Chief Executive Officer Characteristics and Firm Value Among Listed Firms in Nigeria: An Empirical Study
Chapter One
Purposeย ofย theย Study
Theย mainย objectiveย ofย theย studyย wasย toย determineย theย effectย ofย CEOย characteristicsย onย the firm value of listed firmsย in Nigeria.
Specificย Objectives
- To determine the effect of CEO duality on the firm value of listed firms in Nigeria.
- To establish the effect of CEO tenure on the firm value of listed firms in
- To assess the effect of CEO gender on the firm value of listed firms in
- To determine the effect of CEO age on the firm value of listed firms in
- To establish the effect of CEO education on the firm value of listed firms in Nigeria.
CHAPTER TWOย
LITERATUREย REVIEW
ย ย Introduction
This chapter covers relevant literature with a general focus on the notions of CEO traits and business value. It also focuses on prior research and pertinent articles and publications about the variables being studied, including CEO tenure, CEO tenure on firm value decision making, CEO gender, CEO age, and CEO education on firm value decision making.
Studyย Concept
ย Conceptย ofย Firm value
The value of a company is comprised of its long-term debt, specific short-term debt, common equity, and preferred equity (Al-Najjar & Hussainey, 2011). How companies use multiple funding sources to finance their whole operations and expansion is a key factor in determining the company value. The firm value reflects the financing plan, including the overall targeted debt-to-equity ratio, as well as the financing techniques, including the details and timing of a particular loan offering (Meyers, 2003). Brealey and Myers (2003) defined firm value as the company’s choice of various securities used to finance its investments. They make the point that despite the fact that a firm can issue a wide range of securities in countless combinations, it will always try to choose the one that would raise its market value as a whole. According to Graham, Leary, and Roberts (2015), a firm’s worth is determined by its overall operations and ability to grow by utilizing a variety of funding sources. Stock, long-term debt with an indefinite maturity and no call clauses, and non-discretionary short-term debt used to finance the company’s working capital requirements, such as the financing of goods, accounts receivable, and employee pay, are the original components of the firm’s value.
In a company’s balance sheet, the firm value shows the ratio of debt to equity, which varies depending on the firm (Rajan, & Zingales, 1995). A decrease in the cost of capital as a result of increasing firm value is regarded as a positive development (Myers, 2001). Benito (2003) claimed that managers will read the debt-equity ratio as a signal since excessive leverage suggests higher bankruptcy risk (and expenses) for low-quality firms. Because management always has an informational edge over outsiders, the debt structure may be seen as a signal to the market. According to one explanation, equity in a company’s firm value is comprised of retained earnings plus common and preferred stock (Muiruri and Bosire, 2015).
Firm value puts into perspective how a company finances its operations, whether through debt, equity, or a combination of the two. The worth of a corporation is independent of its firm value, according to Modigliani and Miller’s firm value theory, thus it doesn’t matter how it finances its operations (Myers, 2001). The study’s underlying assumptions include the absence of trading costs, the fact that the use of debt has no effect on earnings before interest and tax, the fact that investors can borrow money at the same rate as businesses, and the absence of information asymmetry (Altman & Hotchkiss, 2010).
Determinantsย ofย Firm value
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The firm value of an organization is determined by a number of factors within orย outsideย the organization. ย Some ofย theseย factors areย discussed as follows;
ย Sizeย ofย theย Firm
Firm size has been empirically found to be strongly positively related to firm value.ย Larger firms are more diversified and hence have lower variance of earnings, making themย able to tolerate high debt ratios (Wald, 1999). Smaller firms, on the other hand, may find itย relatively more costly to resolve information asymmetries with lenders, thus, may presentย lower debt ratios (Castanias, 1983). Lenders to larger firms are more likely to get repaidย than lenders to smaller firms, reducing the agency costs associated with debt. Therefore,ย larger firms will have higher debts. Another explanation for smaller firms having lowerย debt ratios is if the relative bankruptcy costs are an inverse function of firm size (Titmanย andย Wessels,ย 1988).ย Empiricalย evidenceย onย theย relationshipย betweenย sizeย andย firm valueย supportsย aย positiveย relationship.ย Severalย worksย showย aย positiveย relationship between firm size and leverage (see Barclay and Smith, 1996; Friend and Lang, 1988;ย Bartonย etย al.,ย 1989;ย MacKie-Mason,ย 1990;ย Kimย etย al.,ย 1998;ย Al-Sakran,ย 2001,ย Hovakimian etย al.,ย 2004).
