Chief Executive Officer Characteristics and Firm Value Among Listed Firms in Nigeria: An Empirical Study
Chapter One
Purpose of the Study
The main objective of the study was to determine the effect of CEO characteristics on the firm value of listed firms in Nigeria.
Specific 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 TWO
LITERATURE REVIEW
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.
Study Concept
Concept of 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).
Determinants of Firm value
The firm value of an organization is determined by a number of factors within or outside the organization. Some of these factors are discussed as follows;
Size of the Firm
Firm size has been empirically found to be strongly positively related to firm value. Larger firms are more diversified and hence have lower variance of earnings, making them able to tolerate high debt ratios (Wald, 1999). Smaller firms, on the other hand, may find it relatively more costly to resolve information asymmetries with lenders, thus, may present lower debt ratios (Castanias, 1983). Lenders to larger firms are more likely to get repaid than lenders to smaller firms, reducing the agency costs associated with debt. Therefore, larger firms will have higher debts. Another explanation for smaller firms having lower debt ratios is if the relative bankruptcy costs are an inverse function of firm size (Titman and Wessels, 1988). Empirical evidence on the relationship between size and firm value supports a positive relationship. Several works show a positive relationship between firm size and leverage (see Barclay and Smith, 1996; Friend and Lang, 1988; Barton et al., 1989; MacKie-Mason, 1990; Kim et al., 1998; Al-Sakran, 2001, Hovakimian et al., 2004).
From the theoretical point of view, the effect of size on leverage is ambiguous. As Rajan and Zingales (1995, p. 1451) claim: “Larger firms tend to be more diversified and fail less often, so size may be an inverse proxy for the probability of bankruptcy. If so, size should have a positive impact on the supply debt. However, size may also be a proxy for the information outside investors have, which should increase their preference for equity relative to debt.” Also empirical studies do not provide us with clear information. Some authors find a positive relation between size and leverage, for example Huang and Song (2002), Rajan and Zingales (1995) and Friend and Lang (1988).On the other hand, some studies report a negative relation, for example (Kester, 1986), (Kim – Sorensen, 1986) and (Titman – Wessels, 1988).
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
The chapter dwells with methodology and design aspects as applied throughout the study. The content for the chapter includes; the adopted research philosophy, the study design, the population, the sample size, the research instruments, validity of the research instruments, the data collection procedures, and data analysis techniques that were used.
Research Design
Explanatory research designs go beyond description and attempt to explain the reasons for the phenomenon. This study adopted an explanatory design as it sought to understand the trait and mechanisms of the relationship and association between the independent and dependent variable. The study is explanatory as it seeks to establish causal relationships between variables by emphasizing on studying a situation in order to explain the relationships between variables and furthermore. The use of description in the study is likely to be a precursor to explaining (Saunders et al., 2009).
Target Population
According to NSE (2015), there are approximately 64 listed firms in 11 categories. The target population for the study was made of all listed companies at the Nigeria Securities Exchange.
CHAPTER FOUR
DATA PRESENTATION AND INTERPRETATION
Introduction
This chapter presents data analysis and their interpretation based on the data collected from the listed firms in Nigeria Security Exchange (NSE) which have been consistent from 2014 to 2020. The chapter analyses the variables involved in the study and estimate the conceptual model described in chapter two. The section begins with the description followed by the presentation of the descriptive statistics of the study variables and inferential statistics respectively. Accordingly, hypotheses testing were done and the explanations of the findings were subsequently presented. Ultimately, the conclusion of the hypotheses was supported by a discussion.
CHAPTER FIVE
FINDINGS, CONCLUSION AND RECOMMENDATIONS
Introduction
This chapter summarizes and presents the research findings of the effect of CEOs characteristics on the firm value of publicly listed firms in Nigeria during the period 2014-2020. For clarity purposes, the discussions are based on the research hypotheses of the study. The study discusses each hypothesis separately starting with a summary, discussion and its conclusion. The study provides policy recommendations limitations and recommendations for further research.
Summary
First, the study presents the demographic characteristics of the CEO in the sample. The average age for the CEO was about 48 years and with an average of seven years’ tenure. About 6% of the CEOs are female.
