1.1 Background of the Study
Ownership structure and corporate performance has been a subject of importance in corporate finance literature. The effects of ownership firms on performance of firms have been of particular research interest in the literature of corporate finance. Often times, the interest of managers and shareholders are usually not aligned, which results to problems that reduce firm’s value as well as profitability (Tatiana and Stela, 2013). Shareholders are always regarded as the corporate owners, while directors are agents or representatives of shareholders who are supposed to allocate business resources in a way to increase their wealth (Benjamin, Love and Kabiru 2014). Beni and Alexander (1999) found that owner-managers firms are more efficient than non-owner managers firms because owner-managers have stakes in the firm while non-owner managed firms are less efficient because the non-owner managers seek after their own personal interests at the expense of other shareholders and the organization at large. To the issues of managerial ownership there are two opposing views: incentive and entrenchment effect as stated by Beyer, Czarnitzki and Kraft, (2011). From the point of view of incentive effect, managerial ownership is supposed to have a positive relationship with firm financial profitability because of the remuneration attached to manager’s performance. On the other hand, entrenchment effect is a situation where the manger is powerful enough to use his discretion, which usually leads to protecting his own interests rather than pursuing the goals of institutional owners and concentration owners. (Beyer 2011).
There are three determinants of firms’ profitability. The first is associated with external factors that are beyond the control of the firms. The second refers to factors that are internal and under the direct purview of the firms. These constitute managerial efficiency, governance structure and ownership structure among others that affect the ability of the firms to cope with external factors. Lastly, the other factors that affect firms’ performance are Return on Equity, Return on Capital and Return on Asset (Kechi, 2011). The relationship between managerial ownership and firm performance can be described in two ways. First, managers who own shares in the company will perform better than non-manager owners who will seek after their personal benefits without taking into consideration the concentration and institutional owners. Secondly as managers’, equity ownership further increases the efficiency of the managers because they are involved in the day to day activities of the company and this involvement will in turn increase the performance of the company.
The relationship between institutional ownership and firm performance is that institutional owners have greater incentive to monitor managers because of the substantial amount of shares invested by them in the company. Also, large institutional owners have the opportunity, resources and ability to monitor, discipline and influence managers. This corporate monitoring by institutional owners can result in managers focusing more on corporate performance and less on opportunistic or self-serving behavior (Edmans and Manso 2010). Ownership structure is one of the important factors employed in shaping the corporate governance system of a firm. In analyzing this relationship, up to now different aspects of ownership structure are considered, for instance being managerial or non-managerial shareholders, shareholders concentration or dispersion, being whole or retail, being internal (domestic) or being foreign shareholders, being institutional or individual shareholders. As ownership increases over time, many researchers have looked to these shareholders (managerial, institutional, concentrated and foreign) as potential monitors due to their monitoring advantage over diffuse shareholders. As they are increasing their shareholdings and their aim is to maximize their return on investment, thus, may create a new management discipline.
Ownership structure is closely connected with the conflicts that can affect the operating performance of the firm. Anderson, Mansi and Reeb (2003) asserted that ownership structure will lead to conflict. Morey, Gottesman, Baker and Godridge (2008) opined that this conflict of interest might cause agency problems. As a company’s ownership structure changes and ownership is separated from control, incentive alignment problems become evident. Hence, ownership concentration is related to firm profitability due to the fact that traditional theories argued that when ownership of a firm is concentrated in the hand of large shareholders, they have incentive to monitor the managers’ action through direct intervention to reduce agency problem (Chen and Swan, 2010). In addition, in the studies of diversification strategy, it was found that ownership concentration enhance corporate diversification and performance of a firm because it constitute the largest investment in a corporate firm (Genc and Angelo 2012). Based on previous literatures, it is observed that various forms of ownership structure have impacted on the performance of firms. However, the study chooses to focus on whether the form of ownership structures have significant impact on profitability of quoted manufacturing firms and to consider how desirable such impacts are, if they exist. Therefore, this study seeks to evaluate the effect of ownership on the performance of listed manufacturing firms in Nigeria by obtaining data needed to test the hypotheses from the annual report of the sample companies and analyzing same through the ordinary least square technique.
