TRIPLE BOTTOM LINE ACCOUNTING

TRIPLE BOTTOM LINE ACCOUNTING

INTRODUCTION

Globalization has brought with it a widerealization that companies do not operate in isolation, but can have significantimpacts on the environment and people at local, national and global levels(International Forum on Globalization, 2008). For the purpose of measuring theimpact of business activities on the environment and the society, Hamilton(2001) noted that the conventional system of business and national accounts isinadequate, because it does not deal with the priceless environmental andsocial externalities, which are important in a sustainable development thusrequires an extension of the standard framework. This has led to an increasingawareness of the “triple bottom-line” of business success – measuring thebusiness not only in its financial performance, but by its social andenvironmental impact as well (Henri & Journeault, 2006).

The triple bottom line (TBL) refers to thesocial, environmental, and economic value of an investment. The concept isincreasingly salient to economic development related fields such as business,finance, planning, and real estate. Triplebottom line is an accounting framework with three parts: social,environmental (or ecological) and financial. Some organizations have adoptedthe TBL framework to evaluate their performance in a broader perspective tocreate greater business value. In traditional business accounting and commonusage, the “bottom line” refers to either the “profit” or “loss”,which is usually recorded at the very bottom line on a statement of revenue andexpenses.

OBJECTIVES OF THE STUDY

Theobjectives of this  seminar paper is toexamine the concept of triple bottom line accountings standard so as ascertainits relevant to the accounting systems of an organization and its impact on thesocial, economic and environmental effects of the firms activities on the localpeople.

SCOPE OF THE STUDY

Aspects of the Triple Bottom Line (TBL) conceptare addressed in economic development literature; however, a clear definitionof TBL economic development is lacking. Furthermore, little research has beenconducted regarding how economic development professionals view and practicethe concept. This study addresses those gaps, paving the way for moreproductive engagement with an important and timely topic. The study begins withan introduction to the TBL concept, review literatures on TBL; discuss thefindings based on the reviewed literatures and draw conclusions.

LIMITATIONS

Thisseminar paper is limited to the above stated scope because of time, lack ofavailable materials and financial implications of the research. However, the researchermakes necessary effort within his reach to ensure that the seminar paper isresearched and conducted to a reasonable conclusion.

LITERATURE REVIEW

The Triple Bottom Line Concept

The triple bottom line term was coinedin the 1990s by business consultant John Elkington to describe economic,environmental, and social value of investment that may accrue outside a firm’sfinancial bottom line (Elkington, 2004). The TBL approach aims to moreaccurately value assets and leverage resources, so that capital is employed asefficiently and effectively as possible. The concept is sometimes referred to asthe 3Ps (people, planet, profit), triple value adding (Roberts & Cohen,2002), and blended value (Emerson, 2003). Triple bottom line thinking isinformed by and relates to the concept of sustainable development—the premisethat development should occur in ways that meet the needs of current generationswhile maintaining conditions and opportunities for future generations to do thesame (World Commission on Environment and Development, 1987). Inherent in the definitionof sustainable development are concepts of environmental stewardship and inter-and intra-generational equity.

Efforts to define and address sustainabilitywere born from the recognition that existing development patterns cannot proceedwithout jeopardizing the environmental systems necessary to sustain life andeconomies, and that significant disparity within and between generations isneither sustainable, ethical, nor in tune with development goals. Triple bottomline and sustainability concepts have gained traction in fields related toeconomic development including business, planning, finance, and real estate.This is evidenced by the growing number of journals, books, professionalorganizations, certifications, and conferences addressing sustainability inrelated topics such as impact investing, responsible property investment, andcorporate responsibility. As discussed below, aspects of the TBL are addressedin economic.

According to Bernardez (2005), sustainable development isa concept, which underscores that the rate of consumption or use of naturalresources should approximate the rate at which these resources can be sustainedor replaced. It is a development process that aimed at achieving the needs ofthe present generation without depriving the future generation the ability toachieve their own needs. There are several approaches to achieving sustainabledevelopment. This paper is however concerned with the application of accountingframework in sustainable development effort. Spreckley (1981) argued thatconsidering the impacts of business activities on the environment and society,enterprises should measure and report on social, environmental and financial performanceto evaluate their contributions to sustainable development. He thereforearticulated the triple bottom line in a publication called Social Audit – AManagement Tool for Co-operative Working. The phrase “triple bottomline” was coined by John Elkington in his 1997 book Cannibals with Forks:the Triple Bottom Line of 21st Century Business (Brown, et al, 2006). A TripleBottom Line Investing group advocating and publicizing these principles wasfounded in 1998 by Robert J. Rubinstein.

Over the last decades, environmentalists andsocial justice advocates have struggled to bring a broader definition of“bottom line” into public consciousness, by introducing full costaccounting. For example, if a corporation shows a monetary profit, but theirasbestos mine causes thousands of deaths from asbestosis, and their copper minepollutes a river, and the government ends up spending taxpayer money on healthcare and river clean-up, how do we perform a full societal cost benefitanalysis? The triple bottom line adds two more “bottom lines” social andenvironmental (ecological) concerns (Magee & Scerri, 2012).

For reporting their efforts companies maydemonstrate their commitment to CSR through the following: top-levelinvolvement- CEO, Board of Directors, policy investments, programmed, signatoriesto voluntary standards, principles – UN Global Compact-Ceres Principles, and reporting– Global Reporting Initiative(Bernardez, 2005; Kaunfman, 2011 ).

Dixon (1994) identified the followingfunctions of triple bottom-line accounting: it assists corporate managers intargeting costs reduction, improving quality in reinforcing quality’ principles;reveals the firm’s financial, social and environmental assets and liabilities,hence employees are motivated to search for creative ways of reducing theliabilities; encourages changes in processes to reduce waste, resources used,recycle waste or identify markets for waste; allocates costs to the appropriateproduct, process, system or facility and thus reveals costs to  responsible manager; provides better estimatesof the true cost to the firm of producing a product and this improves pricing,thereby increasing sales and consequently profit; reassures shareholders and investorsabout the operations and performance of the company and this enables managersreduce the information gap between them and investors, thus gaining investors’confidence. This requires the firm to lower its cost of capital, raise itsstock valuation multiples, increase stock liquidity and enhance interest by institutionalinvestors; and indicates the level of business dependences on environmentalresources thereby serving as a premonition to the business on its use ofnatural resources and the impact on the society (Matthews, 1993).

Economic Development in Practice

Having defined TBL and sustainable economicdevelopment, we consider whether and how the concept has been addressed inpractice. Research regarding how economic development practitioners understandand prioritize TBL or sustainable development is sparse, though consistentlyidentifies the population as having limited engagement with sustainabilitythemes. Jepson (2003) surveyed 500 certified city planners and found that thosewho self-identify as economic developers offered slightly lower support for ecologicallyfocused sustainable development activities than planners with otherspecializations. Zeemering (2009) utilized Q methodology with 28 economicdevelopment officials in the nine-county San Francisco Bay Area and found thatparticipants do not hold a unified conceptualization of sustainability (e.g.,varying levels of emphasis on economic, environmental, and social factors) andthat prioritization of potential actions is influenced somewhat by context(e.g., whether a factor is constrained in their jurisdiction or viewed aswithin the organization’s scope of responsibility). Grodach (2011) exploredbarriers to sustainable economic development in 15 Texas cities throughdocument analysis and interviews with economic development officials. He foundthat economic development officials rarely mentioned TBL themes when asked todefine the purpose of economic development, but did mention TBL themes whenasked to identify important assets for economic development (e.g., humancapital, educated workforce, quality of life, accessibility, and regionalcollaboration).

Sustainability themes were viewed primarilyin relation to how they may negatively impact future growth and as outside theeconomic developer’s control. A competitive and reactive approach to developmentwas identified as a barrier, along with a conventional economic developmentmindset that emphasizes attention to economic growth over social equity andenvironmental protection.

DISCUSSION OF FINDINGS

Triple bottom line and sustainable economic developmentunderstand the purpose of economic development to be improved well-being andquality of life through the creation of jobs and wealth, and the process ofeconomic development to include creation, expansion, retention, andrecruitment, of jobs and businesses through a mix of techniques. Thesetechniques include, for example, business assistance, workforce development,and the cultivation of networks, infrastructure, and amenities that supportbusiness development and influence business location decisions. It adds to thisconventional view a recognition that economic development is inextricablyconnected to environmental and social factors, and that all three must beaddressed for economic development to succeed.

