Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Nexus between Initial Public Offerings and Operating Performance of Deposit Money Banks in Nigeria

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Nexus between Initial Public Offerings and Operating Performance of Deposit Money Banks in Nigeria

Article excerpt

Abstract

This paper empirically analyzes the effect of initial public offerings on ownership structure and the nexus between the outcome and operating performance of banks in Nigeria. Using eleven listed banks on the Nigerian Stock Exchange that got quoted on the stock exchange through initial public offer, the study reports results contrary to research outcomes in the popular press. In the first place, the study does not find any significant dilution of the owners' equity stake as the results confirm that the original owners proactively determined the outcome of the IPO process to favour them to continue to maintain superior control rights after the IPO process. Secondly, the relatively enhanced ownership stake of the Directors after the IPO did not result to superior operating performance during the study period. The main significance of the paper is that it shows that ownership structure changes through IPO is not an efficient internal corporate governance mechanism in Nigeria, necessitating reforms in capital market regulations. It is posited that these outcomes are indices of weak soft infrastructure and weak institutions which characterize the structure of the capital market in most emerging economies. The study accordingly contributes to knowledge by filling the gap in the literature on IPO in an important emerging market banking industry

Keywords: Initial Public Offer, Directors' equity ownership, operating performance, stock excahnge

INTRODUCTION

Initial public offerings (IPO) perform a crucial role in resource allocation in emerging capital markets. As is expected in most emerging market countries, Nigerian companies are mainly owned, managed and controlled by individuals, families and their partners. Firms generally convert to public companies when they believe they can experience faster growth with external financing. Kim et al (2004) argue that due to the relatively underdeveloped market structure, the degree of information asymmetry among participations should be much higher than those in developed countries. They posit that ownership structure may play a more important role in firm performance of emerging firms than those of developed countries.

Initial public offers which are means by which an existing private company makes its shares available to the general public for subscription usually leads to dilution in the ownership structure of the company. Jain and Kini (1994) concur to this, arguing that a private firm that goes public ends up with a reduction in entrepreneur ownership interest. However, Aggarawal and Klapper (2003) document that firms deliberately attempt to change their ownership and corporate governance structure in preparation for going public. It is clear that this deliberate attempt to maneuver the structure prior to the initial public offering can influence the IPO process, the allocation process and the subsequent ownership structure. This procedure of maneuvering the structure with the hope of influencing the allocation process seems to be consistent with the practice of some Nigerian banking public offers. (Oceanic Bank Prospectus 2006).

This proactive approach underscores the value placed on the organization by the founders. Aggarwal and Klapper (2003), report that entrepreneurs signal the value of the firm by retaining a larger proportion of ownership instead of dispensing with their shares at the time of going public. Leland and Pyle (1977) concur, positing that at the time of an IPO, management appears strongly attracted to the firm and overwhelmingly committed to retaining as much ownership control as possible.

Against the backdrop of findings in other climes, this paper empirically examines the effect of initial public offerings on ownership structure and the nexus between the outcome and operating performance of banks in Nigeria. The paper addresses the problem of IPOs in two ways. First, it answers the question, does initial public offer significantly affect the ownership structure of deposit money banks in Nigeria? …

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