e-sRC

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Market prices of shares are among the important indices which influence investors’ decision
to invest in equity shares (Sujeewa, 2016). Share prices can be seen as important indices in
determining stock market returns. It refers to that price at which both the seller and buyer are
willing to exchange for a unit of share in a free market. It is influenced by the forces of
demand and supply as more buyers than sellers result in the rise in share price and vice versa.
Sujeewa (2016) argued that falling share prices are capable of negatively affecting the firms’
ability to raise funds from the stock market, because such firms find it difficult to obtain the
needed funds for expansion through the issue of shares, which costs less when compared with
sourcing for such funds through debt.
Factors influencing share prices have become one of the topical issues of research among
global financial scholars, who have examined different factors and their influence on the
prices. These factors have been broadly classified into microeconomic (firm’s internal) and
macroeconomic (firm’s external) factors (Jimoh, 2009). The microeconomic factors (also
known as firm’s attributes) which influence share prices include but not limited to earning per
share, book value of shares, dividends, liquidity, leverage, firm size, firm age, firm growth,
asset net assets, and cash flows. Also, the macroeconomic factors include interest rates,
inflation rates, exchange rates, gross domestic product (GDP), fiscal deficit and money
supply among others (Jimoh, 2009). Equally, Ibrahim and Aziz (2003) documented the
macroeconomic factors influencing share prices to include industrial production, risk
premium, inflation rates, gross domestic product (GDP) and oil prices among others.
Firms obtain finances to fund their businesses or investments through different sources,
mainly debts and equity. The extent of debt financing of a firm’s business activities indicates
its level of leverage. Uwalomwa, Olowe and Agwu (2012) suggest that leverage is negatively
related to share price. That is, as the debt content in a firm’s capital structure increases, its
share prices would drops. According to Mehul and Varadraj (2013), highly levered
companies are perceived to be riskier, and that leverage affects the changes in share prices. It
is therefore expected that highly levered firms would have lower share prices. Also, firms can
be classified according to their sizes. The size of a firm can be measured in many ways such
as the firm’s operation capacity usually reflected in its sales value, assets base, and
capitalisation among others. Mohammad (2014) posits that investors obtain better investment
opportunities in large firms than smaller ones. This, he argued, is in view of the fact that
shares of large companies do place investors in a more liquid and marketable position
because they are actively traded in the stock exchange. Hence the need to buy the shares of
large companies leads to increase in their prices. In addition, Olawale and Kazeem (2015)
identified the size of a firm as an important factor influencing share price. It can therefore be
argued that firm size is expected to exert positive influence on share price.
Firm age is also an attribute which is unique within a firm and differ among different firms.
Older firms are expected to have higher share prices as the value of their accounting
information can be more relevant in the market (Akeem, 2014). One can deduce therefore
that firm age would have positive influence on share price. Furthermore, firms are also
characterised by their growth rate. Mohammed and Usman (2016) suggest that growing firms
have the ability to offer better customer satisfaction which enables them to attain increased
sales level, thereby earning higher profits which may translate into the increase in their share
prices. Therefore, it can be argued that firms with higher growth rates are expected to have
increasing share prices.

Tangibility of assets is one of the attributes of a firm which is likely to have some impact on
share prices. Campbell and Ohuocha (2011) argued that tangible assets (also called real
assets) are those assets whose values are determined based on some physical properties (eg
building, machinery, land, and mine among others). Tangibility can be perceived to be the
ratio of a firm’s fixed assets over its total assets. By this definition, it can be argued that
tangibility is an important factor which determines a firm’s going concern because,
investment in fixed assets provides some assurances about the firm’s future cash flows.
Considering the fact that some shareholders invest with the main objective of earning capital
gains in the future, firms invest in fixed assets to facilitate shareholders’ wealth
maximisation. This will enhance investors’ confidence and increase demand for the firm’s
shares by prospective investors thereby resulting in the increase in share prices of such firms.
