ABSTRACT
The aim of this study was to determine the effect of corporate performance on stock prices of quoted Nigerian banks. The ex-post facto research design was adopted. This enabled the researcher make use of secondary data to determine the effect of  earnings per share, dividend per share, return on equity and price earnings ratio on share prices of Nigerian banks. The following performance indicators: earnings per share, dividend per share, return on equity and price earnings ratio were the independent variables while the dependent variable was share prices. The source of data for share prices and part of dividend per share were the publication of the Capital Assets Ltd while others were sourced from the annual report of the selected banks for the years under study. The dependent and independent variables were observed over a period of eleven years, that is from 2007 to 2017. The analysis was a panel data analysis and were analyzed using the Ordinary Least Square (OLS) technique. The hypotheses were tested at 5% level of significance. The result  revealed that earnings per share had a positive and  non- significant impact on share prices, dividend per share had a positive and  significant impact on share prices, return on equity had a positive and non- significant impact on share prices and price earnings ratio had a positive and non- significant impact on share prices. Hence, the study therefore concluded that share price is an important indicator of corporate performance of Nigerian banks. It is recommended amongst others that banks should put more emphasis on growing their fundamentals as this will help to boost share prices.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities. Banks are fundamental component of the financial system, and are also active players in financial markets. The essential role of a bank is to connect those who have capital (such as investors or depositors), with those who seek capital (such as individuals wanting a loan, or businesses wanting to grow). Banks play a very useful and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe Abdi, (2010).
Various groups of individuals are particularly interested in evaluating bank performance. First and foremost, bank shareholders are directly affected by bank performance. Investors take advantage of bank information to develop expectations concerning future performance that can be used to help price common shares (in addition to capital notes and debentures that may be issued by the bank). Second, bank management traditionally is evaluated on the basis of how well the bank performs relative to previous years and compared with similar (or peer group) banks. Hence, employees, salaries and promotions are frequently tied to the performance of the bank. Bankers also need to be informed about the condition of other banks with which they have business dealings. Third, regulators, concerned about the safety and soundness of the banking system and the preservation of public confidence, monitor banks using on-site examinations and computer based early warning systems to keep track of bank performance. Fourth, depositors may also be interested in evaluating the performance of the bank, as the nominal values of their deposits are not guaranteed. Fifth, the business community and general public should be concerned about their banks performance to the extent that their access to credit and other financial services is linked to the success or failure of their bank Benton and James,(2005).
Stocks are equities that allow investors to put their money into a company with hope of achieving a higher return than that of a saving account or bonds Sloan, (2012). Stock markets operate as an intermediary between savers and users of capital by means of pooling funds, sharing risk, and transferring wealth Almumani, (2014). The business world will always require management to be creative in an effort to improve their performance, they should have the ability and can take advantage of any opportunity to improve company performance. To improve the company performance, it is important to create strategies, techniques and business tools that are appropriate and suitable for the company. According to Sudiyatno, Puspitasari and Kartika (2012), Accounting Statements provide different measurements to measure the firm performance, such as net income (NI), return on assets (ROA) or return on equity (ROE). The firm performance as a barometer of the success of the company will be seen as a benchmark for investors to invest their funds. When the firm performance is high, the company’s stock market price increases, as investors will respond positively as a signal to invest funds. As a representation of the firm value, the rising stock market prices show the firm value is also increasing. Therefore, the stock market prices are the factors that will determine the firm value through stock price increase.
With the increasing global competition, companies are focusing their efforts on creating shareholder value in order to survive the intense competition. In view of this, it is becoming important for companies to measure the value they create for their shareholders. Keeping track of the value created yearly enables companies to evaluate past decisions and make decisions that will improve shareholder value Moncla & Gregory, (2003). Investors and market analysts resort to financial statement analysis when it comes to share investing. The information on Earnings Per Share (EPS) is presented on the Income Statement while Return on Assets (ROA), which is one of the profitability ratios, is computed using relevant numbers from the Income Statement and Balance Sheet. The broad area of financial accounting and reporting offers a number of fundamental measures of a firm‟s performance for a particular accounting period. One of these financial measures is the earnings per share (EPS). Previous studies on EPS as a predictor of share price generated mixed results. Some research works concluded that EPS is a significant predictor when the firm consistently increases its EPS over a longer period of time. Various news releases, particularly of US firms, reported that many firms did not experience any increase in
share price despite increases in their quarterly EPS. This seemed to suggest that EPS may not be a good predictor of share price on a short-term basis.
ROA, on the other hand, is expected to be significantly correlated with share price since it is a profitability ratio Menaje,( 2012). A person or entity invests in equity securities (shares) of companies for a host of reasons. It may be for safety cushion, cyclical cash needs, investment for a return, investment for influence, or purchase for control Skousen, Stice & Stice, (2007). Whatever the reason might be, an investor undertakes thorough financial evaluation of the available options before deciding to invest in stocks of a particular company. Subasi (2011) asserts that there is no relationship between dispersion in earnings surprises and stock market returns using monthly and quarterly time series of seasonally differenced earnings and dispersion in these differences. This relation depends on the magnitude of the earnings change. In contrast, Jorgensen, Li, and Sadka (2009) are of the view that there exist a positive relationship between dispersion in earnings surprises and stock market returns.
