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Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 1
EFFECT OF CORPORATE RESERVE ON THE FINANCIAL
PERFORMANCE OF OIL AND GAS FIRMS IN NIGERIA
Eneh, Edith Nkiruka, M.Sc., Onyekwelu, Uche Lucy, Ph.D. and Igweonyia, Virginia
Nnenna, M.Sc.
Department of Accountancy, Faculty of Management Sciences, Enugu State University of Science &
Technology, Enugu
Correspondence Author: Uche Lucy Onyekwelu,
Abstract: This study empirically evaluated the effect of corporate reserve on financial performance of oil and gas firms in Nigeria. It
adopted the ex post facto research design as secondary data were used for the study. The study spanned 14 years period 2003 to 2017.
Descriptive statistics and graphical represented was firstly employed using E-Views software to check for the trends, linearity or
otherwise of the data. Regression model was applied in determining the extent of the effect exerted on corporate reserve by depreciation
provision, amortization fund, employee benefit and return on equity. The main theories that underpinned the research were the Agency
Theory, Pecking Order Theory and Signaling Theory. The result of the analysis shows that depreciation provision, amortization fund,
employee benefit and return on equity does not exerts a significant and positive effect on Retained Earning of Nigeria Oil and Gas firms.
The overall finding of this study tends to support the pecking order and signaling Theory. This study therefore conclude that depreciation
provision, amortization fund, employee benefit and return on equity does not have positive affect on the retained earnings of the Nigerian
Oil and Gas firms. The study therefore recommends that firms in Nigeria oil and gas Industry should strive to improve on their retained
earnings so as to enhance depreciation provision in a consistent basis and Management of Nigeria oil and gas firm to improve on retained
earnings so as to enhance amortization of fund by allocating prudently to intangible assets over a period of time.
Keywords: Corporate Reserves, Financial Performance, Oil and Gas Firms, Nigeria
1.1 Introduction
Establishing a cushion for the rainy days in the life of an
organization is very important to its survival. Most often than
not, this soft landing for the firms are created in the forms of
reserves to help it embark on projects that will help propel the
organization. To this extent, corporate reserves can be defined as
liquid assets (cash) held by firms in order to meet expected future
payments and/or emergency needs. Companies all over the world
are increasingly becoming aware of the importance of financial
management, with emphasis on investment and retention
policies, as a veritable tool for efficient business management. It
is the responsibility of the management to establish these
corporate policies for effective and efficient internal control,
performance evaluation and reserve management. Business
managers evolve flexible and feasible financial policies to ensure
the realization of its corporate targets (Nwude, 2007).
Reserves are made by companies mainly for investment into
areas that promises some growth opportunities. This may include
the acquisition of plant and machineries, establishment of new
production lines, diversification of products and business,
establishment of new branch offices, acquisition of a company
to widen its distribution base and so on. Activist stockholders
and corporate governance specialists express concern that large
cash holdings reduce disciplinary pressure on managers and
expose them to the temptation of spending cash even when
profitable investment opportunities are not available. Mikkelson
Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 2
and Partch (2003) documents also that managers of cash-rich
firms cite the benefits of having cash on hand as a reserve to fund
large capital investments and expenditures, resulting from less
internal financing costs. The intention to fulfill the expectations
of investors and financial markets increasingly dominates
reserve accumulation motives which, as Shayne(2013) opines, is
the cornerstone of financial flexibility.
Companies are expected to strategically allocate their
assets/wealth to meet its long term investment need that could
guarantee stability and growth and optimize the risk/return trade-
off. In support, Dominguez (2011) affirms that, although it is to
be expected that a strategic asset allocation decision will be
effective over the medium to long term, the allocation might be
reviewed and revised in the light of changing investment
opportunities. Asset allocation decisions could however be
pursued through sound retention and investment policies in
terms of the magnitude and nature of reserves and provisions to
be created.
Retained earnings (revenue reserves) which as opine by Kim and
Suh (2010) is the accumulated net income that is retained by a
firm rather than distributed to its shareholders as dividends, is
one of the key retentions created by companies especially in the
oil and gas sector. Retained earnings is the percentage of net
earnings not paid out as dividends, but retained by the company
to be reinvested in its core business or to pay debt while
Investopedia (2014) describes it as retained surplus or retention
ratio which equals the beginning retained earnings plus net
income less dividends. Dividend decision also involves the
determination of the proportion of a company’s earnings (profit)
to pay out as dividend to the shareholders or retained within the
firm for self-financing, as opine by Onuorah and Ezeji (2013).
