Developing a model indicating the effect of Corporate Governance on Accounting Ratios and Firm Value of Firms listed on the Nigerian Stock Exchange

Abstract

The study empirically determined the impact and dynamic interaction amongst corporate governance, accounting ratios on the firm value of selected listed firms in Nigeria. It also studied the trend analysis of the selected sampled firms with a convenience sampling method. The study further theoretically investigated the selected firms’ level of compliance to the 2016 code of corporate governance and the rate of disclosure of voluntary information in the financial statement of the companies. Secondary data were employed in this study. Annual data on corporate governance variables and accounting ratio variables from 2008 to 2017 were sourced and computed from the annual reports of the sampled listed firms on the Nigerian stock exchange (NSE). The study covered 10 sectors out of total 11 sectors, as identified by the NSE. Tobin’s q was employed as the dependent variable while board size, market capitalization, growth, director’s remuneration, ROA, EPS, debt to equity ratio and current ratio were employed as explanatory variables. The variables were retrieved from the annual reports of the sampled companies and computed using their appropriate formulas. The computed data were analysed using Tables, Graphs, Descriptive Statistics, Panel Unit root, Pooled Ordinary Least Square, Pane Co-integration, Trend Analysis, Panel Vector Error Correction Mechanism (PVECM), Sensitivity Analysis, and System-Generalised Method of Moment (GMM). The study was also based on multi-theoretical foundation, which is the combination of Agency, Stakeholders, Agency Cost, Signaling, Legitimacy and Litigation Cost Theories. The study further developed Structural-Path-Analysis Model that helped to combine all the variables together in order to achieve the main objective of this study. Findings from pooled OLS and the random effect revealed the same results. Only market capitalization revealed a positive and significant result while all other variables are positively related to firm value except growth and debt to equity ratio that are inversely related. Under system-GMM, all variables are positive and significant except market capitalization that reveal an inverse but significant relationship. The implication is that if good corporate governance has to be in place, the quality and number of boards that govern the company is very important because of its positive impact on the organization as a whole. Well-governed firms by the companies’ boards of directors improve market capitalization, growth of the firm, returns on assets and ultimately improve and sustain firm value. Accounting ratios variables were all positively related to firm value but only debt to equity ratio is significant at 1% while ROA and EPS are insignificant. This implies that both corporate governance variables and accounting ratios variables used in the study improves firm value. The variables were then subjected to robustness test which revealed a robust result. Further result revealed that any shock from both corporate governance and accounting ratio variables actively responded to the shock immediately from the short run period to long run period. This confirms that the result is robust and that there is dynamic interaction among all the three variables employed for the study. Sensitivity analysis result revealed an improved result under pooled OLS and random or fixed effect especially when the variables are subjected to different dependent variables. This also confirmed that the result is robust. The result from the trend analysis revealed very slow growth on average and the study attributed the general low result to poor corporate governance as an internal factor and other factors such as government policies, insecurity and poor governance etc. are from external environment. In particular, the graphs and charts showed better growth between 2008 and 2010 but worst result between 2011 and 2015. The majority of the companies showed a tremendous improvement from 2016 to 2017. The study then recommended that companies should publish material issues that are not mandatory but crucial to stakeholders or that can help public to understand items in the financial statement. Furthermore, comprehensive accounting ratios that can show performance at a glance should be published alongside the main annual reports, which will improve the level of understanding of other stakeholders. Government should enact more laws that would enhance corporate governance practices and promote companies’ compliance and disclosure rate in order to reduce the incidence of corporate failure. Subsequent studies on corporate governance, accounting ratios and firm value should be subjected to this finding in other countries to further consolidate these findings.