The research indicates that economicdevelopment professionals generally favor the consideration of economic, environmental,and social dimensions when making economic development investments, yet few doso. A number of interrelated factors may contribute to this gap. First,economic development is situated in a broader context in which understanding ofand support for TBL concepts may be limited. Research in related areas ofplanning, administration, and sustainability suggests that organizational andcommunity characteristics impeding uptake and implementation of TBL conceptsmay include insufficient capacity, a weak understanding of and support by keyorganizational and political leaders, and low socioeconomic status (Conroy, 2006;Grodach, 2011; Hammer, 2010; Hammer, Allen, &Meier, 2010; Johnson &White, 2010; Saha, 2009; Saha & Paterson, 2008; Svara, Watt, & Jang,2013; Wang, Hawkins, Lebredo, & Berman, 2012). Second, economic developmentoccurs in a highly competitive environment where much of what affects outcomesis outside the jurisdiction’s control and success is narrowly defined.Furthermore, TBL economic development may be impeded by a lack of integration andcoordination among various policies and programs, with existing programs oftenat odds with TBL principles, and trade-offs between economic, environmental,and social goals assumed to be required. Finally, TBL or sustainability principlesare not core to academic and professional accreditation for economicdevelopers, which likely translates into a lack of knowledge and skills toinfuse TBL concepts into practice. For example, accreditation as a CertifiedEconomic Developer or Accredited Economic Development Organization does notrequire any coverage or proficiency with respect to TBL or sustainabilitytheory or practice.

CONCLUSION

Pareto principle posits that a developmentprocess that makes one better off and another worse off, is not desirable. Inlight of this, a business firm that achieves its financial performance andcauses environmental degradation and social imbalance in the society where itoperates needs to be called to order for sustainable development to strive. Inthis study, it was observed that triple bottom-line accounting operationalizedas financial performance, social performance, and environmental performance,has a significant relationship with sustainable development. These findingsagree with the works of Kaufman (2011), and Dixon (1994). This study confirmedthat increase in the adoption of triple bottom-line accounting will result inabout 59% increase in sustainable development in Nigeria.

REFERENCES

Brown, D., Dillard, J., & R. S. Marshall. (2006). “Triple bottomline: A business metaphor for a social construct.” Portland, Portland StateUniversity School of Business Administration Press.

Dixon, J. (1994) “Economic analysis of environmental impact” London,Earthscan Publishers Ltd.

Hamilton, K. (2001) “Indicators of sustainable development” GenuineSavings, The World Bank; Washington.

Henri, J.F., & Journeault, M. (2006) “Environmental performanceindicators” An Empirical Study of Canadian Manufacturing Firms. Journal ofEnvironmental Management, 86, 143-149.

James, P & Scerri, A. (2010) Auditing cities through circles ofsustainability: In Amen, M., Toly, N.J., Carney, P. L., & Segbers, K. (ed)Cities and Global Governance, 111–36.

Magee, L. & Scerri, A. (2012) “From issues to indicators” A Responseto Grosskurth & Rotmans’, Local Environment, 17(8), 915-933.

Matthew, M., R. (1993) “The emergence of ecological & environmentalaccounting” socially responsible accounting. London, Chapman and Hall.

Quarter, J., & Mond, R. (2007) “Social accounting for business”non-profits & cooperatives in Crolia; Academic Research Review 8 (2),34-41.

Scerri, A. & James, P. (2010) “Accounting for sustainability” Combiningqualitative & quantitative research in developing ‘indicators’ ofsustainability”. International Journal of Social Research Methodology13:41-45.

Spreckley, F. (1981) “Social audit: A management tool for co-operativeworking” Working Paper 6.

QUANTITATIVE TECHNIQUES

QUANTITATIVE TECHNIQUES

INTRODUCTION

Quantitative Techniques are about theanalysis of quantities (measured in physical, so-called objective data). Thesetechniques are scientific in nature, their objective is to provide procedureand process that will aid or assist problem solving. These techniques beingscientific in nature are model (mathematically) – based and therefore, followvery good logical (step by step) order.

Consequently, the areas of applicationsinclude: Accounting – cash flow planning, credit policies, planning ofdelinquent accounting system; Construction – allocation ofresources to projects, determination of proper crew size, maintenance crewscheduling and project scheduling; Facilities planning – factory size andlocation, hospital panning, international logistics system; Marketing– advertising allocation, product introduction timing, selection of productmix; distribution channels; Military – general logistics andsupply; simulation; trajectory etc;

Forecasting – profit, sales volume, market shares, brandswitching, production output, etc; among various others too numerous to listhere. Furthermore, they are devoid of personal opinions or judgment.

The quantitative techniques are essentiallyhelpful supplement to judgement and intuition. These techniques evaluateplanning factors and alternative as and when they arise rather than prescribecourses of action. As such, quantitative techniques may be defined as thosetechniques which provide the decision maker with a systematic and powerfulmeans of analysis and help, based on quantitative data, in exploring policiesfor achieving pre – determined goals. These techniques are particularlyrelevant to problems of complex business enterprises.

REASONS

Quantitative techniques though are a greataid to management but still they cannot be substitute for decision making. Thechoice of criterion as to what is actually best for the business enterprise isstill that of an executive who has to fall back upon his experience andjudgement. This is so because of the several limitations of quantitativetechniques. Important limitations of these techniques are as given below:

1. Theinherent limitation concerning mathematical expressions: Quantitative techniques involve the use ofmathematical models, equations and similar other mathematical expressions.Assumptions are always incorporated in the derivation of an equation and suchan equation may be correctly used for the solution of the business problemswhen the underlying assumptions and variables in the model are present in theconcerning problem. If this caution is not given due care then there alwaysremains the possibility of wrong application of the quantitative techniques.Quite often the operations researchers have been accused of having manysolutions without being able to find problems that fit.
2. Highcosts are involved in the use of quantitative techniques: Quantitative techniques usually prove veryexpensive. Services of specialised persons are invariably called for whileusing quantitative techniques. Even in big business organisations or publicsector we can expect that quantitative techniques will continue to be oflimited use simply because they are not in many cases worth their cost. Asopposed to this a typical manager, exercising intuition and judgement, may be ableto make a decision very inexpensively. Thus, the use of quantitative techniquesis a costlier affair and this in fact constitutes a big and importantlimitation of such techniques.
3. Quantitativetechniques do not take into consideration the intangible factors i.e., nonmeasurable human factors:Quantitative techniques make no allowances for intangible factors such asskill, attitude, vigour of the management people in taking decisions but inmany instances success or failure hinges upon the consideration of suchnon-measurable intangible factors. There cannot be any magic formula forgetting an answer to management problems; much depends upon proper managerialattitudes and policies.
4. Quantitativetechniques are just the tools of analysis and not the complete decision makingprocess: It should always bekept in mind that quantitative techniques, whatsoever it may be, alone cannotmake the final decision. They are just tools and simply suggest bestalternatives but in final analysis many business decisions will involve humanelement. Thus, quantitative analysis is at best a supplement rather than, asubstitute for management; subjective judgement is likely to remain a principalapproach to decision making.

CONCLUSION

Quantitativetechniques helps in cash flow planning, credit policies, planning of delinquentaccounting system in both private and public sector, however due to itslimitations conclude that the use of quantitative techniques for decision onany capital investment in Nigeria is a waste of time since the techniques onlyhelp in analysis while the decision making is left for the managers tocarryout.

REFERENCES

• Simon, M.K., 2011. Dissertation and scholarly research: Recipes for success, Seattle, W.A.: Dissertation Success LLC.
• Younus, M.A.F., 2014. Research Methodology. In Vulnerability and Adaptation to Climate Change in Bangladesh: Processes, Assessment and Effects (Springer Theses). Springer, pp. 35–76. Available at: http://link.springer.com/10.1007/978-94-007-5494-2_2 [Accessed August 1, 2016].

CONCEPT OF CORPORATE GOVERNANCE

CONCEPTOF CORPORATE GOVERNANCE

Corporate governance is the mechanisms, processes andrelations by which corporations are controlled and directed.Governance structures and principles identify the distribution of rights andresponsibilities among different participants in the corporation (such as theboard of directors, managers, shareholders, creditors, auditors, regulators,and other stakeholders) and includes the rules and procedures for makingdecisions in corporate affairs.

Corporategovernance includes the processes through which corporations’ objectives areset and pursued in the context of the social, regulatory and marketenvironment. Governance mechanisms include monitoring the actions, policies,practices, and decisions of corporations, their agents, and affectedstakeholders. Corporate governance practices are affected by attempts to alignthe interests of stakeholders.

Corporate governancehas also been more narrowly defined as “a system of law and soundapproaches by which corporations are directed and controlled focusing on theinternal and external corporate structures with the intention of monitoring theactions of management and directors and thereby, mitigating agency risks whichmay stem from the misdeeds of corporate officers.

Corporategovernance is the acceptance by management of the inalienable rights ofshareholders as the true owners of the corporation and of their own role astrustees on behalf of the shareholders. It is about commitment to values, aboutethical business conduct and about making a distinction between personal andcorporate funds in the management of a company.”

CATEGORYOF CORPORATE GOVERNANCE

Corporate governanceis the policies and procedures a company implements to control and protect theinterests of internal and external business stakeholders. It often representsthe framework of policies and guidelines for each individual in the business.Larger organizations often use corporate governance mechanisms to manage theirbusinesses because of their size and complexity. Publicly held corporations arealso primary users of corporate governance mechanisms.

