Statistical Analysis Of Crude Oil Production In Nigeria

Introduction

1.1 Background to the Study

The relation between ownership structure and firm value has been reported to be one of the most interesting issues in corporate finance (Sanda, Mika’ilu & Garba, 2005). It is the subject of continuous debate since the original paper of Berle and Means (1932) who suggested that firms with a wide dispersal of shares tend to under-perform. Berle and Means (1932) observed that during the 1920s, ownership structure in public companies became one in which shareholders had become so numerous and dispersed that they were no longer able to manage the companies they owned and needed to monitor management. In recent years the discussion has centred on an assessment of the relative advantages and drawbacks of concentrated ownership structure as opposed to the separation between management and ownership (Usman & Yero, 2012).

In the light of the conflicts between owners and manager, one of the objectives pursued by governance mechanisms is to prevent managers/directors from taking inadequate measures or from performing in a manner that is inconsistent with maximizing value to the owner, a phenomenon of management immunity can sometimes develop. This is known in the literature as observed by Jensen and Mecklin, (1976) as ‘management entrenchment’. Management entrenchment reflects the situation in which managers/directors are immune to the discipline imposed by a wide range of control mechanisms (Berger, Ofek & Yermack, 1997). The level of the managers/directors’ entrenchment according to Demsetz (1983); Bebchuck, Cohen and Ferrell (2009) may be enhanced by several factors, particularly the weight of ownership held and voting power in decision-making. Managers/directors can also choose to invest in projects that would be rejected when the rate of return required by the owners is considered, but which would meet their own expectations (Fama & Jensen, 1983; Bebchuk, Cohen, & Ferrell, 2009; Lisboa, 2007). For higher levels of managerial ownership, performance increases again, as the owner/manager/director of the company has additional incentives in valuing share price (Loderer & Martin, 1997).

On the other hand, ownership concentration is another mechanism of corporate governance which influences agency costs (Jensen & Meckling, 1976). Based on this premise, the effect of ownership concentration on performance has been widely documented in the literature (Sanda, Mika’ilu and Garba, 2005). Since dispersion creates free riding problems and makes it difficult to supervise, a positive relationship is expected between ownership concentration and corporate performance. Consistent with this hypothesis supervision, Shleifer and Vishny (1986) refer to the important role played by large owners, and how the stock price rises as the percentage of shares held by them increases. Also, Grossman and Hart (1986) argue that owners with a high stake in the company show greater willingness to play an active role in decisions as they can internalize the benefits of their monitoring effort. The method used by large owners to oversee the management/ administration is a result of informal agreements drawn up amongst them (Shleifer & Vishny, 1997). Nevertheless, ownership concentration can lead to conflicts between controlling and minority owners leading to worse performance, as advocated by expropriation hypothesis. Conversely, if the value of the company is too high in relation to expectations generated and participation is subject to high risks, the owners are driven to sell part of their holdings (Pinto & Augusto, 2014).

Conflict of interests between managers and shareholders as well as between controlling and minority shareholders lies at the heart of the corporate governance literature (Jensen & Mecklin, 1976). The literature however fails to produce any conclusive evidence on the relationship between ownership structure and firm profitability as Mitton (2002), Joh (2003) found a positive effect of ownership on firm performance while Dalton, Daily, Certo, and Roengpitya(2003); Sanchez, Juan and Garcia (2007) on the other hand find no substantive relation between ownership structure and profitability. Most of the studies are in banking sector, manufacturing firms, conglomerates (Andow & David, 2016; Saifullahi, Muhammad & Shehu, 2015) but has been carried in the oil and gas sector.

