ABSTRACT
This study investigates the influence of equity ownership structure on the operating
performance of quoted Nigerian banks from 1998 to 2007.
A dataset on bank equity ownership structure and bank profitability, covering one
hundred and eighty observations from eighteen out of the presently quoted twenty one
banks was used for the study. A non probability sampling method was applied to select
the banks used in the study. Overall, the study provided strong empirical validation of the
link between equity ownership structure and bank’s operating performance. Using pooled
cross sectional regression techniques for the entire sample for the ten-year period with
ROA, ROE, and NIM/TA, as alternate measures of performance, the signs of the
regression coefficients and their significance levels are almost consistent across the
different measures of profit. The results challenge many of the widely held opinion
concerning the impact of equity ownership structure on bank profitability. First, there is
no discernible or systematic relationship between directors’ equity ownership structure
and bank profitability. The results remained robust to alternative measures of operating
performance. Further analyses of the sub sample provided limited evidence supporting
the alignment or convergence of interest hypothesis propounded by Jensen and Meckling
(1983). Secondly, the results are not consistent with the theoretical framework evidenced
in the earlier work of Sanda, et. al. (2003), that ownership concentration enhances
corporate performance and differed significantly from the empirical work of Adenikinju
et. al. (2003). This intriguing result suggests that, though the Nigerian banking industry is
highly concentrated, with only five percent of the shareholders controlling two out of
every three shares in the industry, it does not result to superior returns on total assets or
shareholders equity.
This unusual result has been attributed to the events that shaped
banks operations during the study period, especially the bank recapitalization exercise.
Banks’ total assets and capitalization increased significantly during this period without
sufficient commensurate investment windows to enhance their profitability. In addition,
the results give confirmation to the fact that mutual and equity investment trusts are not
well established in Nigeria. The result of the relationship between ownership mix and
bank profitability yielded mixed results. The coefficient of government equity holding is
rightly signed, indicating that with government equity holding in Nigerian banks at
approximately four per cent,` the theoretical negative expectation is confirmed by this
study. Again, this result indicates that there is negative, rather than a positive impact of
foreign equity ownership on bank profitability. However, the alternative estimation
method used in the study, yielded a rightly signed relationship between equity ownership
of foreigners and bank profitability. This confirms generally accepted belief that foreign
direct investment has significant and positive impact on the economy.
The result supports the apex bank’s policy of limiting government’s equity interest in any
bank to a maximum of ten per cent.
The study recommends policy initiatives that would fast track the growth and
development of institutional investors in Nigeria as well as enhancement in corporate
governance practices to sustain the financial health of the banking sector.