1.POLICIES AND PROCEDURES

The first typeof corporate governance is a set of policies and procedures that a corporationuses to control and protect the business interest whether they are internal orexternal. This is represented by the policies and guidelines that need to befollowed by every individual in the business. This type of corporate governanceis oftentimes utilized by large corporations. This is due to the fact thatlarge corporations are complex and this type of corporate governance is a meansof simplifying the complexities that entails having a large corporation. Inaddition to that, publicly held corporations also utilize this type ofcorporate governance.

2.BOARD OF DIRECTORS

Another type ofcorporate governance is the board of directors. The board of directors isactually a mechanism that represents the stakeholders of the company. Itprotects their interest in the business. Board of directors is actuallycomposed of the stakeholders that are elected by them. The board is tasked tomanage and or review the company’s overall performance and to removeindividuals if necessary to enhance the company’s financial performance. Theboard of directors is the means employed by the stakeholders to bridge the gapbetween them and the company owners. The existence of the board of directorswill lose its essence if a corporation or company does not have stakeholders.Board of directors may be utilized by large private organizations andcorporations.

A board ofdirectors protects the interests of a company’s shareholders. The shareholdersuse the board to bridge the gap between them and company owners, directors andmanagers. The board is often responsible for reviewing company management andremoving individuals who don’t improve the company’s overall financialperformance. Shareholders often elect individual board members at thecorporation’s annual shareholder meeting or conference. Large privateorganizations may use a board of directors, but their influence in the absenceof shareholders may diminish.

3.AUDITS:

Auditing is another type of corporate governance mechanism. Basicallyaudits are reviews of the corporation’s financial transactions. Audits ensurethat the business or corporation is in concurrence to the guidelines set by thenational accounting authorities. Audits also ensure that the regulations andother external guidelines are met by the corporation. Auditing is an integraltool in the gathering of information by the shareholders or investors or eventhe general public in their assessment of the business or corporation. Auditscan help improve the corporation’s standing n the business scene. This isbecause business will be conducted willingly by other company if the companiesthey will be doing business with have a good track record.

Audits are an independentreview of a company’s business and financial operations. These corporategovernance mechanisms ensure that businesses or organizations follow nationalaccounting standards, regulations or other external guidelines. Shareholders,investors, banks and the general public rely on this information to provide anobjective assessment of an organization. Audits also can improve anorganization’s standing in the business environment. Other companies may bemore willing to work with a company that has a strong track record ofoperations.

4.BALANCE OF POWER

The last type ofcorporate governance mechanism is the balance of power. This ensures that noone person is vested with all the controlling powers of the company. Thisdistributes the powers to the board members, the directors and theshareholders. The roles established by this balance make sure that the companyis flexible and bend with the changing times. This makes the operation of thecompany smoother and without interruptions to the normal operations of thecompany.

Balancing powerin an organization ensures that no one individual has the ability to overextendresources. Segregating duties between board members, directors, managers andother individuals ensures that each individual’s responsibility is well withinreason for the organization. Corporate governance also can separate the numberof functions that one division or department completes within an organization.Creating well-defined roles also keep the organization flexible, ensuring thatoperational changes or new hires can be made without interrupting currentoperations.

CONCLUSION

Effectivecorporate governance is essential if a business wants to set and meet itsstrategic goals. A corporate governance structure combines controls, policiesand guidelines that drive the organization toward its objectives while alsosatisfying stakeholders’ needs.

REFERENCES

Shailer, Greg. An Introductionto Corporate Governance in Australia, Pearson Education Australia, Sydney,2004.

 Luigi Zingales, 2008. “corporate governance,” The NewPalgrave Dictionary of Economics, 2nd Edition.

Williamson, Oliver E. (2002).“The Theory of the Firm as Governance Structure: From Choice toContract,” Journal of Economic Perspectives, 16(3), pp. 178–87,191–92. [Pp. 171–95.]

Pagano, Marco, and Paolo F. Volpin(2005). “The Political Economy of Corporate Governance,” AmericanEconomic Review, 95(4), pp. 1005–1030.

Williamson, Oliver E. (1988).“Corporate Finance and Corporate Governance,” Journal of Finance,43(3), pp. 567–591.

Real Estate Marketing

 Real Estate Marketing

The real estate brokerage business is a strong traditional service agency that conveys market information for facilitating trading of the product (namely, real estate developments) within a highly inefficient market and mechanism (Li and Wang, 2006). Various scholars have examined the subject of real estate marketing (agency) from different perspectives. Pheng and Hoe (1994) examined the important attributes for real estate marketing. The study which was questionnaire-based identified twenty two (22) attributes. It was found in the study that ability to provide good service, good track record, dedication and total commitment, ability to achieve defined results and professionalism in dealings are the top most driving attributes of the agency firms for real estate consultancy. Qualified and experience team, big client base, ability to achieve desired results, dedication and total commitment are rated high as the attributes that influence the developers’ choice of appointing an agent. The study further concluded that consistent with the marketing mix concept for the marketing of services, the developer rates ‘people factor’ as a very important attribute which real estate agency firms should possess. The “people factor” includes the marketing team’s dedication and total commitment, their ability to achieve desired results, their experience and qualifications as well as their professionalism in handling deals.

Jud and Roulac (2001) in their study revealed the features of unethical practices in agency in the forms of multiple listing, disrespect of agency regulation, rise of fee for service pricing. The study revealed that the elements of no-service quality may be because of little or no entry barrier. The proliferation of various marketing strategy can also be attributed to the advent of the internet as posited by Nissen (1995), and Li and Wang (2006), that the roles of a service agent on the internet is classified as that of a watcher agent, learning agent, shopping agent, information retrieval agent and helper agent. However, the aspect of online real estate marketing is a ripe area to explore in Nigeria to identity the challenges confronting the practicing ESVs. Xu et al (2010) put forward a novel approach to describe the changing situations of the Chinese real estate market by means of Chinese Real Estate Confidence Index called CRE index, which is synthetically calculated based on its three sub-indices to reflect the three different aspects. The study served as a generic indicator to reflect changes in the Chinese real estate market, the CRE index provides all stakeholders with a quantitative method to verify history and detect tendency with regard to the progressive development of the market which is influenced by dynamic social and national conditions.

Iroham et al (2011) posit that in real estate agency practice, where the market is fraught with dearth of information, the role of the estate agent cannot be overemphasized particularly in bringing together parties of divergent interest in attaining specific goals. The authors surveyed 159 estate surveying firms and 91 property development companies in the commercial nerve centre of Lagos and indicated that multiple agency is mostly adopted in Nigeria real estate practice. The study consequently advocated for the modification of agency practice to eradicate all inefficiencies by safeguarding the interest of all parties. Munneke and Yayas, (2001) confirmed that the differences among brokerage firms and/or their agents suggest the possibility that some homes sell at premium prices and over a shorter time horizon than is the case with other broker-assisted transactions handled by less skilled or motivated agents. In the research conducted by Ke et al (2008), the performance of an estate agent is attributed to market environment volatility such as market uncertainty, housing market liquidity and house price changes. The study hence concluded that the size of a firm does not determine business performance and that there is need for enhancing, through training, the skills of estate agents in Nigeria per effective service delivery.

Considering the strategies in real estate marketing, it is important to state that marketing is the skill of matching the needs of a buyer with the product of a seller, for a profit. It is true to say that development property used to be a soft-sell product. In the light of this, it is ethical in Nigeria to erect bill board and place an advertisement. Nowadays, however, those marketing property developments are faced increasingly with a highly competitive and discerning market and one that demands better information. The days of certain markets, easy lettings and malleable tenants have gone, and for the foreseeable future they unlikely to retain property as a product has become more difficult to sell and those responsible for selling it require bringing a higher degree of professionalism to the market. (Araloyin and Ojo, 2011). This implies that property service is tasking if an agent is to claim any achievement. In accordance with the codes of conduct of NIESV (2005), the following approaches are allowed in real estate marketing: site or bill boards, direct marketing, press marketing, brochure/bulletin and personal contact ethically.

Concepts and Attributes of Marketing

Concepts and Attributes of Marketing

Marketing is a way or philosophy of life, a discipline, as well as organizational function. Alexander (1990) officially defined marketing as the performance of business activities that direct the flow of goods and services from producers to consumers or users. The Ohio State University (1964) described marketing as the process in a society by which the demand structure for economic goods and services is anticipated or enlarged and satisfied through the conception, promotion and physical distribution of such goods and services. It is important to state that the scope of marketing is broadened beyond tangible or physical goods.