Oil and gas firms in Nigeria especially Oando Plc, Conoil and
several others create capital reserve for long-term capital
investment projects or other large anticipated future
expenditures. The reserve is made to guarantee availability of
fund to finance their anticipated projects which might include
fixed asset replacements that are neither expenditure on purchase
of goods nor period expenses. The two oil and gas firms
mentioned above are some of the leaders of the highly capital
intensive industry in Nigeria which largely automated their
production lines. They invest so much on heavy equipment and
fixed assets resulting in huge capital outlay which has to be
accumulated over time.
Depreciation provisioning is another key retention made by oil
and gas firms in Nigeria. It is the systematic allocation of the
depreciable amount of an asset over its useful life. Provision for
depreciation is a charge against profit which has to be made
whether the company is making profit or accumulating losses. It
does not directly result in a cash outlay. However, an
organization which does not make reasonable estimation of its
depreciation is making decisions blind to its long-term financial
situation (Iga, 2008). The extent to which provision for
depreciation is made is determined by factors such as service life
of assets which is influenced by the operating environment,
company’s service standards, production targets from the assets,
company’s maintenance culture, asset replacement policy,
method of calculating the provision for depreciation and
procedure for asset valuation.
Considering that some of these retentions could exert significant
impact on financial performance and shareholder’s equity of
firms in Nigeria oil and gas industry, the study attempts to
ascertain whether there is a relationship as well as the strength of
the relationship, where it exists, between corporate reserves and
selected industry financial performance indicators. Such a
quantitative process, in our opinion, will be of tremendous
importance in determining the nature and magnitude of corporate
reserves with emphasis on retained earnings and depreciation
provisions as they individually and collectively influence
performance and investments in Nigeria oil and gas firms.
1.2 Statement of the Problem
Debates often go on among scholars asking if corporate reserves
would really serve to enhance the financial performance of
organizations. These scholars are bothered with the issue of
creating corporate reserves and if these reserves would positively
impact the performance. Some scholars argue that setting some
funds aside after dividends are paid as it provides available funds
for funds to be employed. However others are of the view that
any reserve created will have a neutral effect on the financial
performance. On the contrary opposing views exist that reserves
are often created to disallow firms from paying good dividend to
shareholders and this may negatively affect the reputation of the
organization.
However, each of these modes of financing has implications.
When fund is raised through the sale of equity shares, it tends to
dilute the pattern of ownership and by extension, could lead to
monumental changes in board composition and executive
Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 3
management. Sourcing fund through bank loan requires
collateral and accumulates interest while fixed assets taken up on
lease also attracts lease rental just as hire purchase accumulates
interest with the bigger risk of repossession in case of default.
On the other hand, provision for depreciation and corporate
reserves are two main sources of internal financing and firms
prefer internal financing. It has although been observed that
retained earnings are key item in shareholders’ equity, but
corporate finance literature has paid little attention to this
variable. It has also been opined by many scholars that unless a
firm consciously and explicitly intends not to replace certain
assets, or is prepared to operate with less or lower standard assets
and provide less or lower standards of services in future, it should
always strive to ensure that operating revenue matches operating
expenses, including depreciation costs which results in a
reduction in the carrying value of assets in an entity’s balance
sheet.
It is in the light of the above submissions that this paper appraises
the effect of corporate reserves on financial performance of firms
in Nigeria using the Oil and Gas firms.
1.3 Objectives of the Study
The main objective of the study is to evaluate the effect of
corporate reserves on financial performance of oil and gas firms
in Nigeria.
The specific objectives of the study are as follows:
1. T
o appraise the effect of retained earnings on depreciation
provision of firms in Nigeria oil and gas industry.
2. To investigate the extent of effect to which retained
earnings exert on amortization fund of firms in Nigeria oil and
gas industry.
3. To examine the extent to which retained earnings affects
employee benefits of firms in Nigeria oil and gas industry.
4. To investigate the extent of effect to which retained
earnings exert on return on equity of firms in Nigeria oil and gas
industry.
1.4 Research Questions
1. What is the effect of depreciation provision on retains
earnings of firms in Nigeria oil and gas industry?
2. How does amortization fund affected by retain earnings of
firms in Nigeria oil and gas industry?
3. How employee benefits affect does retains earnings of
firms in Nigeria oil and gas industry?
4. To what extent is return on equity affected by retains
earnings of firms in Nigeria oil and gas industry?
1.5 Statement of the Hypotheses
1. Retain earnings does not have significant effect on
depreciation provision of firms in Nigeria oil and gas industry.