Johnson and Soenen (2003) analyzed 478 firms in USA during 1982-1998 and concluded that big sized and profitable firms with high level advertising expenditure have better performance in terms of those three measurements. Hobarth (2006) studied the correlation between financial indicators and firm‟s performance of listed firms in USA for 19 years period by using 17 financial indicators and three variables to measure firm‟s performance, namely market performance (stock market value), cash flow performance (dividend per share), and profitability (ROI). The result shows that firms with low book to market ratio, efficient working capital management, low liquidity, more equity and less liabilities, and high retained earnings have high profitability based on ROI Menaje, (2012).
If the financial markets are efficient, market price for banks’ stock price would be one of the most appropriate tools for assessing banks’ performances. The alternative to the market approach is the accounting-based financial ratio approach, which has commonly been used for measuring the financial performance of firms Abdu, (2004). Financial performance analysis through the traditional method of financial indices based on balance sheet, and income statement analysis is an important theme and it is widely used to summarize the information in a company’s financial
statements in assessing its financial health. Hence, this study seeks to investigate the role of corporate performance on the determination of stock prices in the Nigerian banking sector.
1.2 STATEMENT OF THE PROBLEM
All investors, whether institutional or individual, hold one common objective when they invest in the share market; they all hope to maximize expected returns at some preferred level of risk. For investment in common stocks, much is said to have caused the changes in share prices. These have over the years created concern to investors and others such as stockbrokers, fund managers and investment analysts. Due to worldwide changes in share price in recent years, studies on share price determination and factors that affect value of firms which in turn lead to changes in the share prices of firms have received increased attention Adedoyin, (2011). If these factors can be identified, then it makes sense to consider changes in the value of firms to have been driven by these factors. Consequently, changes in share prices may be as a result of volatility in these value-drivers called corporate firm performance or characteristics. Angel, (1997) established that the average price per share differs substantially amongst stock markets around the world. The median of the United States Stock, for example, sells for about $40; a typical London stock sells for about $7.50 and a typical Hong Kong share is about $2. Furthermore, when stock prices rise above a country’s usual trading range, firms often split their stocks to restore prices to that range.
The Nigerian company operates under a turbulent environment, characterized by massive deceleration in money supply and credit, an energy crisis, problematic oil and gas sector, a weakening exchange rate, fluctuating inflation rate and high cost of capital. However a company share price is susceptible to all of these variables which it has no control over. There had been various questions on what is responsible for changes in price of shares. The behavior of share prices has been discovered to have been influenced by many factors both internally and externally. Sunde & Sanderson (2009) mentioned many factors that affect share price which include: corporate earnings, management strength, news of law suit, mergers, takeovers, market liquidity, market stability, availability of substitute, government policies, analyst reports, macroeconomic issues, investor‟s perception and technical influences.
Aside the external factors, there are internal factors influencing share price. The price of a commodity. Accepting the economists view, what factors then influence demand and supply behavior? In the securities market, whether the primary or the secondary market, the price of shares is significantly influenced by a number of factors which include book value of the firm, dividend per share, earnings per share, price earnings ratio and dividend cover Somoye, Akintoye and Oseni,( 2009).
Empirical results show that markets generally react when financial information is available to investors Aduda & Chemarum, (2010). Aduda and Chemarum (2010) noted that there is always a change in the market on announcement of financial information and the only difference is the path such change or reaction takes. Sometimes the reaction is positive which is indicated by a significant increase in the value of shares or in the volume of shares traded; while at other times it is negative, indicated by a reduction in the value and volume of shares traded Khan & Ikram, (2012).. Previous studies done on the effect of performance indicators on share prices have produced contradictory results and therefore have failed to give conclusive results, hence the need to carry out this research to establish the state of affairs from Nigerian perspective as well as to advance contribution in this growing body of literature.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to determine the effect of corporate performance on stock prices of quoted Nigerian banks. However, the specific objectives are:
1. To identify the effect of earnings per share on share prices of Nigerian banks.
2. To ascertain the effect of dividend per share on share prices of Nigerian banks.
3. To establish the effect of return on equity on share prices of Nigerian banks.
4. To determine the impact of price earnings ratio on share prices of Nigerian banks.
1.4 RESEARCH QUESTIONS
Following the above objectives, the research questions shall be:
1. How far does earnings per share had a positive and significant impact on share prices of
Nigerian banks?
2. To what extent does dividend per share had a positive and significant impact on share prices of Nigerian banks?
3. How far does return on equity had a positive and significant impact on share prices of
Nigerian banks?