It entails service delivery and satisfaction of people (consumers) with non-physical products or services (Olakunori, 2002). The overriding goal of marketing and every marketing organization is the identification and satisfaction of the needs of consumers. This implies that marketing is all about people and the satisfaction of their needs. Marketing is perceived by Kotler (1980) as human activity directed at satisfying needs and wants through the exchange process. Mentzer and Schwartz (1985) described marketing as consisting of the activities performed by individuals or organizations for commercial and non commercial objectives, aimed at satisfaction through the exchange process of buyers’ demand for products, services, people and ideas.

Olakunori and Ejionueme (1997) posit that marketing is the identification and satisfaction of people needs through the exchange process. The business activities in marketing are much of concern to some situations. Anyanwu (1993) opined that marketing consists of business activities that seek to anticipate demand, help in developing and making the products or services available to the satisfaction of the consumers (users and at a profit to the organization). The dynamism in the world of technology is bringing a kind of metamorphosis to the concept of marketing. Kotler (1994) defined marketing as a social and managerial process by which individuals and groups obtain what they need and want through creating, offering and exchanging products of value with others.

Moreover, Modern (1991) posits that the most important managerial task within the organization is that of understanding the needs and wants of customers in the market, and of adapting the operations of the organization to deliver the right goods and services more effectively and efficiently than its competitors. According to the author, marketing concept situates between two targets; the company and the market. The input of company is determined by the technology, research and development. Consumer or buyer behaviour and causes of changes in demand largely influence the market. As the company (service or goods providers) hit the market, the feedback, new products and service demands are expressed to the providers.

Advantages of Housing Cooperatives

Advantages of Housing Cooperatives

Housing co-operatives basically differ from other market actors by creating value for their members. With this in view UN-Habitant (2010) highlighted some advantages and there are noted below:

Economic Advantages

Co-operative society creates an opportunity for affordability of houses.Lower down payment, much lower closing costs, economies of scale, and a longer mortgage term all make co-operatives more affordable than other ownership housing. Members have no reason to increase monthly charges substantially unless taxes or operating costs go up, so monthly charges remain reasonable.

The cooperative member is usually considered a homeowner and, as such, can deduct his or her share of the real estate taxes and mortgage interest paid by the cooperative. Cooperatives can provide for accumulation of individual member equity. For market-rate cooperative societies, the accumulation of equity and resale prices are based on the market. Limited-equity coops establish limitations on the accumulation of equity to assure long-term affordability to new members.

Members have no personal liability on the cooperative mortgage. The cooperative association is responsible for paying off any mortgage loans. This can often make it possible for persons whose income might not qualify them for an individual mortgage to buy a membership in a limited equity coop.

With the involvement incooperative association, members can jointly exert influence in order to change tax rates and utility prices and obtain improved services from local governments. The cooperative, as consumer advocate, can also join with other organizations.  Cooperative society encourages saving among members. Members can benefit from economy of scale in cooperative operating costs as well as from not-for-profit operation. Also, when there are transfers, only the out-going member’s equity must be financed by the incoming member. Transfers of shares are subject to fewer settlement costs (UN-Habitant, 2010).

1. Social Advantages

Cooperatives housing offer control of one’s living environment and a security of tenure not available in rental housing. As mutual owners, member residents participate at various levels in the decision-making process. This is not true of tenants who usually do not have the opportunity to exercise responsibility. Members own the cooperative together and have the security of being able to remain in their homes for as long as they wish, as long as they meet their monthly obligations, and abide by the cooperative bylaws, rules, and regulations.

Many cooperative members indicate that the possibility for interaction with people from different backgrounds, cultures, and income levels is a positive factor in their decision to become a member.

By establishing cooperative procedures and working together, people are able to provide services for themselves that otherwise would be impossible to obtain. When one cooperatively organized venture is successful it often becomes clear that people can be successful in another area as well. As a result, the original effort often can be strengthened.

1. Physical Benefits

Shared maintenance responsibilities: cooperative members usually have limited direct maintenance responsibilities. The cooperative association is responsible for major repairs, insurance, replacement of worn-out buildings, and upkeep of common grounds and facilities.

Vandalism and Security: cooperative members vigorously protect their association’s property. An important benefit of converting rental properties to cooperative ownership is reduction in vandalism and abuse of property and improved and shared security arrangements. Recent studies show that the cooperative’s presence in the neighbourhood brings neighbourhood crime down (UN-Habitant, 2010).

Standard cooperative practices: it is evident that cooperative housing associations are most successful when operated in accordance with specific recommended practices, in addition to the general co-op principles. The cooperative’s board of directors should keep its members informed of all its actions. A regular communication system for instance, through frequent newsletter, information bulletins, special meetings, solicitation of members for opinions and priorities-strengthens the relationship between the board of directors and the members.

The cooperative society must maintain adequate financial reserves to protect the cooperative and its members’ interests. These usually include a general operating reserve and a reserve for replacing components of buildings as they deteriorate. Such reserves reduce the possibility of members having to pay unexpected special charges in emergencies. An annual audit should be conducted by professional accountants and made available to all members.  To protect the interests of the remaining residents, the cooperative board must have the right to approve incoming members who take the place of those leaving the cooperative. A credit check and a visit with the membership committee are usually required. This process also helps orient the incoming member to their rights and responsibilities as coop members (UN-Habitant, 2010).

HOUSING CO-OPERATIVE SOCIETY APPROACH TO HOUSING DELIVERY

HOUSING CO-OPERATIVE SOCIETY APPROACH TO HOUSING DELIVERY

According to Dogarawa (2005), Co-operative Societies emerged as an option explored by the majority which are mostly low income group and are somewhat alienated by the privileged minority that control the resources of an economy. The Societies have become a strong, vibrant and viable economic alternative in a period when many people feel helpless, powerless or disenfranchised to change their living conditions. Co-operative Societies are formed principally to meet peoples’ mutual needs based on the idea that together, a group of people can achieve goals that none of them could achieve alone. The formation and goal of Co-operative Societies is not to meet unessential collective or individual needs. Rather, it is aimed at providing basic needs which otherwise might take a long time to realize or completely unaffordable without assistance.

The UN-Habitat (2002) identified co-operatives as an important way of achieving the two goals of Habitat  Agenda which are “Adequate Shelter for all” and “Sustainable Human Settlement Development”. Also, the Global Strategy for Shelter to the year 2000 states that implementation of a shelter strategy will involve the redistribution of responsibilities to a variety of actors and stakeholders, including individual households, cooperative groups, informal and formal private producers, governmental agencies and ministries (UN-Habitat, 1989).

Co-operatives are people-centred and are owned, controlled, used and invested in by their members, who have a responsibility to support their co-operative by being an active member. In return, the co-operative must ethically service the needs of its members (Cooper 2012). Members are the heart and soul of a co-operative. The main purpose of a co-operative is for all members to join with a group of like-minded people to share in the benefits of co-operation, which are designed to meet the social, economic and cultural needs of its members. Co-operatives promote member development through their participation in governing the organisation, and usually provide local social or economic development, such as providing employment, goods or services that would not otherwise be available or affordable to the members.

Whether the term is used as co-operative housing or housing co-operative the literature on the subject matter is extant with conceptual clarifications (Wikipedia 2013, Sazama, 2000; Fasakin, 1998; NCHAA, 2001; Kennedy, 1996). The different definitions however reflect varying typologies rather than kinds of co-operatives. For instance, Wikipedia defined Housing co-operative as “a legal entity, usually a corporation, renting own real estate, consisting of one or more residential buildings, and that, it is one type of housing tenure”.

According to Sazama (2000) housing cooperative is one in which member-residents jointly own their building, democratically control it and receive the social and economic benefits accruable from living in and owning a cooperative. Housing co-operatives are often established to meet the needs and visions of certain groups of people, such as people from low income households, of specific ethnic or religious background, artistic persuasion, age, sex, sexual preference, disabilities, or environmental awareness.The general objective function of the housing co-operatives is to provide for the low and medium income class, decent and affordable housing. In terms of structure and function, they are mostly set up by civic organisations or private realtors with partial funding from governments which in most cases act as policy maker or facilitator (Adeboyejo & Oderinde, 2013).

In Nigeria, co-operative housing is not new, as the principle is embedded in the customs of many Nigerian ethnic nationalities. Among the Yorubas of South-western Nigeria, for instance, informal co-operative means, known as aaro in local language, have been used to achieve aspects of home ownership. This involved pooling physical efforts of relatives and friends, and obtaining loans, aajo or esusu from saving societies. However, there are very few, if any formal, or real housing cooperative movements in the country (Adeboyejo & Oderinde, 2013).

NATURE OF HOUSING DELIVERY IN NIGERIA

NATURE OF HOUSING DELIVERY IN NIGERIA

UN-Habitat (2010; 2012) estimated total housing needs in Africa at around 4 million units per year with over 60 per cent of the demand required to accommodate urban residents and that the figure may likely increase to 5 million per year in the cities. This translates into nearly 15,000 dwellings per day in order to accommodate the expected urban population growth. UN-Habitat (2010) also observed that rapid urbanization is generating extraordinary demographic pressure and demand for housing, land and infrastructure especially in African cities.