From the theoretical point of view, the effect of size on leverage is ambiguous. As Rajanย and Zingales (1995, p. 1451) claim: โLarger firms tend to be more diversified and fail lessย often, so size may be an inverse proxy for the probability of bankruptcy. If so, size shouldย have a positive impact on the supply debt. However, size may also be a proxy for theย informationย outsideย investorsย have,ย whichย shouldย increaseย theirย preferenceย forย equityย relative to debt.โ Also empirical studies do not provide us with clear information. Someย authors find a positive relation between size and leverage, for example Huang and Songย (2002), Rajan and Zingales (1995) and Friend and Lang (1988).On the other hand, someย studies report a negative relation, for example (Kester, 1986), (Kim โ Sorensen, 1986) andย (Titmanย โ Wessels, 1988).
CHAPTER THREEย
RESEARCHย METHODOLOGY
ย Introduction
The chapter dwells with methodology and design aspects as applied throughout theย study.ย Theย contentย forย theย chapterย includes;ย theย adoptedย researchย philosophy,ย theย studyย design,ย theย population,ย theย sampleย size,ย theย researchย instruments,ย validity ofย theย research instruments, the data collection procedures, and data analysis techniques thatย were used.
Researchย Design
Explanatoryย researchย designsย goย beyondย descriptionย andย attemptย toย explainย theย reasonsย forย theย phenomenon.ย Thisย studyย adoptedย anย explanatoryย designย asย itย soughtย toย understand the trait and mechanisms of the relationship and association between theย independent and dependent variable. The study is explanatory as it seeks to establishย causal relationships between variables by emphasizing on studying a situation in orderย to explain the relationships between variables and furthermore. The use of descriptionย in theย studyย isย likelyย to beย aย precursor toย explainingย (Saundersย et al.,ย 2009).
Targetย Population
According to NSE (2015), there are approximately 64 listed firms in 11 categories. Theย targetย populationย forย theย studyย wasย madeย ofย allย listedย companiesย atย theย Nigeria Securitiesย Exchange.
CHAPTERย FOUR
DATAย PRESENTATIONย ANDย INTERPRETATION
ย Introduction
This chapter presents data analysis and their interpretation based on the data collectedย from the listed firms in Nigeria Security Exchange (NSE) which have been consistentย from 2014 to 2020. The chapter analyses the variables involved in the study andย estimate the conceptual model described in chapter two. The section begins with theย description followed by the presentation of the descriptive statistics of the studyย variables and inferential statistics respectively. Accordingly, hypotheses testing wereย doneย andย theย explanationsย ofย theย findingsย wereย subsequentlyย presented.ย Ultimately,ย theย conclusionย of theย hypothesesย wasย supported byย aย discussion.
CHAPTERย FIVE
FINDINGS,ย CONCLUSIONย ANDย RECOMMENDATIONS
ย Introduction
This chapter summarizes and presents the research findings of the effect of CEOsย characteristics on the firm value of publicly listed firms in Nigeria during theย period 2014-2020. For clarity purposes, the discussions are based on the researchย hypothesesย ofย theย study.ย Theย studyย discussesย eachย hypothesisย separatelyย startingย withย aย summary, discussion and its conclusion. The study provides policy recommendationsย limitationsย and recommendationsย forย further research.
Summary
First,ย theย studyย presentsย theย demographicย characteristicsย ofย theย CEOย inย theย sample.ย Theย averageย ageย forย theย CEOย wasย aboutย 48ย yearsย andย withย anย averageย ofย sevenย yearsโย tenure.ย Aboutย 6% of theย CEOsย areย female.