These inconclusive findings by previous literature makes this study relevant as the study’s domain which is the Nigerian oil and gas sectors is characterised with business who explore crude oil from the Niger Delta region of the country that has experienced several issues of militancy kidnapping and destruction of company’s asset. Given that researchers like Pinto & Augusto (2014) have argued that high environmental risk that affects the operation of business might instigate owners to sell part or all of their holdings which will consequently lead to a loss in equity other decision making roles they play in the board, it is therefore necessary to carry out such study to investigate the impact of ownership structures on the profitability of oil and gas firms in Nigeria as previous studies like Demsetz and Villalonga (2001) have observed that when owners of a privately held company decide to sell shares, and when shareholders of a publicly held corporation agree to a new secondary distribution, they are, in effect, deciding to alter the ownership structure of their firms and, with high probability, to make that structure more diffuse which ought to be influenced by the profit- maximizing interests of shareholders, so that, as a result, there should be no systematic relation between variations in ownership structure and variations in firm performance. Also, most of the studies in this area failed to make some robust tests in order to improve the validity and reliability of the statistical inference derived from the studies. However, this study conducts heteroskedasticity, hausman, Lagragian tests among others.

Though there are several studies that have investigate ownership structure as it relates to earnings management (Usman and Yero, 2012), dividend policy (Miko and Kamardin, 2015), capital structure (Mahrt-Smith, 2000), firm value San-Martin-Reyna and Durán-Encalada, 2012), firm performance (Saifullahi, Mohammed, and Hassan, 2015, Gambo, 2020); there is however not many studies that have investigated the impact of ownership structures on the profitability of oil and gas firms in Nigeria despite their contribution to the Nigerian economy at large and also noting the fact that since ownership in oil and gas companies in Nigeria varies with concentration, managerial, and foreign ownership, the result is uncertain as to how it will affect firm profitability. In this wise, the study raises the question how does ownership structure influences the profitability of oil and gas companies in Nigeria.The main objective of the study is to examine the effect of ownership structure(managerial ownership (MGO), concentrated ownership (INST) and foreign ownership (FRNO)) on the profitability of listed oil and gas companies in Nigeria.

1.2 Statement of the Problem

There are several studies conducted on ownership structure and firms profitability in developed economies like the United States, Taiwan, Russia, and France. Some of the studies are Harold and Belen (2001), Wang (2003), Pavel and Alexander (2001) and Eric (2011). Harold and Belen (2001) found no statistically significant relation between ownership structure and firm profitability. Wang (2003) showed that managerial ownership had a negative relationship with profitability of firms and a positive relationship exist between institutional ownership and profitability of firms. Pavel and Alexander (2001) found out that the association between ownership by different groups of owners’ ownership concentration, state ownership and firm’s profitability was relatively weak. Eric (2011) found out that there was no significant difference between type of ownership and profitability. The results in the above studies have shown mixed findings and these differences could be attributed to difference in economic structure of the countries studied as well as firms characteristics. In addition, most of these foreign studies used different industries as their domain. For instance, Pavel and Alexander (2001) used blue chips firms as their domain and Eric (2011) used firms in the financial sector as their domain. This could influence the results and the conclusions arrived at because every industry in the economy has its own inherent attributes, which could have a significant impact on the results and conclusions. However, this study focuses on the manufacturing sector specifically the quoted oil and gas companies in Nigeria to get a better picture of the relationship between dependent variable (Return on Equity) and independent variables (managerial ownership, institutional ownership and ownership concentration).

In Nigeria, there are studies that have been conducted on ownership structure and firm performance which include studies of Ogbulu & Francis (2007), Ioraver & Wilson (2011) and Uwalomwa & Olamide (2012). Ogbulu and Francis (2007) used all the firms quoted on the Nigerian Stock Exchange as the population. Purposive sampling technique was used to select the sample size using survey research design. Ioraver & Wilson (2011) on the other hand, used all listed financial firms as their population. Uwalomwa & Olamide (2012) used all firms in the financial sectors as their population. The two out of the three studies which are the studies of Ioraver and Wilson (2011) and Uwalomwa and Olamide (2012) used firms in service sector as their domain. The findings of studies that used firms in the service sector as their domain cannot be the same with the findings of studies that use firms in the manufacturing sector as their domain because of the nature of operation of business. The service firms are customer satisfaction oriented while the manufacturing firms are production oriented. This is the gap the study wants to fill. To this point, the study addressed the gap by looking at the manufacturing sector specifically the oil and gas companies in Nigeria to see if its findings are different from the financial sector. Also, studies of Ogbulu & Francis (2007), Ioraver & Wilson (2011) and Uwalomwa & Olamide (2012) in Nigeria have not taken into consideration multicollinearity and fixed and random effect. However, this study took into consideration multicollinearity and fixed and random effect. This is also a gap that the study wants to address.