In many developing countries, including Nigeria, urban housing crisis is escalating unabated despite a number of new policies, programs and strategies being engaged in by public and private sectors in addressing this problem. Government has recognized that the majority of those in need of housing in many less-developed nations in Africa, Asia and South America are in the low income categories and that some require special housing programs to be able to live in decent housing (Offiaet, 2014).

Several studies have indicated that public housing provision involves policy formulation, institutional development, actual housing provision, allocation and management (Omole, 2001; Valenca, 2007; Sengupta and Tipple, 2007). This goes to suggest that challenges in public housing provision are related to policy formulation, institutional growth and development as well as actual production and consumption of housing units and services. In fact, Sengupta and Tipple (2007) noted that the performance of public-sector housing in terms of total supply and quality, price and affordability of housing and services depends on these key areas and perhaps on other intervening factors.

Specifically, the actual production of housing units and associated services is one of the key objectives of public housing provision which aims at increasing decent and affordable housing stock within a country, state or locality. However, evidence from literature review clearly shows that public housing provision in many developing countries, including Nigeria, has not recorded any impressive result in matching housing production to housing demand, as there are huge housing supply deficits in many less developed countries (Rondinelli, 1990; Mukhija, 2004; Sengupta and Ganesan, 2004; Olotuah, 2010).

The burgeoning housing supply deficit in Nigerian which as at 2015 was put at over 35 million housing units (Onwuemenyi, 2015) for instance, has been blamed on low productivity in public-sector housing. Taking a closer look at planned and constructed number of housing units in the different public housing programs initiated between 1962 and 1999 record shows that a total of 618,498 housing units were planned for production in the various public housing schemes across the country and around 85,812 housing units representing around 14% of the planned housing units were actually completed. This achievement level clearly shows that many of the public housing programs initiated by government within that period failed to meet the targeted number of housing units.

With respect to affordable housing provision, the UN-HABITAT (2006) report on Nigeria noted that past public housing policies and programs in the country were aimed at enabling low-income earners gain access to decent housing at affordable cost. According to Aribigbola (2008), the 2002 New National Housing and Urban Development Policy (NNHUDP) for instance, asserted that no Nigerian is expected to pay more than 20% of his or her monthly income on housing. But to the contrary, prior studies (Onibokun, 1985; Awotona, 1990; Mba 1992; Olotuah and Bobadoye, 2009; Ibem, 2010) have shown that the targeted population of many past public housing schemes in Nigeria did not benefit from such schemes. This was due to high cost of housing units provided. Consequently, several authors have contended that the constraints in accessing housing inputs (land, building materials and finance) as well as cost of providing infrastructure were partly responsible for the hike in the cost of public housing beyond the reach of an average Nigerian (Ikejiofor, 1999; UN-HABITAT, 2006; Aribigbola, 2008).

FACTORS AFFECTING PROPERTY VALUE

FACTORS AFFECTING PROPERTY VALUE

Property value is influenced by many factors. Some of the factors include

1. Location of the property: Land located in urban areas is of higher value than that of rural areas. This is often due to the demand for it; there is high competition for a land in an urban area. Professionals in real estate business will  always acknowledge the initial importance of location to property investment even within urban areas. Ifediora (1993) postulated that any part of the city cut off from the rest of the metropolis as a result of poor access road, lack of transportation roads will command a relatively low value. Whereas areas with good network of roads which can lead them to different parts of the city is capable of commanding a higher value.
2. Planning control: The power of planning in today’s world is very great indeed. Restriction policies might cause values to be higher than would normally occur. Balchin and Kieve (1982) observed that the prohibition of office development in central London between 1965 and 1970 created scarcity and resulted in rapidly rising rents and capital value. Control of land uses by the government takes place through laws like zoning regulations which can be land use zoning, bulk zoning, height zoning and density zoning. Developers must comply with zoning regulations and obtain planning approval for the usage and improvement of land. Haphazard development is not only prevented but land value is also enhanced t through various planning regulations.
3. Population: Oyebanji (2003) described population change as occurring in two ways namely decrease in population or increase in population. Any increase or decrease in population will obviously affect property values (Millington, 1982). Take for instance, an increase in population with other factors held constant, means an increase in demand.
4. Environment and Features: Akintunde (2009) sees environment as an external factor that impact on property value. To him environment factor include neighbourhood, in term of its general security, servicing and state of public infrastructure ( good access roads and drains, water and electricity) topography, soil type ( dry or swampy), amenity provision level ( i.e. accessibility to schools, hospitals, shopping/ market facilities, sports, social club etc.) as well as the aesthetic quality of the area. Features on the other hand includes; green area, adequate provision for parking, good perimeter fence with security devices, children play area, swimming pool, gymnasium, water treatment plant, well paved road, quality plumbing work etc. Any property with all the above will definitely command high value than the one that have less of these features and environment quality. Some scholars refers to feature as utility
5. Quality design and finishing: The internal arrangement of bedrooms with a provision for bathroom and toilet portends convenience. A house that has good ventilation will no doubt enhance healthy living.
6. Good maintenance practices: Akintunde (2009) observed that for properties to command high value, owners must ensure that there is adequate provision for maintenance of the building. This will prevent frequent repair and ensure that the property is in good state of repair.
7. Economic Factors: This factor influences the value of land and property a great deal. Where many activities take place the value of land will surely rise because there is always a possibility to recoup back the money after a short period of time. While areas of low economic activities will bring about a low level in land value.
8. Institutional Factors: These are factors relating to the people’s culture, religious belief and government which invariably dictate what land is used for in the society. The consequential effect is either low or high property value. People’s culture and religious belief tend to limit or shield away valuable land area for economically viable uses such as hotel. In an attempt to make land and housing available for every member of the public at affordable cost, government can introduce certain policy or enact laws to that effect (land reforms programmes).
9. Technological Factors: The level of technological development can affect the value of a land. The value of property is high in certain areas because improved technological equipments and social amenities such as central sewage system, good lift system as well as central cooling system to mention a few are available.
10. Complementary Uses: Since land uses are independent with man and his economic activities, this thereby brings about mixed uses and areas with complementary uses have high values. As such, economic activity blossom where there are other complementary uses and concentration of activities such as Motor Park and a nearby shopping center.
11. Change in Taste and Fashion: People tend to develop taste for modern buildings. This is as result of civilization and new innovations. Potential purchasers prefer to purchase or lease a house of modern design coupled with fashionable finishes. This thereby brings about an increase in value of land in the urban areas while values fall in the rural areas.

REFERENCES

OLANIPEKUN T. A. (2010) IMPACT OF URBAN RENEWAL ON PROPERTY VALUES. DEPARTMENT OF ESTATE MANAGEMENT YABA COLLEGE OF TECHNOLOGY YABA, LAGOS. A Journal of Estate Surveying Research, (December 2010) 80 -89

 

Akintunde, Femi. (200 ): Facility management as a defensive strategy to maximize value of real estate assets during economic recession.

Oyebanji, A.O. (2003): Principle of Land use Economics, Lagos, Sam Otu Nigeria Company

Balchin P.N & Kieve J.L (1982): Urban land economics, Hong Kong, The Macmillan Press limited,

IMPACT OF FINANCIAL LIBERALIZATION ON THE EFFICIENCY OF THE NIGERIAN STOCK MARKET: 1986-2011

 

IMPACT OF FINANCIAL LIBERALIZATION ON THE EFFICIENCY OF THE NIGERIAN STOCK MARKET: 1986-2011

Abstract

Using Nigeria aggregate level data for 26 years: 1986-2011, the study estimates the impact of financial liberalization on stock market efficiency in Nigeria. The study used the Generalised Least Square (GLS) to estimate the four hypotheses formulated for the study. The ratio of stock market capitalization to gross domestic product, ratio value of shares traded to gross domestic product, ratio of all share index to gross domestic product, and ratio of value of shares traded to market capitalization were adopted as the dependent variables, while the independent variable was financial liberalization (percentage in foreign equity ownership). The study also controlled for some macroeconomic variables such as exchange rate, inflation rate and interest rate that might impact on the dependent variables. The results showed that the regression coefficient for financial liberalization was negative and non-significant in predicting or promoting four proxies of stock market efficiency, which supports the preposition that financial liberalization does not transform or promote stock market efficiency. Based on the results, the study recommends inter alia: promotion of favourable macroeconomic environment; formulation of policies that will reduce the impact of speculative hot money, strengthening of the legal system, stronger transparency in terms of information disclosure, the need for the establishment of effective and efficient Dispute Resolution Mechanism, the urgent need to rethink the tenure of the market; among others.