Secondly,ย theย mainย objectiveย ofย theย study wasย toย determine the effectย ofย CEOsย characteristics on the firm value of publicly listed firms in Nigeria. This sectionย presents the findings from the study in comparison to what other scholars have saidย about the influence of CEO duality, tenure, gender, age and education on firm value.
The first objective sought to determine the effect of the CEO duality on the firm valueย ofย listedย firmsย inย Nigeria.ย Theย resultsย showย thatย CEOย dualityย hasย noย significantย effectย onย theย firm value ofย listedย firmsย inย Nigeria.ย The studyย findingย indicatedย thatย CEO duality does not affect firm value because of the fact that the corporateย governance code in Nigeria does not envision or allow a situation where the boardย chairpersonย andย chiefย executiveย officeย areย occupiedย byย aย singleย individual.ย Theย absenceย of duality in the governance structure then would suggest that the firm valueย decisionย isย individuallyย generatedย andย directedย byย theย CEOย andย withย approvalย fromย theย board.
The second objective sought to establish the effect of the CEO tenure on the firm value of listed firms in Nigeria. The results show that CEO tenure has a significantย negative effect on the firm value of listed firms in Nigeria. The study findingย indicated that CEO tenure negatively affects the firm value of listed firms basedย onย theย factย thatย longer-tenuredย CEOsย tendย toย assertย themselvesย inย theย corporateย financing decisions and thus institutionalize the use of debt more than equity. Theย increased use of debt as opposed to equity in corporate financing decisions is moreย likely preferred because of the tax allowance and benefits. Besides, the use of debt byย theseย CEOย canย alsoย beย attributedย toย theย favourableย costย ofย financingย fromย theย debtย fromย theย capitalย market.ย Nigeriaย isย consideredย aย bank-basedย systemย asย opposedย toย theย capital โย market-basedย systemย becauseย ofย theย relativelyย nascentย developedย capitalย marketย whenย comparedย to theย well-developed bankingย system.
Theย thirdย objectiveย soughtย toย assessย theย effectย ofย theย CEOย genderย onย theย firm valueย of listed firms in Nigeria. The results show that the gender of the CEO has a significantย positive effect on the firm value of listed firms in Nigeria. The study findingย indicated that the gender of the CEO positively affects the firm value based onย theย factย thatย mostย firmsย haveย maleย executivesย asย opposedย toย femaleย CEOs.ย Theย empiricalย literature indicated that female executives are risk-averse and therefore would beย reluctant to use debt financing less often. On the converse, the dominance of the maleย CEOs would then portend the use of debt either based on their personal characteristicsย orย theย inclination to risk.
The fourth objective sought to determine the effect of the CEO age on the firm value of listed firms in Nigeria. The results show that the age of the CEO has aย significant positive effect on the firm value of listed firms in Nigeria. The studyย findingย indicatedย thatย theย ageย ofย theย CEOย positively affectsย theย firm valueย based onย theย fact thatย olderย CEOย tendsย toย goย forย moreย debt.ย Theย factย thatย olderย CEOย areย moreย likely to use more debt is explained by individual personal characteristics, behavioursย andย experienceย inย theย positionย wouldย beย validatedย byย theย marketย asย aย signalย toย theย firmโsย foundation. By using more debt, either the CEO signal the firmโs capability to marketย and thus its reputation to use the capital wisely and/or the true value of the firm asย indicated by the market is not optimized, thus the cost of using equity would beย significantly higher in comparison. Due to this, the CEO would consciously use moreย debtย asย aย signalย or theย taxableย allowanceย benefit ofย the debt.
The fifth objective sought to establish the effect of the CEO education on the firm value of listed firms in Nigeria. The results show that the education of the CEO hasย a significant positive effect on the firm value of listed firms in Nigeria. The studyย findingย indicatedย thatย mostย ofย theย CEOsย holdย graduateย degrees.ย Theย empiricalย literatureย indicatedย thatย executivesย withย graduateย degreesย orย MBAย areย risk-takersย andย thusย wouldย goย for moreย debt.