This study to this end basically, seeks to investigate precisely whether or not ownership structure impact on profitability of Quoted oil and gas companies in Nigeria.

1.3 Objectives of the Study

The main objective of the study is to determine the effect of ownership structure on the profitability of listed oil and gas companies in Nigeria.

The specific objectives are:

To determine the extent to which managerial ownership significantly impact on profitability of listed oil and gas companies in Nigeria.

To determine the extent to which institutional ownership significantly impact on profitability of listed oil and gas companies in Nigeria.

To determine the extent to which ownership concentration significantly impact on profitability of listed oil and gas companies in Nigeria.

1.4 Research Questions

For the purpose of this study, the following research questions are addressed:

To what extent does managerial ownership impact on profitability of listed oil and gas companies in Nigeria?

To what extent does Institutional ownership impact on profitability of listed oil and gas companies in Nigeria?

To what extent does ownership concentration impact on profitability of listed oil and gas companies in Nigeria?

1.5 Research Hypotheses

In line with the objectives, three Null Hypotheses are formulated as follows:

HO1: Managerial ownership has no significant impact on profitability of listed oil and gas companies in Nigeria.

HO2: Institutional ownership has no significant impact on profitability of listed oil and gas companies in Nigeria.

HO3: Ownership concentration has no significant impact on profitability of listed oil and gas companies in Nigeria.

1.6 Significance of the Study

The Significance of the study arises from the fact that many studies have been conducted on Ownership structure and firm profitability of quoted firms at different time and in different parts of the world, most of the studies are well documented in accounting and finance literature but to the best of our knowledge no studies have been carried out on Ownership structure and profitability of listed oil and gas companies in Nigeria.

The following benefits are expected from the study:

The outcome of the research will assist the potential investors of the oil and gas companies in Nigeria to know whether ownership structure made impact on firms’ profitability, which will guide them in taking relevant investment decision.

The regulatory authority, Security and Exchange Commission (SEC) will benefit from the outcome of the study which will enable them examine the effectiveness of their monitoring instruments as well as review and upgrade them as appropriate. The study will be useful to accounting educators, thereby serving as an input and a motivation for further research.

1.7 Scope of the Study

The effect of ownership structure on the profitability of listed oil and gas companies in Nigeria as related to the manufacturing sector of the economy cannot be over emphasised. The population of the study is Six oil and gas firms quoted on the Nigerian Stock Exchange (NSE) as at 31st December 2022. Four firms are selected based on two criteria to eliminate the company considered not suitable for the study. The first criteria is; companies who are eligible to form part of the sample must have publish their annual financial report for the years under review and such documents must be accessible. Secondly, such companies must have been listed on the Nigerian Stock Exchange before 2012. The period of ten (10) years spanning from 2012- 2022 was chosen for the study, this period is considered long enough for the variables to form a pattern in combination with the economic activities of the industries. The period of study also envelops economic activities before, during and after the global economic meltdown.

1.8 Limitations of the Study

The limitations faced by the researcher in the course of carrying out this work include:

The variables of the study: the study used only three variables as proxies for ownership structure which are managerial ownership, ownership concentration and institutional ownership whereas there are other proxies such as family ownership, individual ownership and state ownership not same as ownership concentration.

The use of Return on Equity (ROE) as the only proxy to profitability.

Annual report: The study used data from annual reports. If there are falsifications of figures in those annual reports, it may likely affect the application of the study.

These limitations however, does not reduce the quality of the work rather it adviced for caution in the generalisation of the study.

1.9 Definition of the Study

Dividend:

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders.

Dividends Policy:

A dividend policy is the policy a company uses to structure its dividend payout to shareholders

Ownership Structure:

An ownership structure concerns the internal organization of a business entity and the rights and duties of the individual holding the equitable or legal interest in that business.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows.

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.

Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.

Chapter three deals on the research design and methodology adopted in the study.

Chapter four concentrate on the data collection and analysis and presentation of finding.

Chapter five gives summary, conclusion, and recommendations made of the study.