 

CHAPTER ONE

1.0       INTRODUCTION

1.1       Background of the Study

The issue of market efficiency, as espoused by Fama (1965, 1970), which posits that prices fully reflect available information has remained at the heart of financial economics literature. Lim and

Brooks (2011), state that the efficient market hypothesis defines an efficient market as one in which new information is quickly and correctly reflected in its current security price. Generally, the argument is based on the assumption that at any given time, prices of stocks fully reflect all the available information related to them. This is the path toed by Marashdeh and Shrestha (2008), Maghyereh (2003), Bashir, Ilyas and Furrukh (2011), among others.

For the market to be efficient, the prices of stock must reflect company fundamentals, state of the economy and most importantly, the law of demand and supply, which can only come to fruition through liberalising the stock market (Kawakatsu and Morey, 1999; Waliullah, 2010). Proponents of this theory have documented extensive evidence to show that financial liberalization promotes stock market development (Ortiz, Cabello and Jesus, 2007). Against this background, the effects of financial liberalization on stock market efficiency has remained a core issue in finance literature, more so, considering efforts by governments especially in the developing countries to liberalize their financial markets in order to catch up with the developed countries on one hand and to integrate their economies to the global economy on the other. The impact of financial liberalization on the stock returns and volatility is an important issue for researchers, regulators and investors (Nazir, Khalid, Shakil and Ali, 2010).

An illustrative list of studies of the effects of financial liberalization on stock market efficiency includes those by Henry (2000) who found that stock market liberalization may reduce the liberalizing country’s cost of equity capital by allowing for risk sharing between domestic and foreign agents; Kim and Singal (2000) found that stock returns increase immediately after market opening without a concomitant increase in volatility; Bekaert, Harvey and Lundblad

(2003) report that integration affects the functioning of the equity market, the cost of capital, the diversification ability of local participants, the level of prices, the business focus of local companies, and foreign capital flows while the empirical findings of Levine and Zervos (1998) show that stock markets tend to become larger, more liquid, more volatile, and more integrated following liberalization and Grabel (1995) states that financial liberalization induces increased asset price volatility. On his part, Miles (2002) reports that reforms has a statistically significant impact in almost three fifths of the emerging markets surveyed, but more often than not, the effect is actually to raise, rather than lower the volatility of stock returns. In this connection, therefore, the highly articulated view of Levine (2001) which states that international financial integration can promote economic development by encouraging improvements in the domestic financial system is worth noting.

Specifically, Bekaert and Harvey (1995) explain that markets are completely integrated if assets with the same risk have identical expected returns irrespective of the market. A prominent line of research suggests that financial development has a causal influence on economic growth (Ujunwa and Salami, 2010). However, Stigliz (2004) in his criticism of the International Monetary Fund (IMF) policy of pressuring countries into liberalizing their capital markets, reports that economists, particularly in developing countries, had long expressed doubts about the virtues of capital market liberalization.

The foregoing effects especially the aspects detailing the positive imparts of liberalization, may have formed part of the reasons why liberalization became a matter of choice in Nigeria in the 1980s. Financial liberalization which involves banking reforms, insurance reforms and stock market development, without doubt, could have significant effect on stock returns and volatility Ojo and Adeusi (2012) state that in Nigeria, financial sector reform was a component of the Structural Adjustment Programme (SAP) which was introduced in 1986. They further state that some of the reforms created for the money market indirectly affected the capital market activities simultaneously. Quoting Nnanna, Englama and Odoko (2004), these reforms according to Ojo and Adeusi (2012) include deregulation of interest rates, exchange rate, entry/exit into the banking business, establishment of the Nigeria Deposit Insurance Corporation (NDIC), strengthening the regulatory and supervisory institutions, upward review of capital adequacy, sectorial credit guidelines, capital market deregulation and introduction of direct monetary policy instruments.

Opening of capital markets represents an important opportunity to attract the necessary foreign capital (Kim and Singal, 2000). Foreign capital in the nature of portfolio flows may take a different pattern when the market is made more open following liberalization. On the issue of regaining access to foreign capital by developing countries, Bekaert and Harvey (2003) argue that portfolio flows to developing countries (fixed income and equity) and foreign direct investment replaced commercial bank debt as the dominant sources of foreign capital. They argue further that portfolio flows to developing countries could not have happened without these countries embarking on a financial liberalization process, relaxing restrictions on foreign ownership of assets, and taking other measures to develop their capital markets, often in tandem with macroeconomic and trade reforms. Specifically, Nigeria was in dire economic crisis in the period preceding liberalization. Omotoye, Sharma, Ngassan, and Eseonu, (2006) are of the view that the oil glut of the mid-1980s exposed the fundamental weakness of the Nigerian economy and greatly intensified the country’s debt management problems. On their part, Omoleke, Salawu, and Hassan, (2010) point out that it is a trite fact that, deregulation and privatization in Nigeria are consequences of failure of the state owned enterprises. Also, Adeyemo and Salami (2008) see privatization as a strategy for reducing the size of government and transferring assets and service functions from public to private ownership and control.

According to Alabi, Onimisi and Enete (2010), the argument for economic reforms in Nigeria in the 1980/1990s could be attributed to several reasons among which were: the need for more money to fund imports, policy reactions towards combating the impending economic collapse, external shocks of foreign loans; the enterprises in Nigeria have found themselves in a state of perfidy, low performance and undoubted inefficiency.

Probably as a result of the foregoing, the Babangida government in 1986 applied for what was known as the IMF loan. As part of requirements for the loan, the IMF insisted on certain conditionalities which prescribed exchange rate depreciation, privatisation and liberalization. This resulted in a package that later became known as Structural Adjustment Programme (SAP). It could be argued that these conditionalities were prescribed as part of qualifications for the facility and also due to the need for greater integration of the Nigerian economy into the global economic system. Anyanwu (1992) argues that the IMF-World Bank economic policy packages embodied in President Babangida’s Structural Adjustment Programme (SAP) provided overt encouragement to the fostering of an unregulated, dependent capitalist development model, while allowing only a supportive role for the government in a refurbished economic environment of highly reduced government ownership and control of enterprises.

There is no doubt that these conditionalities were universal in terms of prescriptions for the economic ailments of developing and underdeveloped economies irrespective of backgrounds, structure and individual level of development even when generally classified as developing or underdeveloped. To this extent, Ekpo (1992) is of the opinion that the countries of West Africa continue to experience underdevelopment despite the economic growth of the early and late sixties. He added that the sustained crisis, evidenced in low productivity, high rates of inflation, high rates of unemployment, deterioration in standards of living, huge external debts, social and political chaos, etc, prompted virtually all the countries in the West African sub-region to implement, in one form or another, the typical International Monetary Fund (IMF) and World Bank adjustment programmes.

Proponents of these prescriptions can argue that the choice is anchored on the belief that globalisation increases economic integration of world economies which manifests in increased trade and investment. In the view of Zekos (2005), globalization is characterised by structural reforms such as trade and investment liberalization and increased trade and international investment flows promoting growth, altering the composition and geographical distribution of economic activities, stimulating competition and facilitate the international diffusion of technologies having significant effects, both positive and negative, for sustainable development.

But the level of economic development and the point in the lifecycle of individual economies which could have formed the basis upon which prescriptions were made appears to have been inadvertently omitted. In the case of Nigeria, the economy was characterised by sustained fiscal imbalance and exposure to external shocks which brought about both domestic and external instability. In fact, economic deregulation in Nigeria was not a policy option during the oil boom period of the 1970/1980s as no evidence suggests that external influence on policy choices at that time was strong. The need to transmute from a planned to market economy, although, arose through the influence of the World Bank and IMF, impetus was added by thinking in the international arena due to what was seen as benefits of the free market system. Smith, Jefferis and Ryoos (2003) made a strong case for transition from planned to market economy by stating inter alia: “we believe success requires a psychological readjustment, a mind-shift from the failed assumptions of a decadent, centrally planned economy to those of a competitive, vigorous and expanding free market”. Economic deregulation implies the breaking down of barriers to trade and finance.

Financial market liberalization was a major component of economic deregulation in Nigeria. The need to liberalize Nigeria’s financial market may have been hinged on the need to build an efficient and sound financial sector which is vital for poverty reduction and economic growth. The financial sector before deregulation was not well developed and the range of institutions in the sector was narrow. As a result of this, banks played a limited role in the economy and cash remained the dominant financial instrument. There was, therefore, the need to enhance the financial market infrastructures to enable market deepening.

The importance of stock market liberalization cannot be over-emphasized. On his part, Henry (2000) argues that stock market liberalization is a decision by a country’s government to allow foreigners purchase shares in the market. He added that standard models of international asset pricing predict that stock market liberalization may reduce the liberalizing country’s cost of equity capital. It should be noted that stock market liberalization does not end with just allowing foreigners to purchase shares. It equally entails general lessening of controls and aligning the market to international best practices such as establishing institutional frameworks that will facilitate market development and enhance regulatory roles. Sharma and Vashishtha (2007) are of the opinion that innovative changes in financial institutions, regulatory structures and practices, and financial instruments occur, from time to time, over a long period. They explained further that these changes affect the generation, mobilisation and distribution of savings, which are important for shaping the direction and pace of growth of an economy. It is therefore expedient to find out how liberalization has impacted the Nigerian Stock Market which in turn might have affected the endogenous growth model in Nigeria.