The evaluation of this factor (tangibility) in the manufacturing sector would not be out of
place in view of their investments in such fixed assets as production machines, delivery vans,
buildings, and IT equipment among others. In spite of the envisaged important roles of
tangibility in influencing share prices, the researcher could not find any study which
examined tangibility in relation to share price.This could be as a result of dearth of relevant
studies which evaluated such relationship. However, prior studies such as Vijitha and
Nimalathasan (2014); Edirin and Godsday (2015); and Sujeewa (2016) examined the
influence of net assets or net assets per share on share prices.Internal governance is one of the
corporate governance mechanisms in which control structures are directed towards proper
management of a corporation’s resources in order to safeguard investors’ interests. Brown,
Beekes and Verhoeven (2010) point out that internal governance usually emanates from the
decisions and actions of a firm’s shareholders and those of its board of directors. Drawing
from this position, it can be understood that internal governance is one among firms’
attributes which differ from one firm to the other. Mediha, Asma and Adel (2017) examined
the effect of both ownership structure and board structure on share price volatility and
established that the components of board structure have significant negative effect on share
price volatility. The components of board structure examined in the study were board
independence, CEO duality, and board size. In this study, board size will be examined as a
proxy for internal governance in relation to share price. Board size can be referred to as the
number of persons in a firm’s board of directors. Owing to the fact that the decisions and
actions of the board of directors are aimed at the firm’s growth, and shareholders wealth
maximisation, the relevance of board size in determining share price cannot be
overemphasised. It can therefore be expected that firms which have higher number of
members in the board of directors are likely gain more advantage in terms of the rise in share
prices. In spite of the perceived role of board size in determining share price, only a few
studies (such as Martiju&Vinay, 2005; and Mediha, Asma, &Adeh, 2017) have examined the
effect of board size on share prices. This study would therefore examine board size as a proxy
for internal governance, and its impact on share prices.
Market concentration is also one of the firms’ attributes which are expected to exert some
influence on the prices of shares. Hrazdil and Zhang (2012) argued that market concentration
is a very useful interface for competition among the different firms in an industry. It was
suggested in the study conducted by Aghion, Bloom, Blundell, Griffith, and Howitt (2005)
that competition measures can be used to determine the extent to which market structur
affects investments and innovations. Market concentration can simply be referred to as the
proportion of sales of one firm relative to other firms within the same industry. However,
Enida and Vasilika (2013) argued that market concentration can be determined using other
factors than sales, such as production, employment, and other relevant indicators. Owing to
the fact that the turnover of a firm has direct bearing on its profitability, it can be posited that
turnover is a factor which can affect the firm’s share price. This is because, higher turnover
ceteris paribus translate into higher profits for a firm, which can result in increase in the
firm’s share prices because of attracted increased investors patronage. By this position, it can
be expected that market concentration would have a positive effect on share price. The
assessment of this factor (market concentration) in the Nigerian manufacturing sector would
be plausible in view of the large number of competing firms in the sector. For instance,
African Pints (Nig.) Plc, Berger Paints Plc, DN Meyer and other paints producing firms
would always compete to ensure that their respective products are patronised more to enable
them earn higher turnover. In spite of the expected effect of this factor on share prices,
previous studies have neglected to examine the relationship between market concentration
and share prices. However, some studies such as Adekunle, Agbadudu, and Ammeh (2015);
and Ijeoma (2015) only examined the effect of some profitability ratios (return on equity and
return on assets) on share prices.
Studies have been conducted in both developed and developing economies to ascertain the
influence on share prices by the respective factors. Studies conducted on the influence of
microeconomic (firm’s internal) factors on share prices produced divergent outcomes. Some
of the studies established positive relationships (Edirin&Godsday, 2015; Ijeoma, 2015; and
Dissanayake&Biyiri, 2017), whereas others documented positive relationships between some
of the factors (earning per share, book value per share, net assets per share, and dividend per
share among others) and the share price, as well as negative relationships between the other
factors (liquidity, firm size, leverage and total dividends among others) and share prices
(Nidhi&Kamini, 2013; Maimako, (2014); and Muzammal, Syed &Amjad, 2014). This study
would examine firm attributes (leverage, firm size, firm age, firm growth, tangibility, internal
governance, and market concentration) and their impact on the share prices of manufacturing
firms in Nigeria.
