Academic journal article Journal of Financial Management & Analysis

Corporate Governance and Agency Behaviour : Methodological Analysis of the 'Announcement Effect of Corporate Governance Failures' on Nigerian Stock Market Prices

Academic journal article Journal of Financial Management & Analysis

Corporate Governance and Agency Behaviour : Methodological Analysis of the 'Announcement Effect of Corporate Governance Failures' on Nigerian Stock Market Prices

Article excerpt


Since the seminal work of Jensen and Meckling1 in proposing a theory of the firm based upon conflicts of interest between various contracting parties namely shareholders, corporate managers and debt holders - - a vast literature has been developed in explaining both the nature of these conflicts, and means by which they may be resolved. Finance theory has developed both theoretically and empirically to allow a fuller investigation of the problems caused by divergences of interest between shareholders and corporate managers, and to fully summarise all the research that has been conducted in this field would be almost impossible. Indeed much of the empirical literature has tended to resolve this conflicts within the framework of corporate governance and agency theory; and there is as yet no consensus on the most effective mechanism to make managers act in the best interest of shareholders2.

In a corporation, the shareholders are the principals and the managers are the agents working on behalf of, and for the interests of, the principals. In agency theory, a well developed market for corporate controls is assumed to be non-existent, thus leading to firm or market failures, non existence of markets, moral hazard, asymmetric information, incomplete contracts and adverse selection among others. Also various corporate governance mechanisms have been advocated which include monitoring by financial institutions, prudent market competition, executive compensation, debt, developing an effective board of directors, markets for corporate control, and concentrated holdings (Bonazzi and Islam3). This study adopts the position that developing an effective board of directors and stringent controls (and reaction) of shareholders and prospective investors remains an important and feasible option for an optimal corporate governance mechanism. This position can be defended on the premise that the efficiency of stock.

Sixteen years after the Lagos Stock Exchange commenced operations in 1961 it was re-designated the Nigerian Stock Exchange (NSE) in 1977. Branches were established in eight locations - - Lagos, Kaduna, Port Harcourt, Kano, Ibadan, Onitsha, Abuja and Benin*. The Securities and Exchange Commission (SEC) was established to protect investors and promote capital market growth and development in the country. It is the apex regulatory organ of the Nigerian Capital Market. Formerly called the Capital Issues Committee and later the Capital Issues Commission (Capital Issue Decree No. 14 of 1973), SEC was established under the SEC Decree No. 71 of 1979 amended in 1988, 1999 and recently in 2004.

Operational Performance of the Nigerian Capital Market

The total number of listed securities (comprising government stock, industrial loans and equities) increased from 9 in 1961 to 52 in 1971 and 71 in 1978. It also increased from 157 in 1980 to 276 in 1994, but declined to 260 in 2000 then increased again to 277 in 2004, with an average annual growth rate of 17 per cent for the entire period. The total number of listed firms stood at 214 in 2005**. However, as at December 31st, 2012 the NSE had 258 listed securities which predominantly consists of 198 ordinary stocks; with a total market capitalization of about N-8.9 trillion (U.S. $57 billion).

NSE has continued to undertake policies to reduce information asymmetry and transaction costs to facilitate the use of the market by the private sector to raise funds. For example on 27th April 1999, NSE transited from the call-over trading system to the automated trading system (ATS). An electronic-business (e-business) platform was commissioned in July 2003. The approach makes it possible for investors in the Nigerian stock market to access the markets requires that investors and shareholders will react (either positively or negatively) to favourable or unfavourable information emanating from firms in which they have interest in, or in which they are shareholders. …

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