In liberalizing the financial market, the capital market became a component part of the process being a cardinal part of the financial sector. The capital market which represents a major arm of the financial market can be likened to any other market for assets, e.g. the property market.

Trading in assets of different types is the major function. Fischer and Jordan (1995) argue that a securities market is a broad term embracing a number of markets in which securities are bought and sold. They explain further that one way in which securities markets may be classified is by the types of securities bought and sold. Their argument centred on the classification of securities markets; whether the securities are new issues or are already outstanding and owned by investors. Another classification according to Fischer and Jordan (1995) is by maturity: securities with maturities of one year or less normally trade in the money market; those with maturities of more than one year are bought and sold in the capital market. Markets, however, differ in some respects which were identified by Hutchison and Nanthakumaran (1998) to include presence or absence of a central trading system, homogeneity or otherwise of assets, low versus high lot value of assets traded, quality of available information and number of market participants.

There is a linkage between macroeconomic variables and stock market returns as several models (arbitrage pricing theory (APT), aggregate demand and aggregate supply (AD/AS), monetary transmission mechanisms, etc] provide a basis for the long-run relationship and short-run dynamic interactions among macroeconomic variables and stock prices (Ibrahim and Aziz, 2003). This linkage implies that policy reactions to economic problems impacts the financial system (both money and capital markets).With the adoption and subsequent implementation of SAP, what could be regarded as economic deregulation in Nigeria evolved. The outcome of this was financial market liberalization and a later boom in both the money and capital markets. With specific reference to the capital market, Ujunwa and Salami (2010) point out that overall, equity culture is increasing among Nigerians.

Due to financial market liberalization in Nigeria, restrictions were lessened and equities listed on the Nigerian Stock Exchange became a serious class of asset to consider in any investor’s portfolio whether local or foreign. That is to say that financial market liberalization provided an opportunity for a stronger interconnection of the local economy to the global economic community especially in the area of funds flow. Loungani and Razin (2001) show that economists tend to favour the free flow of capital across national borders because it allows capital to seek out the highest rate of return. They identified risk diversification and spread of best practices in corporate governance, accounting rules, and legal traditions as some of the apparent advantages. On their part, Smith-Hillman and Omar (2005) argue that advances in communication and transportation have created new opportunities that now place Less Developed Countries on the menu of choice in spite of the relatively higher degree of political risk. How Nigeria has benefited from these advantages warrants an empirical examination. This study, therefore, is modelled after the studies by Kawakatsu and Morey (1999) and Auzairy, Ahmad and Ho (2011) in the areas of liberalization and efficiency of emerging stock market prices; and impact of stock market liberalization and macroeconomic variables on stock market performances respectively.

The stochastic behaviour of the NSE has not been fully addressed in previous studies. Such issues include stochastic dominance, conditional heterascedasticity, chaotic behaviour and stock market efficiency. The need for this type of study has been justified by Jarrett and Kyper (2005) who argued that studies of capital market efficiency are important as they infer that there are predictable properties of the time series of prices of traded securities on organised markets.

While Okpara and Nwezeaku (2009) were concerned with whether idiosyncratic risk can be diversified in the Nigerian stock market; Donwa and Odia (2010) analyzed the impact of the Nigerian capital market on her socio-economic development. Olowe (2009) on his part addressed the relation between stock returns and volatility in Nigeria in the light of banking reforms, insurance reform, stock market crash and the global financial crisis. The five year data (2004 – 2009) he employed in his analysis ordinarily looks small but is suitable for the type of study he carried out as he primarily looked at the effects of global financial crises on stock return and volatility. The current global financial crisis is a cycle that will give way to the normal stable stock market situation, although, factors which contribute to the equilibrium of the market may never be the same again. On their part, Asaolu and Ogunmuyiwa (2011) investigated the impact of macroeconomic variables on Average Share Price. None of these studies specifically addressed the impact of financial liberalization on stock market efficiency in Nigeria, which is the hallmark of this study. Furthermore, the effects of announcement of liberalization of the financial sector on the stock market performance have not been particularly addressed. Bekaert, Harvey and Lundblad (2003) identified the methods by which researchers can date the integration of world equity markets. The dating, according to them is a critical exercise and only when dates are established can research begin to measure the impact of liberalization. This, we have done which defines the scope of this study and our study considered financial liberalization index while measuring economic activity and also analyzed the impact of liberalization and size of financial market on stock returns in the case of Nigeria which to our knowledge has not been done before; and therefore, makes this study novel.

Specifically, the study investigated the relationship between financial liberalization and stock market indicators while controlling for the effects of macro-economic variables (interest, exchange and inflation rates) in the context of an emerging economy. Kim and Singal (2000) enthuse that opening of capital markets represents an important opportunity to attract the necessary foreign capital which also hastens the development of equity markets that is positively related to long run economic growth and a reduction in the cost of external finance. Also, Karolyi (2002) submits that in most empirical studies, the process of market liberalization focuses on important events that facilitate cross-border capital flows.

Examples include regulatory actions, such as the relaxation of foreign currency controls or foreign ownership limits, and capital market events, such as the introduction of the first country fund for foreign investors. In measuring capital market liberalization which he described as a process and not an event, Karolyi (2002) used the growth and expansion of global cross-listings, especially in the United States by non United States companies through American Depository Recepits (ADRs). He defined ADRs as negotiable claims against ordinary shares in the home market of a company created by U.S. depository banks that trade over-the-counter, on major United States exchanges or as private placements. Along this line of reasoning, the major contribution of this study will be the estimation of changes in the level of stock market variables (capitalization ratio, liquidity ratios and returns (ASI)] within the liberalization window.

The short-comings identified by Kawakatsu and Morey (1999) regarding the liberalization index in Nigeria have now been overcome as Bekaert, Harvey and Lundblad (2003) identified August, 1995 and May 1998 as the official liberalization date and first country American Depository Receipts introduction (indirect means of entering the market) respectively. Miles (2002) also identified August 1998 as official liberalization dates while Jeferris and Smith (1995) point out that restriction on foreign participation were removed in 1995 since when foreign-owned brokerages have been permitted and controls on foreign participation in the ownership of

Nigerian companies have been removed. Kawakatsu and Morey (1999) point out that identification of liberalization date has been described as the most significant liberalization of the market stating further that only a few authors focus on the effect of liberalization on stock market efficiency. This also makes this study unique. There is therefore a knowledge gap in the literature that warrants a more robust approach. We, therefore, investigated in this study the impact of financial liberalization on the efficiency of the Nigerian Stock Exchange from the announcement year.

1.2       Statement of Problem

The implications of financial market liberalization on stock market efficiency have generated a lot of controversy. The basis for this controversy is whether financial market liberalization has had any effects on the efficient hypothesis of stock markets. Empirical evidence along this line is surrounded with mixed results. In the case of the efficiency of Arab stock markets, Abdmoulah (2010) argues that since efficiency improvements seem to be positively related to market size, efforts to expand and deepen these markets should then be a prime concern. Bekaert, Harvey and Lundblad (2003) argue that if liberalization is effective, it leads to market integration, which has a fundamental impact on both the financial and real sectors of developing countries.

Potential shortcomings of capital market liberalization, according to Semmler and Young (2010) are that too fast liberalized capital markets, with risk assessments solely left to the market, can trigger boom-bust cycles, the busts precipitated by financial instability, entailing contagion effects and strong negative effects on the real sector of the economy. Another problem bothers on the procedure to adopt in order to systematically identify the date of Nigeria’s stock market liberalization. Henry (2000) points out that official policy decree dates are used when they are available; otherwise two alternatives are used; viz: firstly, permission of foreign ownership through country funds (for example, American or Global Depository Receipts) i.e. since government permission is presumably a necessary condition for establishment of these funds, the date when the first country fund is established is used as proxy for the official implementation date. Secondly, indirect capturing of official implementation dates by monitoring the IFC’s Investability Index. According to Henry (2000), the investability index is the ratio of market capitalization of stocks that foreigners can legally hold to total market capitalization. He adds that a large jump in the investability index (at least 10% increase) is evidence of an official liberalization. To this end, this study contributes importantly to both the literature on financial liberalization and literature on stock market efficiency and also policy implications of these whether to liberalize more or curtail same.