2. Retain earnings does not have significant effect on
amortization fund of firms in Nigeria oil and gas industry.
3. Retain earnings does not have significant effect on employee
benefit of firms in Nigeria oil and gas industry.
4. Retain earnings does not have significant effect on return on
equity of firms in Nigeria oil and gas industry.
1.6 Scope of the Study
The study covers a period of fifteen years (2003 to 2017) and the
researcher made use of the four firms in Nigeria oil and gas
industry which are listed on the Nigeria Stock Exchange as at
1stJanuary, 2003 and as at 31st December, 2017, still have their
shares actively participating in trading activities on the floor of
the Nigeria Stock Exchange. They include Total Oil Nig. Plc,
Mobil Nig. Plc, Conoil Nig. Plc, MRS Oil Nig. Plc and Oando
Oil Nig. Plc. The choice of the period and the firms was based
on data availability.
REVIEW OF RELATED LITERATURE
2.1
Conceptual Framework
2.1.1 Corporate Reserves
Corporate reserve also known as retained earnings has been
widely conceptualized by many authors. Chasan (2012) posits
that retained earnings, otherwise known as revenue retentions or
retained surplus, refer to the portion of a company’s profits that
is kept for reinvestment into the business or for debt payments,
instead of being paid out as dividends to shareholders. Agreeing
with this submission, Akparhuere, Eze and Unah (2015) define
retained earnings as “retention ratio” or “retained surplus”,
which represent “the percentage of net earnings not paid out as
dividends but retained by the company to be reinvested in its core
business, or to pay debt. This is recorded under shareholders’
equity on the statement of financial position”. The formula is
expressed as:
Retained earnings (RE) = Beginning RE + Net Income –
Dividends
In his own contribution, Thirumalaisamy (2013) postulates that
retained earnings are the most important sources of financing
growth of a firm. The level of internal funds conveys information
Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 4
about growth prospects of companies. He further says that
retained earnings are a major source of finance for growth of
companies. This is because, there is no transaction or bankruptcy
cost associated with retained profits. Thus, potential growth
opportunities of a firm necessitate a greater demand for
internally generated funds.
2.1. 2 Depreciation Provision
Expenditure on assets of the business like furniture, fixtures and
fittings of the shop,motor vans, machines and equipments are
neither expenditure on purchase of goodsnor expenses.
Expenditure of this nature gives service to the business for many
years and thus called fixed assets (STS, 2010). Iga (2008) defines
depreciation as an accounting concept that measures and spreads
the cost associated with the using up of an asset over its useful
life while Australian Accounting Standards define depreciation
as the systematic allocation of the depreciable amount of an asset
over its useful life.
2.1.3 Amortization Fund
Onojah and Unegbu(2013) defined amortization is the deduction
of capital expenses over the asset's useful life. In this case,
amortization measures the consumption of the value of an
intangible asset such as goodwill, a patent or a
copyright.Amortization is like depreciation, which is used for
tangible assets, and depletion, which is used for natural
resources. When businesses amortize expenses, they help tie an
asset's costs to the revenues it generates. For example, with a
large asset, the business reaps the rewards of the expense for
years. Thus, it writes off the expense incrementally over the
useful life of that asset, tangible or intangible. By contrast, if a
company buys a ream of paper, it writes off the cost in the year
of purchase and generally uses all the paper the same year.
2.1.4 Employee Benefits
Employee benefits are defined as a form of compensation paid
by employers to employees over and above regular salary or
wages (Doepke, 2004).Employee benefits come in many forms
and are an important part of the overall compensation package
offered to employees. It can also be seen as indirect, non-cash,
or cash compensation paid to an employee above and beyond
regular salary or wages.Some employee benefits are required by
law. For example, employers are required to make payments on
employees' behalf for Social Security and Medicare. Employers
must also pay for unemployment benefits on employees'
behalf.Other benefits are offered by employers to enhance the
compensation provided to employees. Employee benefits such as
health insurance, life insurance, paid vacation, and workplace
perks are common offerings used to recruit and retain
employees.
2.1.5 Return on Equity (ROE)
Return on Equity is one of the all-time favourites and perhaps
most widely used overall measure of corporate financial
performance (Rappaport 1986). This was confirmed by Monteiro
(2006) who stated that ROE is perhaps the most important ratio
an investor should consider. The fact that ROE represents the end
result of structured financial ratio analysis, also called Du Pont
analysis (Stewart, 2003) contributes towards its popularity
among analysts, financial managers and shareholders alike.