The manufacturing sector in Nigeria is considered as the second largest employer of labour
apart from the government (Mahmoud, 2016). The sector consists of five sub-sectors, which
include agriculture, conglomerates, consumer goods, healthcare, and industrial goods. As a
result of the sector’s importance in the Nigerian economy, in which it contributes a major
component of the nation’s Gross Domestic Product (GDP), the federal government has
established different policies over time to strengthen the operations of manufacturing firms
and to enlarge their scope of activities so as to enable them maximise shareholders’ wealth
through improved financial performance (Mahmoud, 2016). This makes the sector relevant
for the assessment of share prices behavior. Also, the unprecedented decline in oil prices
motivated the federal government’s decision, in which it has recently reiterated the need to
develop the manufacturing sector in order to move Nigeria from an import-based to an
export-based economy. Thus, the sector provides a good motivation for assessing the impact
of firms’ attributes on share prices of firms operating in the sector in Nigeria.
1.2 Statement of the Problem
Market prices of shares are among the important indices which influence investors’ decision
to invest in shares. This is because such increases will offer prospective investors the
confidence of earning some future returns in the form of capital gains. Therefore, the
understanding of share price movements in the capital market will be useful to investors for
their investment decisions. In Nigeria, the activities of the past such as recapitalisation of the
banking sector in the year 2004 and the insurance industry in the year 2005 improved the
activities of the manufacturing sector by facilitating their production growth. Although
marginally, the growth in the manufacturing sector created increased public awareness and
investors’ confidence on the movement of share prices of manufacturing firms in Nigeria
(Ajao&Wemambu, 2012). However, investors in the recent time have been worried about the
fluctuations and instability in the prices of shares in Nigeria (Ogbade&Austine, 2015). This
may not be unconnected with the recent economic hardship faced by the Nigerian economy,
which ranges from high inflation rates, among other factors.
In spite of the efforts made by previous researchers to establish the reaction of share prices to
the numerous factors, their measurement of share price may be faced with some
shortcomings. For instance, Shobhana and Karpagavalli (2011); Sharma (2011); and
Karpagavalli and Nirmala (2014) measured share price as the average of the highest market
price and the lowest market price of the shares during the financial year. In contrast, Anita
and Yadav (2014); and Shamki and Khalaf (2016) used closing price as at the financial year
end as the measure for share price. In Nigeria, prior studies such as Okolie (2014), Oyinola
and Ajeigbe (2014), and Kehinde, Uwalomwa, Olubukola, Osariemen and Sylvester (2017)
used the closing price as at the balance sheet date as the measurement of share prices.
Considering the nature of the Nigerian stock market, the reaction of the market to new
information would be slow. It would therefore be practically impossible to expect that closing
price at financial year end can reflect any change resulting from the firm’s accounting
numbers of the same financial year. Also, the study conducted by Adaramola, and Oyerinde
(2014) measured share price as the price as at the end of third month post balance sheet
date.This measure of share price may be considered as being capable of reflecting the effect
of new accounting information of the preceding year. However, the measures may be
criticised for not being capable to sufficiently represent the share prices of a financial year.
This is owing to the fact that share prices fluctuate almost on a daily basis, hence taking the
price of only one business day may not be sufficient to represent the share prices of a
financial year.