Conclusion
This study examined the effect of CEOs characteristics on the firm value ofย publiclyย listedย firmsย inย Nigeria.ย Thereย isย overwhelmingย evidenceย fromย theย studyย showingย that CEO duality has a positive and no significant effect on firm value. Thisย implies that one tier of leadership is appropriate to get more funds as debt. This is dueย toย theย factย thatย CEOย dualityย avoidsย theย conflictย betweenย theย CEOย andย theย chairman.ย Theย study is therefore in support of the proposition that having a CEO in the firm who isย bothย aย chairpersonย andย atย theย sameย timeย theย CEO,ย thereย isย aย higherย likelihoodย thatย firmsย willย increaseย itsย firm value.
With regard to CEO tenure, the study found that CEO tenure has a negative effect onย the firm value. As CEOs acquire firm-specific knowledge early in their tenure,ย theย resultย isย betterย firmย performance.ย Eventually,ย asย tenureย continuesย toย advance,ย boardsย lose theirย oversightย andย firmsย engage inย aย moreย value-destroyingย activity.
The study also found out that gender diversity is likely to bring on board a wide arrayย ofย individualsย thatย areย knowledgeableย andย conversantย withย theย managementย ofย theย firms.ย However, the study has indicated that CEO gender has no significant effect on theย firm value.ย Thereย isย thusย needย forย furtherย studiesย onย theย sameย soย asย toย validateย thisย concept.
Besides,ย theย studyย hasย establishedย thatย CEOย ageย hasย aย positiveย andย significantย effectย onย the firm value. The average age for the CEOs is 48 years. This is an indicationย thatย theย CEOsย areย olderย individuals.ย Theย CEOsย areย thereforeย moreย likelyย toย pursueย lowerย leverage on debt ratio toย enhanceย theย firmย performance.
Finally,ย theย existenceย ofย educatedย CEOsย couldย leadย toย betterย managementย decisionsย andย helpย firmsย inย attractingย betterย resources,ย theย studyย hasย indicatedย thatย CEOย educationย hasย a negative effect on the firm value. It can, therefore, be inferred that the moreย educatedย theย CEOย gets,ย theย moreย cautiousย he/sheย becomesย ofย theย riskย ofย bankruptcyย liesย inย debt.ย Asย aย result,ย firmsย willย haveย lessย capacityย toย borrowย inย timesย whereย financingย isย necessary.
Based on the trade-off theory, certain firm-level factors are associated with the firmโsย corporateย leverageย activitiesย noย matterย theย countryย orย region.ย Theseย factorsย includeย firmย size and asset tangibility which have a positive effect, while profitability negativelyย associatesย withย theย firm valueย (Belkhirย etย al.,ย 2022).ย Thereย isย littleย evidenceย thatย firmsย followย industryย normsย ofย firm valueย orย thatย managersย useย debtย orย equity for agency costs or tactical reasons such as to pressure employees or to motivateย managersย toย workย harder.ย Weย findย moderateย supportย forย theย trade-offย theoryย butย lessย forย theย peckingย order theory.
Recommendations
Based on the findings of the study on the effect of CEOs characteristics on the firm valueย ofย publicly listedย firmsย inย Nigeriaย theย followingย recommendationsย wereย advanced.
The study is indicative of a positive and significant effect of CEO tenure on firm value. It is therefore instrumental for firms to appoint their CEOs based on theย duration they have served the company or they have been in the mentioned industry.ย With this in place, firms will be able to appoint CEOs that are conversant with theย dealingsย of theย firmย and thoseย withย wealthย of experience.
The finding of the study indicated that the CEO education has a negative effect on theย firm value. It therefore importance for firms to employ more educated CEOs inย orderย to enhanceย longevityย of theย firm.
Based on the study findings, there is a significant relationship between the age of theย CEOs and firm value. It is therefore utmost necessary for CEOs to be matureย individuals. Older CEOs have the requisite knowledge and experience hence they canย be tasked withย makingย importantย decisionsย pertainingย firmsโ financing.
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