout on shareholders’ value of listed industrial goods firms.
ii. Determine the effect of ratio of working capital to total assets on shareholders’ value of listed industrial goods firms.
iii. Determine the effect of sales growth on shareholders’ value of listed industrial goods firms.
iv, Determine the effect of return on equity on shareholders’ value of listed industrial goods firms.
v. Determine the effect of ratio of debt to equity on shareholders’ value of listed industrial goods firms.
1.5 Research Hypotheses
In line with the objectives of the study, the following hypotheses have been formulated:
i. Dividend payout does not have any significant relationship with shareholders’ value of listed industrial goods firms.
ii. Working capital to total assets does not have any significant relationship with shareholders’ value of listed industrial goods firms.
iii. Sales growth does not have any significant relationship with shareholders’ value of listed industrial goods firms.
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iv. Return on equity does not have any significant relationship with shareholders’ value of listed industrial goods firms.
v. Debt to equity does not have any significant relationship with shareholders’ value of listed industrial goods firms.
1.6 Scope of the Study
This study assesses the determinants of shareholders value of listed industrial goods firms listed on the Nigerian Stock Exchange as at 31st December, 2016. This study will cover a period of ten (10) years from 2007 to 2016. This period is considered in order to allow for a thorough investigation of the subject. The population of this study is 25 listed industrial goods firms on the NSE as at 31st December, 2016.
Five independent variables were used in this study comprising of dividend payout, working capital to total asset ratio, sales growth, return on equity and debt. The reason behind choosing these variables is that the literature reviewed concentrated on only some of the variables of the study despite the importance of the variables in explaining changes in the value of the shareholders. To the best of the researcher’s knowledge there is no single study that capture all the variables of the study.
1.7 Significance of the Study
This study contributed to the body of knowledge by identifying the roles played independent variables of this study in determining shareholders’ value specifically in the listed industrial goods firms in Nigeria. The study identified the extent to which the determinants of shareholders’ value within the Nigerian context, thus enlightening interested members of the public on the subject. Real time investors are expected to benefit from the
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outcome of the study Also, management of manufacturing concerns, particularly operators in the industrial goods subsector should be able to utilize this study to focus on strategies that create excess value attributed to market value compared to the book value of equity. This is because the factors that have significant effect on the shareholders’ value creation were identified by this study.
Future researchers will also benefit from the study, given that the study is exploratory in nature. It is expected that the study will provoke further research on the subject matter in other sectors of the Nigerian economy. Overall, the study is also expected to contribute to the body of knowledge in relation to shareholders value, particularly in developing countries that are bedeviled with paucity of empirical research with respect to the subject.
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