Capital Budgeting Moderators and Shareholders’ Wealth Maximization in the Nigerian Commercial Banks
Chapter One
Objective of the study
- Investigate how the Nigerian banking sector’s regulatory environment influences commercial banks’ capital budgeting decisions.
- To analyze the risk management practices adopted by Nigerian commercial banks in the context of capital budgeting.
- To examine the level of information transparency and disclosure practices within commercial banks and their impact on shareholders’ ability to evaluate capital budgeting decisions.
CHAPTER TWO
REVIEWED OF RELATED LITERATURE
Making Investment Decisions
Peterson and Fabozzi (2002) say that investment decision involves the identification of viable projects. This is done by appraising projects using various techniques to determine the viability. Management is always concerned with making investment decisions. The decision on which asset to invest in, always poses a problem since the value of any asset is not always easy to determine. The financial manager pursues the firm’s objective of maximizing its wealth and for this to be, there must be evaluation of investment opportunities so as to determine the asset which can add value to the firm. If a number of firms are taken into consideration, for instance firms X, Y and Z and each of them has identical investment opportunities and similar assets, but given the following differences: v The management of firm X happens to ignore investment opportunities and decides on active dividend policy by paying all its profit to the shareholders. v Y’s management makes replacement decisions as at when due, to replace old plants and machinery and pays left- over profit to its shareholders. v The management of another company, Z decides to invest in every opportunity that would provide a good return on investment than what the shareholders would have got in alternative investment. The three scenarios above show that the shareholders’ investment in company X will not have good returns on investment as it would have been if the company took advantages of the foregone investment opportunities. By taking this unpopular decision, the firm’s wealth will diminish and may lead to loss of all assets. Firm Y’s management on the other hand, being satisfied in replacing old assets but not taking further risks to invest in other profitable investments indicates that other opportunities are foregone and shareholders’ wealth will not be maximized. However, the other firm, Z, is better-off because its management has made all profitable investment, and is able to maximize the shareholders’ wealth. This company will continue to grow as long as there are profitable investment opportunities which the management is taking advantage of.
Investment Decisions and Capital Budgeting
Tangible and intangible assets make up the firm’s total assets which is equal to the firm’s capital. It is known that firms invest funds in assets which produce income and cash flows which the firm can re –invest in more assets to increase its capital or pay to the owners. The tangible assets of a firm include land, buildings, equipment and machinery while the intangible assets include accounts receivable, securities, patents and copyright. Therefore, capital investment by a firm through better asset financing strategies could result in wealth maximization.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine capital budgeting moderators and shareholders’ wealth maximization in the Nigerian commercial banks. UBA, Lagos state form the population of the study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain capital budgeting moderators and shareholders’ wealth maximization in the Nigerian commercial banks. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing capital budgeting moderators and shareholders’ wealth maximization in the Nigerian commercial banks.
Summary
This study was on capital budgeting moderators and shareholders’ wealth maximization in the Nigerian commercial banks. Three objectives were raised which included: To Investigate how the regulatory environment in the Nigerian banking sector influences the capital budgeting decisions of commercial banks, to analyze the risk management practices adopted by Nigerian commercial banks in the context of capital budgeting and to examine the level of information transparency and disclosure practices within commercial banks and their impact on shareholders’ ability to evaluate capital budgeting decisions. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from UBA, Lagos state. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
In light of these findings, it is evident that capital budgeting decisions in Nigerian commercial banks are complex, requiring a holistic understanding of internal and external influences. The study’s insights contribute to the body of knowledge on financial decision-making in emerging economies and provide practical recommendations for banks, policymakers, and regulators.
As the banking sector continues to evolve, future research should delve deeper into the evolving regulatory landscape, the dynamics of technological innovation, and emerging market trends. By doing so, we can further refine our understanding and contribute to the development of resilient and value-creating financial systems that prioritize the interests of shareholders and stakeholders alike.
Recommendation
- Regulatory authorities should strive to provide clear and consistent guidelines to foster a stable and predictable environment for capital budgeting decisions. Periodic reviews and updates to regulations should consider the dynamic nature of the banking industry, balancing the need for compliance with the imperative for flexibility.
- Banks should continuously enhance their risk management frameworks to effectively identify, assess, and mitigate risks associated with capital projects. This includes regular stress testing, scenario analysis, and the integration of emerging risk factors to ensure a proactive approach to risk management.
- Commercial banks should prioritize transparent communication with shareholders. Improved disclosure practices, including providing comprehensive information on capital projects, risk factors, and financial performance, can enhance stakeholders’ understanding and confidence in the decision-making processes of the bank.
- Boards of directors and management teams should focus on reinforcing corporate governance mechanisms. This involves ensuring board independence, accountability, and the establishment of effective oversight structures. By aligning the interests of all stakeholders, corporate governance can play a pivotal role in optimizing capital budgeting decisions.
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