Many scholars point out the importance of the financial system in mobilizing savings, allocating capital, and easing risk management which they argue is achievable with an efficient stock market. Besides, some theories provide a conceptual basis for the belief that larger, more efficient stock markets boost economic growth; while others argue that the idea of market efficiency has fallen into disrepute as a result of market events and growing empirical evidence of inefficiencies. Admittedly, Cho (1986) points out that the literature on financial liberalization has emphasized the role of the banking sector, which is correctly perceived as the only organized capital market in most developing countries; he, however, points out that it has neglected the potential role of equity markets for efficient capital allocation and risk sharing in a liberalized financial environment. Furthermore, while the argument for financial market liberalization has gained currency, some empirical results differ. One of which is the outcome of a study by Auzairy, Ahmad and Ho (2011) which explored the effects of macroeconomic factors: exchange rates, interest rates and oil prices, on stock market performances in Malaysia, Thailand and Indonesia. The two conclusions supported by the results of their study are: firstly, subsequent stock market liberalization policies implemented in and after 1997 are not significantly effective in improving stock market performances of the liberalizing countries; and secondly, macroeconomic variables have significant impact on the performances of liberalizing countries’ stock markets in some of these events.

The stock market in Nigeria prior to financial market liberalization was characterized by paucity of financial instruments, low turnover ratio and the dominance of government securities. Other features of the markets include: poor infrastructure, illiquidity, inactive bond market, non automation of trading system and large unclaimed instruments, among others. It was generally believed that the problems that bedeviled the stock market will be ameliorated by financial market liberalization. Liberalization was expected to lead to stock market efficiency which will enable domestic financial institutions duplicate innovations from their more advanced counterparts by offering options and other derivative instruments that are important for shaping the direction and pace of economic growth and development. Although, the market has witnessed growth in key market indicators such as all-share index and market capitalization in recent years but it could not withstand the debilitating effects of the current global economic meltdown. Investments worth billions of dollars have been wiped off despite the long-held belief that financial market liberalization will lead to market stability. Does this, therefore, mean that after several years of so-called financial market liberalization, most of the expected benefits have eluded Nigeria?

This importance can be seen from the perspective of savings mobilization, capital allocation and easing risk management. As the world becomes a global village, rent seekers know no boundaries as international relationships in the arena of politics, science and technology and funds movement create new opportunity set. Defining economic globalization, Gaburro and O’Boyle (2003) see it as the practice of economic agents (business enterprises, banks, and finance companies) working in different countries and serving the world market without a prevailing national base. This therefore means that with a well developed stock market, the ever elusive foreign direct investment could flow into the Nigerian economy following liberalization as the rate of return on assets before now was not attractive enough all things being equal. This without doubt will boost economic growth. It is probably from this angle that Lopez-Mejia

(1999) argues that the heightened interest of foreign investors in some developing countries has led to their increased integration into the global financial system, with benefits for those countries and for the global economy.

Without doubt, financial market liberalization may mean more funds flow to the domestic economy which is essential for growth and development. The stock market is a big channel in this connection, although some issues here are debatable. Despite often divergent views as to how growth of an economy should proceed, development economists and planners seem to agree that successful development requires availability of capital in a sufficient amount (Agbetsiafa, 1998). A stock market that is well developed and efficient can provide opportunity for large pool of capital for investment purposes especially for the long-term.

The above claims and pressure from the International Monetary Fund compelled the Nigerian government to deregulate its financial market in 1986. Thus, it has now become imperative to empirically determine the impact of financial liberalisation on the Nigerian stock market. This study strives to fill this important knowledge void using standard measure of stock market efficiency such as market capitalization ratio, value of shares traded ratio, stock turnover ratio and all share index (ASI).

1.3       Objectives of the Study

The main objective of the study is to establish the impact of financial liberalization on stock market pricing efficiency in Nigeria. To achieve this, the study strives to fulfil the following specific objectives;

1. To establish the impact of financial liberalization on market capitalization ratio (size of the capital market) in Nigeria.
2. To identify how financial liberalization has impacted on value of shares traded ratio (liquidity) in Nigeria.
3. To establish the relationship between financial liberalization and stock turnover ratio (transaction cost) in Nigeria.
4. To determine the relationship between financial liberalization and all share index (aggregate returns) in Nigeria.

1.4       Research Questions

In order to carry out a successful research, the following research questions were postulated to give direction to the study;

1. Does financial liberalization have positive and significant impact on market capitalization ratio?
2. Does financial liberation have positive and significant impact on the value of shares traded ratio?
3. Is there any positive and significant relationship between financial liberalization and stock turnover ratio in Nigeria?
4. Does financial liberalization have positive and significant impact on all share index (ASI) in Nigeria?

1.5       Research Hypotheses

In order to systematically and scientifically enhance the chances of achieving the objectives stated above, the following hypotheses are proposed for this study:

1. There is no positive and significant relationship between financial liberalization and market capitalization ratio in Nigeria.
2. There is no positive and significant relationship between financial liberalization and value of share traded ratio in Nigeria.
3. There is no positive and significant relationship between financial liberalization and stock turnover ratio in Nigeria.
4. There is no positive and significant relationship between financial liberalization and all share index (ASI) in Nigeria.

1.6       The Scope of the Study

Financial liberalization is about the removal of restrictions as a result of government regulation of economic affairs. Arguments ensue whenever the word “financial liberalization” is mentioned especially in Nigeria where there is a divide in public opinion about the advantages and disadvantages of liberalization. The benefits of liberalization in some economies have been realized through privatisation and implementation of policies that minimize price distortions which are the hallmarks of economic liberalization. Metwally (2004) shows how most Middle Eastern governments encouraged the role of the private sector by opening up the economy to international trade and encouraging competitiveness. With liberalization of the financial market, the capital market was expected to attain a new level of efficiency whether the weak-form, semi-strong form or the strong-form. This work will examine the various concepts of efficiency within the period: 1986 – 2011. The choice of period was informed by data availability and the impact of economic liberalization on the stock market efficiency prior to the global economic meltdown which aggravated from 2008. This period marks the beginning of events leading to liberalization announcements and actual period of liberalization and post liberalization period. We would strive to identify as practically as possible the advantages of economic liberalization as well as its disadvantages. Some of the advantages have already been highlighted above while one of the probable disadvantages is the case of huge foreign direct investment that may lead to the superimposition of foreign managerial expertise over local ones as is the case with multinational-corporations. However, it is succinct to state that the main focus of this study is to find out how financial market liberalization has impacted on the efficiency of the stock market in Nigeria. Although liberalization is a process and continuous; the post liberalization period terminating in 2011 is deemed convenient for the purposes of this research exercise.

1.7       Significance of the Study

This study is important since it investigates the impact of financial market liberation on the stock market efficiency. This has become important given revelations from most scholars that financial liberalization will be best located in economies with favourable macroeconomic environment.

Thus, it is apt to compare stock market efficiency or performance index with using liberalization index to establish the pattern and trend of their interactions from the adoption year till 2011 in Nigeria. Besides that, the study also investigates the association among stock market indicators, macroeconomic variables and financial market liberalization in the context of an emerging economy. The major contribution of this study will be the use of liberalization index, stock market and macroeconomic variables in the analysis of market efficiency in Nigeria. Specifically, four sets of stock market indicators and the level of foreign equity ownership as an index of financial liberalization and macroeconomic variables were used to investigate whether liberalization has improved the efficiency of the Nigerian stock market in line with the prevailing theory of market efficiency.

The study also accommodated the short-comings of previous studies on Nigeria such as Kawakatsu and Morey (1999), Bekaert, Harvey and Lundblad (2003), Miles (2002) and Jeferris and Smith (1995). These studies estimated for lagged-effect, based on the assumption that the adoption of financial liberalization will not have immediate effect on the economy in their crosscountry studies for developed and developing economies. However, recent revelations have shown that because adoption of such policy is a national policy that involves extensive national debate and opinion pull in some cases, the impact manifests even before the adoption of such policy. Based on this, it is currently advocated that for any study to contribute to the debate, it must incorporate the year of policy adoption even if it is the last month of the year. This study incorporated the postulation by using the period 1986-2011.

The study will be of immense benefit to the following;

1. Policy makers in Nigeria who will derive valuable lessons as the country combats the consequences of a fragile financial sector. There may be need for a rethink of the extent of market openness as a result of privatization.
2. The study will provide a basis for investors to evaluate the impact of market opening on the Nigerian stock market behaviour.
3. The study will benefit stakeholders in the financial market as it will focus on significant and varied structural changes in the economy as a result of financial market liberalization that has led to meteoric growth in stock market indices before the recent crash. A leeway will therefore be handy.
4. Foreign investors will benefit since equities listed on the Nigerian Stock Exchange have become an asset class in globally-diversified portfolios as the study will identify how regulatory reforms have been used to foster stock market development since liberalization has made Nigeria to be interconnected with other economies.
5. The findings from this study can provide helpful insights for other stock markets in transition.
6. Researchers/academicians will benefit equally as the findings from this research will provide answers to some issues yet to be resolved in the area of study and a platform to initiate future research.

---

REQUEST FOR PROJECT MATERIAL

For the complete research material visit our CHECKOUT PAGE or fill the request form below:

 

[contact-form]

Thanks for your interest in the research topic we will reach out to you as soon as possible.

---