This study adopted the modified model of Rostami, Rostami and Kohansal (2016).
Rostami, Rostami and Kohansal (2016) expressed financial performance measure by return on assets as a function of ownership concentration, board independence, board size, CEO duality that is:
Where = return on assets, = ownership concentration, = board independence, = board size, and = Chief Executive officer (CEO) duality. The model was modified by removing CEO duality, and introducing two corporate governance variables: independent audit committee and directors‟
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shareholding; and control variables: size of the banks and capital structure. As a result, the modified of Rostami, Rostami and Kohansal (2016) which is now the model of this study with assimilation of the different measurement of profitability and efficiency of the banking sector: return on assets, return on equity, net income margin, assets utilization, operational efficiency and Tobin Q is stated as:
The models were transformed in econometric format for estimation based on the assumption of a linear regression model as follows:
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Where:
ROA is Return on Assets ROE is Return on Equity NIM is Net Income Margin
84 AU is Assets Utilization
OE is Operational Efficiency TQ is Tobin‟s Q
BS is Board Size
OBD is Outside Board Directors IAC is Independence Audit Committee BSH is Block Shareholding
DSH is Director‟s Shareholding BSIZE is Banks‟ Size
CS is Capital Structure
= Stochastic or disturbance term.
= Time dimension of the variables = Constant or intercept
= Coefficients to be estimated or the coefficients of slope parameters 3.6 Description of Variables
The measurements of profitability and efficiency of deposit money banks in Nigeria are the dependent variables: Return on Assets (ROA) Return on Equity (ROE), Net Income Margin (NIM), Assets Utilization (AU), Operational Efficiency (OE) and Tobin‟s Q. The independent variables are the corporate governance indicators visa viz: Board Size (BS), Outside Board Directors (OBD), Independent Audit Committee (IAC), Block Shareholding (BSH) and Directors‟ Shareholding (DSH). Two control variables that may affect profitability and efficiency of deposit money banks were included in the model – Bank Size (BSIZE) and Capital Structure (CS).
3.6.1 Dependent Variables
ROA is return on assets: Return on assets shows how proficient a company‟s assets are in generating profits. It indicates the effectiveness of the company‟s assets in
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increasing shareholders‟ economic interests (Haniffa & Hudaib, 2006). Return on assets measured by net income over total assets at the end of the year, and it is an indicator of how profitable a company is relative to its total assets. Return on assets gives an idea regarding how efficient management is at using its assets to generate earnings.
ROE is return on equity: Return on equity focuses just on the equity component of the investment and it specifies the earnings left over for equity investors after debt service costs have been factored into the equity invested in the asset (Damodaran, 2007). Return on equity is the amount of net income returned as a percentage of shareholders‟ equity, and it measures a corporation‟s profitability by revealing how much profit a company creates with the money that shareholders have invested (Khatab, Mashood, Zaman, Salem, & Saeed, 2011). Thus, a higher ratio indicates a higher return. This measure is expected to indicate a positive association between corporate governance and firm performance.
NIM is net income margin: Net income margin is defined by the ratio of net interest income to total earning asset. Increase in interest margin leads to growth in profitability and capital; but it may affect efficiency and competition, thereby economic growth. This indicates that net interest margin is one factor that affects efficiency of deposit money banks.
AU is Assets Utilization: Assets utilization measure how efficient a business is at using its assets to make money. A business's receivables turnover, which is defined as its credit sales divided by the value of its accounts receivable from customers, indicates whether a business is able to turn the goods and services it sells into money that is available for other purposes.
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OE is operational efficiency: Operational efficiency specifically measures how efficiently bank's product has been developed, held and distributed. Kolapo (2006) posited that a bank that is not operationally efficient will not achieve satisfactory return on owners‟ equity and later finds it difficult to survive adverse economic conditions.
TQ is Tobin’s Q: This is a market profitability indicator as it deals with the market value of the banks‟ common stock. Tobin‟s Q as applied in this study is the current price of banks‟ shares at the last day of trading in the month of December of every year multiplied by the number of outstanding share, and then divided by the total assets of the bank. TQ ratio between 0 and 1 the stock is under-valued while TQ ratio greater than 1 the stock is over-valued.
BS is board size: Board size refers to the total number of directors on the board of each sample bank which is inclusive of the CEO and Chairman for each accounting year. This includes independent directors, executive directors, and non-executive directors.
OBD is outside board directors: An outside board director also known as a non-executive director is a member of a company's board of directors who are not part of the executive team. A non-executive director typically does not engage in the day-to-day management of the organization but is involved in policy making and planning exercises. However, in the context of this research, it implies percentage of non-executive directors relative to the entire board.
IAC is independent audit committee: Independent audit committee is made up of independent outside directors that are charged to provide oversight management practices in key governance areas such as risk management, internal audit, value and
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ethics governance and financial stability. However, it indicates members of the audit committee that are not on the board in this study.
BSH is block shareholding: A block shareholder is an outside ownership (block-holding that exceeds 5% of the outstanding shares of the bank) or the number/percentage of shares held by institutions. In the context of this work, it shows substantial shareholders with 5% and above shareholding.
DSH is directors’ shareholding: This refers to the number of shares owned by directors of the banks or in a related corporation that its shares in which the directors have interest and the nature and extent of that interest. In the context of this study, it is the percentage of total shares owned by the directors.
BSIZE is bank size: The size of a bank is pertinent in determining the extent to which companies perform. In studying the effect of corporate governance firm performance, bank size is often introduced as a control variable. Bank size as applied in the context of this research work is natural logarithm of total assets.
CS is capital structure: Leverage or debt ratio has often featured in capital structure related researches is also a control variable because the decision of a bank to introduce debt which is a financing decision studied in the process of financial management.