ABSTRACT
This study examines the effects that Corporate Governance has on the outcome of Corporate Investment Decisions of Ghanaian Companies.
This research is conducted on 19 Ghanaian companies sub-divided into Multinational and local Companies. Multiple regression analysis is used in this study in estimating the relationship between corporate governance characteristics and the outcome of investing decisions. The independent variables used which are Firm Size, Board Size, Board Independence, CEO Duality, Size of Audit Committee and the Independence of Audit Committee; represent the measure of corporate governance for this study. The results of this study show that for all 19 Ghanaian Firms, the Board Size, Board Independence and Size of Audit Committee are variables relevant in making sound investing decisions whose benefits companies can enjoy over a number of years. For multinationals, Board Independence, the Size of Audit Committee and the Independence of Audit Committee have positive relationships with investing decisions while for local companies the Board Size, Board Independence and the Independence of the Audit Committee are the variables having a positive relationship with the outcome of investment decisions.
This paper adds to the limited evidence on the governance-performance relationship that exists in Ghana but approaches the topic by focusing mainly on the outcome of investing decisions (capital budgeting decisions). This study can inform governance policy making in Ghana.
Keywords: Investment Decisions, Corporate Governance, Multiple Regression and Firm Performance.
TABLE OF CONTENTS
DECLARATION………………………………………………………………………………………………….. i
ACKNOWLEDGEMENT…………………………………………………………………………………….. ii
ABSTRACT……………………………………………………………………………………………………….. iii
TABLE OF CONTENTS……………………………………………………………………………………… iv
CHAPTER 1: INTRODUCTION…………………………………………………………………………… 1
CHAPTER 2: LITERATURE REVIEW……………………………………………………………….. 12
- Introduction………………………………………………………………………………………….. 12
CHAPTER 3: METHODOLOGY………………………………………………………………………… 21
- Introduction………………………………………………………………………………………….. 21
CHAPTER 4: RESULTS…………………………………………………………………………………….. 30
- Introduction………………………………………………………………………………………….. 30
CHAPTER 5: CONCLUSIONS…………………………………………………………………………… 46
- Introduction………………………………………………………………………………………….. 46
BIBLIOGRAPHY……………………………………………………………………………………………… 50
APPENDICES…………………………………………………………………………………………………… 56
Appendix 1…………………………………………………………………………………………………….. 56
Breusch and Pagan Multiplier Test for Random Effects……………………………………….. 56
Appendix 2…………………………………………………………………………………………………….. 57
Hausman Test………………………………………………………………………………………………….. 57
Appendix 3…………………………………………………………………………………………………….. 58
Regression Results for Local Companies…………………………………………………………….. 58
Appendix 4…………………………………………………………………………………………………….. 59
Regression Results for Multinational Companies…………………………………………………. 59
CHAPTER 1: INTRODUCTION
Background to the Study
The study and development of Corporate Governance began earnestly in developed economies like France, Germany, United States and the United Kingdom (Herrigel, 2007). Due to increased industrialization, firms grew larger and larger making the classical entrepreneurial systems of owner-manager give way to a more dispersed system. Hence, the creation of the system of ownership separated from management. The separation of ownership from management gives rise to the ‘agency problem’. Every organization whether or not management is separated from ownership must be governed well for the organization to achieve the strategic and operational goals the organization was incorporated to achieve.
Currently, in Africa, corporate governance has been widely accepted as it has implications for economic development and long-term growth (Okeahalem and Akinboade, 2003). For instance, a survey was conducted in 2000 by the Institute of Directors (IOD) for top 100 companies and some state-owned enterprises to investigate the current state of corporate governance practices in both the private and public sectors. The survey revealed that corporate governance practice had gained grounds in Ghana and several sub-Saharan countries (Okeahalem and akinboade, 2003). Developing countries vary from developed countries in many ways and as such, there is the need for developing countries to develop their own corporate governance models that consider the cultural, political, and technological changes in each African country (Mulili and Wong, 2011).