1.2 Statement of the Problem
There are several studies conducted on ownership structure and corporate performance in developed economies like the United States, Taiwan, Russia, and France. Some of the studies are Harold and Belen (2001), Wang (2003), Pavel and Alexander (2001) and Eric (2011). Harold and Belen (2001) found no statistically significant relation between ownership structure and firm financial performance. Wang (2003) showed that managerial ownership had a negative relationship with financial performance of firms and a positive relationship exist between institutional ownership and financial performance of firms. Pavel and Alexander (2001) found out that the association between ownership by different groups of owners’ ownership concentration, state ownership and firm’s profitability was relatively weak. Eric (2011) found out that there was no significant difference between type of ownership and profitability. The results in the above studies have shown mixed findings and these differences could be attributed to difference in economic structure of the countries studied as well as firms characteristics. In addition, most of these foreign studies used different industries as their domain. For instance, Pavel and Alexander (2001) used blue chips firms as their domain and Eric (2011) used firms in the financial sector as their domain. This could influence the results and the conclusions arrived at because every industry in the economy has its own inherent attributes, which could have a significant impact on the results and conclusions.
However, this study focuses on the manufacturing sector in Nigeria to get a better picture of the relationship between dependent variable and independent variables. In Nigeria, there are studies that have been conducted on ownership structure and corporate performance which include studies of Ogbulu and Francis (2007), Ioraver and Wilson (2011) and Uwalomwa and Olamide (2012). Ogbulu and Francis (2007) used all the firms quoted on the Nigerian Stock Exchange as the population. Purposive sampling technique was used to select the sample size using survey research design. Ioraver and Wilson (2011) on the other hand, used all listed financial firms as their population. Uwalomwa and Olamide (2012) used all firms in the financial sectors as their population. The two out of the three studies which are the studies of Ioraver and Wilson (2011) and Uwalomwa and Olamide (2012) used firms in service sector as their domain. The findings of studies that used firms in the service sector as their domain cannot be the same with the findings of studies that use firms in the manufacturing sector as their domain because of the nature of operation of business. The service firms are customer satisfaction oriented while the manufacturing firms are production oriented. So then, this study considers the effect of ownership structure on corporate performance of manufacturing firms which is a gap in the literature since most studies have been done on other sectors other than the manufacturing sector. To this point, the study addressed the gap by looking at the manufacturing sector to see if its findings are different from the financial sector. Also, studies of Ogbulu and Francis (2007), Ioraver and Wilson (2011) and Uwalomwa and Olamide (2012) in Nigeria have not taken into consideration multi-co linearity and fixed and random effect.
1.3 Objective of the Study
The main objective of this research is to ascertain the relationship between ownership structure and corporate performance of manufacturing firms in Nigeria. However, this main objective is further broken down to the following:
To examine the relationship between Individual Ownership and Return on Equity of Manufacturing firms in Nigeria.
To examine the relationship between Institutional ownership and Return on Capital Employed of Manufacturing firms in Nigeria.
To examine the relationship between Managerial ownership and Return on Asset of manufacturing firms in Nigeria.
1.4 Research Questions
From the statement of the problem in section 1.2 of this research work, a lot of questions must have been pointed out, but for the purpose of this study, answers will be given to the following questions:
What is the Relationship between Individual Ownership and Return on Equity of Manufacturing firms in Nigeria?
What is the relationship between Institutional ownership and Return on Capital Employed of Manufacturing firms in Nigeria?
What is the relationship between Managerial ownership and Return on Asset of manufacturing firms in Nigeria?
1.5 Statement of Hypotheses
The statements of hypotheses for this research work are;
H01: There is no significant relationship between Individual Ownership and Return on Equity of Manufacturing firms in Nigeria.
H02: There is no significant relationship between Institutional ownership and Return on Capital Employed of Manufacturing firms in Nigeria.
H03: There is no significant relationship between Managerial ownership and Return on Asset of manufacturing firms in Nigeria.