DuPont analysis also states that ROE is one of the most
important financial ratios and profitability metrics which is often
said to be the ultimate ratio or the ‘mother of all ratios’ that can
be obtained from a company’s financial statement as it measures
how profitable a company is for the owner of the investment, and
how profitably a company employs its equity. Black, Wright and
Davies (2001) states that shareholder value is created when the
equity returns of a company exceed the cost of that equity and it
can also be described as the present value of all future cash flows,
less the cost of debt. Return on equity seems an appropriate
measure of investment profitability.
2.1 T
heoretical Framework
This study which is on the measures of corporate reserve and
financial performance of oil and gas firms have enlarged
theoretical underpinning such as the Signaling Theory by Ross
(1977),Pecking Order Theory of Myers and Majluf (1984)
andAgency Theory by Jensen and Meckling (1976) and the.
2.2.1 S
ignaling Theory
The signaling theory by Ross (1977), who created a theoretical
model, had its root from the information asymmetry existing
between managers as fund users and shareholders as fund
providers. The theory assumes that managers have access to
more information relating to the value of the firm’s assets than
other outside agents and investors. Therefore managers seek to
use dividend pay-out policies to signal to the shareholders about
the financial performance of their firms. In addition, the firms
could also reveal the strategies adopted in pursuing their vision
and attaining their mission.
Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 5
2.2.2 The Pecking Order Theory
The Pecking Order Theory of Myers and Majluf (1984) try to
generate ideas that firms will use hierarchy of financing by
prioritizing their sources of financing. It states that firm should
utilize its’ internal funds, that is debt and equity. It documents
that firms prefer internal funds first, debt second and external
equity last and that funding needs and internal funds jointly
determine capital structure decisions. The theory argues that the
more profitable a firm becomes, the lesser it borrows because it
would have sufficient internal finance to undertake its
investment projects. According to the theory, it is only when the
internal financing is not adequate that firms should source for
external finances. The theory tries to capture the cost of
asymmetric information where companies prioritize their source
of financing from internal financing to equity, according to the
law of least effort, or least resistance. This means that firm’s
capital structure chooses to follow a hierarchy; first prefer
internal financing, then choose debt when internal finance is not
available, and only choose equity (debt) as a last resort. The firm
maturity stage shows up because it is believed that new firms
rely more on new equity (or contributed equity) for early growth
whereas mature companies rely more on self-financing through
corporate retentions and are more able to pay dividends as a
result of sufficient growth of earnings.
2.3 E
mpirical Review
3 A
pplying the standard cash-in-advance framework, Retained
Earnings and the Real Effects of Monetary Shocks was examined
by Doepke (2004) who summarized his findings by submitting
that another key feature of an economy is that the business
industry accumulates retained earnings and credits profits and
dividends to the consumers and other stakeholders only with a
delay. This is because the bottom line can only be determined at
the end of the accounting year leading to proposing the year’s
dividend in arrears, thus, the delay. The study concludes that
Retained earnings matter for the transmission of monetary policy
because they affect the overall balance between different uses of
funds in the economy and that corporate profits react quickly to
a monetary shock, whereas dividend payments adjust only after
a considerable delay. Since the shareholders own the firms, in a
frictionless model, they would consider retained earnings as
equivalent to their own savings.
4 I
n a study related to this research, Lintner (1956) found that a
firm’s net earnings are the critical determinant of dividend
changes; and by extension, extent of corporate retentions.
Retentions are mainly made by organizations for investment into
areas that promise some growth opportunities. Mikkelson and
Partch (2003) establish that managers of cash-rich firms cite the
benefits of having cash on hand as a reserve to fund large capital
investments and expenditures, resulting from less internal
financing costs. The intention to fulfill the expectations of
investors and financial markets is the cornerstone of financial
flexibility (Shayne, 2013).
Zaman (2013) studied bank profitability, growth, retained
earnings and size were measured by using multiple regression
and correlation, as potential determinants of dividend policy in
Dhaka Stock Exchange of Bangladesh. The study reveals that
while profitability appears to be a better determinant of bank
dividend policy than a bank’s growth and size, it may not be
concluded that profitability alone is a strong indicator of bank
dividend policy over time in the capital market of Bangladesh.