Modigliani and Miller (1958) “think of firms as collections of investment projects”. Two important decisions taken by the financial managers are the financing decisions and capital budgeting or investing decisions. According to Cooremans, (2009), capital budgeting decisions increases a firm’s economic capacity and financial value and is equally and sometimes even more important than the financing measures a company adopts. Financial managers are constantly faced with the decision of how to allocate scarce corporate resources of a company in a governance system and environment that is increasingly placing pressure on them (Waddock and Graves, 1997).
The pursuit to provide answers to issues that improve firm performance in Ghana is still an ongoing process with volumes of literature written around the subject (Fiador, 2016). The factors according to research that affect firm performance range from macroeconomic factors to industry level factors, through to firm level factors (Fiador, 2016). At the firm level, a factor central to the success or failure of a company is the firm’s investing decisions. An example of a successful outcome of an investing or capital budgeting decision was the development of the 757 and 767 jets by Boeing which increased stockholders investment by more than double and by the year 2002 the estimated cumulative profit for this investment project was estimated at $10 billion.
Capital budgeting failures like that of Iridium Communications can have unfortunate consequences on the existence of an organization. A $5 billion investment in a satellite system saw the company filing for bankruptcy in less than a year (YouSigma, 2008).
From the Iridium Communications example, the importance of the outcome of investing decisions is shown as they can affect the operations and the continued existence of an organization. Therefore, beyond governance systems, it is necessary to investigate the
possible returns or outcomes of a capital budgeting decision before implementation. Popular methods of valuing the feasibility of capital budgeting projects include the Net Present Value, Discounted Cash Flows, Payback Period, Internal rate of Return and the Profitability Index. These project appraisal techniques do not only access the financial returns of an investment project for a company but also the viability and feasibility.
Corporate governance failures also come with their own repercussions on a firm. Scandals such as those of Enron and WorldCom are attributed to poor corporate governance and the failure to consider stakeholder concerns in decisions (Mulili and Wong, 2011). The more current corporate governance failures in Africa are the Saanbou Bank, Fidentia (accaglobal.com, 2016) and First Strut (Wet, 2013). Following these scandals, many governments have set up new regulations to align the interests of stakeholders with corporate conduct (Wulili and Wong, 2011).
This study makes a contribution to the debate on the impact of corporate governance on firm performance particularly the outcome of a capital budgeting decision in a developing economy as Ghana’s. The concept of corporate governance and capital budgeting decisions are necessary areas of study that require much needed attention from financial managers and corporate managers. Their implications on the success and profitability of companies worldwide can be costly or beneficial. Many studies in Africa relate corporate governance with company performance and the investors’ decision to invest in a company (Mulili and Wong, 2011). This paper, however, does differently by focusing on corporate governance systems and how they influence the outcome investing decisions in Ghana.
Research Problem
Many notable scholarly articles written on the topic of corporate governance in Ghana establish the relationship between corporate governance and financing decisions (Abor, 2007), corporate governance and disclosure practices (Aboagye-Otchere, Bedi and Ossei Kwakye, 2012), corporate governance and financial performance (Kyereboah- Kyereboah-Coleman and Biekpe, 2006) among others. The different direction this study is taking is from the perspective of investing or capital budgeting decisions. According to Swain and Haka, (2000) “Capital Investment decisions is an activity that is crucial to future organizational variability, as indicated by the high level of time and resources typically committed by companies to the capital investment process.” Moreover, Myers, (1974) argues that there is a significant interaction between corporate financing and investment decisions and while the study by Abor, (2007) addresses Corporate Governance and Financing decisions, no study exists for investing decisions in Ghana.
Also, the study by Kyereboah-Coleman, (2008) looked at governance and firm performance based on the various industry sectors in Ghana. However, there has not been any empirical study that divides the companies based on their firm size. The literary gap, therefore, is that no known empirical study discusses corporate governance and the outcome of capital budgeting decisions in one paper. Furthermore, another literary gap exists as governance studies have failed to categorize sample companies according to their firm size. A perspective from Lozano and Boni (2002) identifies that multinational enterprises have continued to grow and increase worldwide and have a clear competitive advantage over local companies The size of a company is also known to influence the capital budgeting process and the firm’s performance as a whole (Pike, 1987).