Secondly, the main objective of the study was to determine the effect of CEOs characteristics on the firm value of publicly listed firms in Nigeria. This section presents the findings from the study in comparison to what other scholars have said 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 value of listed firms in Nigeria. The results show that CEO duality has no significant effect on the firm value of listed firms in Nigeria. The study finding indicated that CEO duality does not affect firm value because of the fact that the corporate governance code in Nigeria does not envision or allow a situation where the board chairperson and chief executive office are occupied by a single individual. The absence of duality in the governance structure then would suggest that the firm value decision is individually generated and directed by the CEO and with approval from the 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 significant negative effect on the firm value of listed firms in Nigeria. The study finding indicated that CEO tenure negatively affects the firm value of listed firms based on the fact that longer-tenured CEOs tend to assert themselves in the corporate financing decisions and thus institutionalize the use of debt more than equity. The increased use of debt as opposed to equity in corporate financing decisions is more likely preferred because of the tax allowance and benefits. Besides, the use of debt by these CEO can also be attributed to the favourable cost of financing from the debt from the capital market. Nigeria is considered a bank-based system as opposed to the capital – market-based system because of the relatively nascent developed capital market when compared to the well-developed banking system.
The third objective sought to assess the effect of the CEO gender on the firm value of listed firms in Nigeria. The results show that the gender of the CEO has a significant positive effect on the firm value of listed firms in Nigeria. The study finding indicated that the gender of the CEO positively affects the firm value based on the fact that most firms have male executives as opposed to female CEOs. The empirical literature indicated that female executives are risk-averse and therefore would be reluctant to use debt financing less often. On the converse, the dominance of the male CEOs would then portend the use of debt either based on their personal characteristics or the 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 a significant positive effect on the firm value of listed firms in Nigeria. The study finding indicated that the age of the CEO positively affects the firm value based on the fact that older CEO tends to go for more debt. The fact that older CEO are more likely to use more debt is explained by individual personal characteristics, behaviours and experience in the position would be validated by the market as a signal to the firm’s foundation. By using more debt, either the CEO signal the firm’s capability to market and thus its reputation to use the capital wisely and/or the true value of the firm as indicated by the market is not optimized, thus the cost of using equity would be significantly higher in comparison. Due to this, the CEO would consciously use more debt as a signal or the taxable allowance benefit of 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 has a significant positive effect on the firm value of listed firms in Nigeria. The study finding indicated that most of the CEOs hold graduate degrees. The empirical literature indicated that executives with graduate degrees or MBA are risk-takers and thus would go for more debt.
Conclusion
This study examined the effect of CEOs characteristics on the firm value of publicly listed firms in Nigeria. There is overwhelming evidence from the study showing that CEO duality has a positive and no significant effect on firm value. This implies that one tier of leadership is appropriate to get more funds as debt. This is due to the fact that CEO duality avoids the conflict between the CEO and the chairman. The study is therefore in support of the proposition that having a CEO in the firm who is both a chairperson and at the same time the CEO, there is a higher likelihood that firms will increase its firm value.
With regard to CEO tenure, the study found that CEO tenure has a negative effect on the firm value. As CEOs acquire firm-specific knowledge early in their tenure, the result is better firm performance. Eventually, as tenure continues to advance, boards lose their oversight and firms engage in a more value-destroying activity.
The study also found out that gender diversity is likely to bring on board a wide array of individuals that are knowledgeable and conversant with the management of the firms. However, the study has indicated that CEO gender has no significant effect on the firm value. There is thus need for further studies on the same so as to validate this concept.
Besides, the study has established that CEO age has a positive and significant effect on the firm value. The average age for the CEOs is 48 years. This is an indication that the CEOs are older individuals. The CEOs are therefore more likely to pursue lower leverage on debt ratio to enhance the firm performance.
Finally, the existence of educated CEOs could lead to better management decisions and help firms in attracting better resources, the study has indicated that CEO education has a negative effect on the firm value. It can, therefore, be inferred that the more educated the CEO gets, the more cautious he/she becomes of the risk of bankruptcy lies in debt. As a result, firms will have less capacity to borrow in times where financing is necessary.
Based on the trade-off theory, certain firm-level factors are associated with the firm’s corporate leverage activities no matter the country or region. These factors include firm size and asset tangibility which have a positive effect, while profitability negatively associates with the firm value (Belkhir et al., 2022). There is little evidence that firms follow industry norms of firm value or that managers use debt or equity for agency costs or tactical reasons such as to pressure employees or to motivate managers to work harder. We find moderate support for the trade-off theory but less for the pecking order theory.
Recommendations
Based on the findings of the study on the effect of CEOs characteristics on the firm value of publicly listed firms in Nigeria the following recommendations were 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 the duration they have served the company or they have been in the mentioned industry. With this in place, firms will be able to appoint CEOs that are conversant with the dealings of the firm and those with wealth of experience.
The finding of the study indicated that the CEO education has a negative effect on the firm value. It therefore importance for firms to employ more educated CEOs in order to enhance longevity of the firm.
Based on the study findings, there is a significant relationship between the age of the CEOs and firm value. It is therefore utmost necessary for CEOs to be mature individuals. Older CEOs have the requisite knowledge and experience hence they can be tasked with making important decisions pertaining firms’ financing.
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