Furthermore, another Nigerian study conducted by Mohammed and Usman (2016) used the
average share price for three months (ie 1st April to 30th June) as a measure of share prices. It
is therefore not clear as to whether the share price data obtained by the study relate to the
same balance sheet year or post balance sheet year, hence attract some doubt with regard to
the relevance of the share price data used in the measurement. However, if it is assumed on
one hand that the share price data used was for the balance sheet year, the research outcome
may be seen as spurious because the share price would have preceded the balance sheet data
used hence cannot reflect the reaction of the share prices to annual the financial data. If on the
other hand the share price data is for the post balance sheet periods, the research effort may
then be a commendable one because of the long period data used. Even though, the use of a
relatively lengthier post balance sheet period’s share price data may better reflect the reaction
of share prices to balance sheet data because of the slow reaction of the Nigerian stock
market to new information. This study therefore strives to minimise or even eliminate the
aforementioned shortcomingsby using the share prices of lengthier time periods,
thusmeasuring share price as the average of quarterly closing prices of the first three quarters
(March 31; June, 30; & September 30) of the post balance sheet year so as to have a better
and more sufficient representation of the annual share prices. This may equally produce a
better research outcome.
In addition to the shortcomings faced by the measurement of share price in most previous
studies such as Shobhana and Karpagavalli (2011) and Shamki and Khalaf (2016), a majority
of the studies were focused on the stock markets of different countries without consideration
for sector specifics despite the fact that firms in one sector share certain common peculiarities
different from those in another sector. For instance, studies conducted by Pramond and Pija
(2012); and Hassan (2015) concentrated on the stock markets in India and Nigeria
respectively. However, few studies like Mohammad (2014) in Jordan, and Ganna and
Cornelia (2016) in the USA, among others, concentrated on the Banking and Aviation
Industries respectively. In addition, some similar studies in Nigeriansuch as Mohammed and
Usman (2014), and Kehinde et al. (2017) respectively focused on the Nigerian
Pharmaceutical firms and the Banking industry respectively. However, only few studies in
Nigerian such as Mahmoud (2016) were conducted in the Nigerian manufacturing sector, but
examined the relationship between earnings quality and share price.This therefore creates the
vacuum to be filled by further studies on share prices in the Nigerian manufacturing sector.
Also, all the studies by Edirin, and Godsday(2015), Yusuf, Ibrahim and Alabede(2015) and
Sujeewa(2016) which examined the impact of assets on share prices made use of the value of
net assets per share. The major pitfall of using net assets value (NAV) is that it merges the
assets which have both long term (fixed assets) and short term (current assets) effects on the
firm. However, considering the nature of tangibility which serves as a more dependable
collateral for obtaining loans and other credit facilities, and owing to the fact that investment
in shares is mostly aimed at earning future capital gains in the long run, it will be necessary to
assess the effect of fixed assets on share prices. Therefore, this study would be among the
few, if any that examined tangibility (the ratio of fixed assets to total assets) and its impact on
share price.
The measurement share price as the average of quarterly closing prices of three quarters
(March 31; June, 30; & September 30) of the year introduced in this study, coupled with the
mono-dimension focused of most previous studies, and the introduction of new variables
suggest the need and motivation for further studies in the area. Hence a study of this nature in
the listed manufacturing firms in Nigeria would not be out of place. This is in view of the fact
that manufacturing sector in Nigeria plays a very important role in job creation, which is one
of the major activities that drive the Nigerian economy. It is against this backdrop that this
study concentrates on the impact of firm attributes on share prices of listed manufacturing
companies in Nigeria in order to fill the established gaps, and to serve as addition to the
number of similar studies conducted on specific sectors.
Subsequent to the statement of problem, it becomes pertinent to ask the following questions:
i.) How does leverage impact on the share prices of listed manufacturing companies
in Nigeria?
ii.) To what extent does firm size impact on the share prices of listed manufacturing
companies in Nigeria?
iii.) What is the impact of firm age on the share prices of listed manufacturing
companies in Nigeria?
iv.) How does firm growth impact on the share prices of listed manufacturing
companies in Nigeria?
v.) To what extent does tangibility impact on the share prices of listed manufacturing
companies in Nigeria?
vi.) How does internal governance impact on the share prices of listed manufacturing
companies in Nigeria?
vii.) What is the impact of market concentration on the share prices of listed
manufacturing companies in Nigeria?