4. To what extent does price earnings ratio had a positive and significant impact on share prices of Nigerian banks?
1.5 HYPOTHESES OF THE STUDY
In line with the objectives and research questions, the hypotheses of the study shall be:
1. Earnings per share does not have positive and significant impact on share prices of
Nigerian banks.
2. Dividend per share does not have positive and significant impact on share prices of
Nigerian banks.
3. Return on equity does not have positive and significant impact on share prices of
Nigerian banks.
4. Price earnings ratio does not have positive and significant impact on share prices of
Nigerian banks.
1.6 SCOPE OF THE STUDY
This study focused on the role of corporate performance on the determination of stock prices, as it relates to the Deposit Money Banks (DMBs) quoted in the Nigerian Stock Exchange. The periods of study were from 2007 to 2017. The year 2007 was characterized by global financial crisis which transmitted financial shocks across the globe.The banking sector consolidation programme of 2005 mandated banks to shore up their capital by a whopping 1,150% from N2 billion to N25 billion. So many banks adopted the merger and acquisition approach to meet the minimum capital requirement and at the end of the exercise, the number of banks in the country shrank from 89 to 25. In addition to mergers and acquisitions, virtually all the banks that succeeded in the recapitalization exercise raised funds through the capital market mostly through Initial Public Offering. At the end of the exercise, many of the banks had listed their shares on the main board of the Nigerian Stock Exchange. Today, with the acquisition of Enterprise Bank
by Heritage Bank and the acquisition of Main street Bank by Skye Bank, there are 21 banks operating in the country – 18 commercial banks and 3 merchant banks. The sampled bank were selected based on international authorization within the period under study.
The 15 quoted commercial banks are Access bank plc, Diamond bank plc, Ecobank plc, FBN holdings plc, FCMB plc, Fidelity bank plc, Guaranty trust bank, Skye bank, Sterling bank plc, UBA plc, Union bank plc, Unity bank plc, Wema bank plc, Zenith bank plc, Stanbic IBTC holdings plc”. The Stalwart Report, (2015).However, for the purpose of this study, ten (10) quoted banks classified as commercial banks, licensed under international authorization by the Nigerian Stock Exchange were selected based on the first ten that have the highest average net profit after interest and tax over the years under study (See Appendix B).
1.7 SIGNIFICANCE OF THE STUDY
This study will be beneficial to various parties specifically as follows:
BANK MANAGEMNT: The first beneficiaries of this study will be the management arms of the various Deposit Money banks that will get new insights on the determinants of market share prices within their organizations. They will be able to structure and implement strategies aimed at improving profitability in an informed manner and avoid obvious pitfalls thus enhancing maximum profitability and the image of the bank through better market share prices.
POLICY MAKERS: The government and the corporate world policy makers will be able to borrow from this study and identify areas that will need policy development and/or enhancement in order to enhance profitability in Deposit Money banks.
RESEARCHERS AND STUDENTS: To the scholars this study will provide area for further research which can be used to add value in this area of study. The study will also be available in the University repository system for access to future researchers.
FINANCE MANAGERS: Finance managers of various banks across the world will be able to appreciate the importance of the final recommendations of this study in terms of the strategies that can be taken to improve bank signaling using various financial indicators.
1.8 PLAN OF THE STUDY
Expost-factor research designs were adopted as planned using historical data of the banks selected. The total population of the banks was twenty-three, out of which ten were judgmentally selected.
International authorization was used as bench mark for selection of the sampled banks. The banks that failed to meet the requirement were not selected for study.
The secondary data was sourced online as planned from the end of year financial statements of the banks concerned and properly arranged in a table form for easy identification and analysis.
1.9 Operational Definition of terms
Performance: Performance is associated with quantity of output, quality of output, timeliness of output, presence/ attendance on the job, efficiency of the work completed [and] effectiveness of work completed (Mathis & Jackson 2009).
Productivity: Productivity has been defined as the measure of how well resources are brought together in organizations and utilized for accomplishing a set of results (Nwachukwu, 2006).
Efficiency: Efficiency is the ratio of actual performance to the standard performance (Koonz and Weihrich, 2000).
Diversification: Diversification involves growing the current business areas of a firm or extending their capacity to new areas.
Profitability: Profitability is the ability of a business to produce a return on an investment based on its resources in comparison with an alternative investment.
Market Share: Market share represents the percentage of an industry, or market’s total sales that is earned by a particular company over a specified time period.
Risk factor: This is the preparedness of the business owner to take reasonably associated risk in the line of business.
Total Annual Turnover: The total annual turnover is the total sales of an enterprise in its accounting period.
Assets Base: This comprises of all the assets of an enterprise from which the enterprise can collateralise or secure its loans.
This material content is developed to serve as a GUIDE for students to conduct academic research
THE EFFECT OF CORPORATE PERFORMANCE ON STOCK PRICES OF QUOTED NIGERIAN BANKS
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