Furthermore, an evaluation of the relationship between a number
of company selected factors such as free cash flow, growth,
leverage, profit, risk and size and the companies’ dividend
payout ratios, using both an Ordinary least square (OLS) and a
Tobit regression was conducted by Hellström and Inagambaev
(2012). Previous studies were reviewed as well as dividend
theories in order to conclude which factors that potentially could
have an impact on the companies’ dividend payout ratios. The
dividend payout ratios of large caps were found to have a
significant relationship with free cash flow, growth and risk,
while the dividend payout ratios of medium caps have a
significant relationship with free cash flow, leverage, risk and
size.,
5 A
hmed (2000) investigates the relative importance of dividend and
retained earnings to explain the stock price variation in
Bangladesh. The findings reveal that both dividend and retained
earnings influence the stock price and they have their impact
ignoring their usual expectation of stronger dividend impact on
non-growth industries and retained earnings impact on growth
industries. In most cases, dividend hypothesis appears to be
stronger than the retained earnings hypothesis. Dividends
convey valuable information to the investors and it has been
Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 6
documented that the managers’ behavior also appears to be
consistent with this view thus supporting Dividend Relevance
Theory (Linter, 1956). Although other alternative exists through
which managers can disseminate information but dividends are
highly visible compared to other announcements in addition to
its credibility of cash signals.
Baloch, Edwin, Kiyanjui, and Kayode (2015) define retained
earnings as portion of net income which is not paid as dividends
to the shareholders. They are rather retained by the firm and re-
invested in the business. They are recorded in the statement of
financial p0sition under the heading of the shareholders’ equity.
The figure of retained earnings is obtained by deducting the
dividend paid from the net income after taxes.
Inyiama (2014) expresses retained earnings as the portion of net
income of a firm that is retained by the firm rather than
distributed to shareholders as dividend. In the event of loss, the
accumulated retained earnings of the firm is reduced by the
amount of the loss. However, if the balance of the retained
earnings account is negative, it may be called retained losses,
accumulated losses or accumulated deficit. Retained earnings
and losses are cumulative from year to year and reported in the
shareholder’s equity department of the corporation’s statement
of financial position.
Ekwe and Inyiama (2014) while citing the work of Segal and
Spivak (1985) on firm size and optimal growth rate by
reinvestment of retentions, noted that by retaining earnings and
reinvesting them in the firm, the firm can change the
characteristics governing the stochastic process, thereby
increasing the probability of multiplication and reducing the
probability of disappearance. Consequently, the firm’s decision
variable is the size of the retained earnings.
Thirumalaisamy (2013), supports that retained earnings are
determined as remainder of profits, after dividends are paid out;
it is changes in profits than current level which determine how
much should be retained by a firm; funds for investment are not
very strong in determining the amount of profit retentions by
firms. He concludes, as cited, that retained earnings are
determined residually and investment decisions are to play a
minor role in allocation of profits.
Uwuigbe (2013) investigated the determinants of dividends
policy in the Nigerian stock exchange market; using the
judgmental sampling technique and regression analysis method..
The variables considered as determinants were financial
performance of firms, firm size, financial leverage and board
independence. The analysis reveals that there is a significant
positive relationship between firms’ financial performance,
retained earnings, size of firms and board independence on the
dividend payouts decisions of listed firms in Nigeria.
Thirumalaisamy (2013) postulates that retained earnings are the
most important sources of financing growth of a firm. The level
of internal funds conveys information about growth prospects of
companies. He further says that retained earnings are a major
source of finance for growth of companies. This is because, there
is no transaction or bankruptcy cost associated with retained
profits. Thus, potential growth opportunities of a firm necessitate
a greater demand for internally generated funds.
Chasan (2012) introduce that retained earnings, otherwise
known as revenue retentions or retained surplus, refer to the
portion of a company’s profits that is kept for reinvestment into
the business or for debt payments, instead of being paid out as
dividends to shareholders. Agreeing with this submission,
Akparhuere, Eze and Unah (2015) define retained earnings as
“retention ratio” or “retained surplus”, which represent “the
percentage of net earnings not paid out as dividends but retained
by the company to be reinvested in its core business, or to pay
debt. This is recorded under shareholders’ equity on the
statement of financial position”.
Alzomaia and Al-Khadhiri (2012) examined the factors
determining dividend represented by dividends per share for
companies in the Saudi Arabia stock exchanges (TASI). In this
study a regression model with a panel data covering the period
from of 2004 to 2010 for 105 non- financial firms listed in the
stock market was used. The model investigates the impact of
Earnings per share (EPS), Previous Dividends represented by
dividends per share for last year , Growth, Debt to Equity (D/E)
ratio, Beta and Capital Size on Dividends per Share. The results
consistently support that Saudi listed non-financial firms rely on
current earnings per share and past dividend per share of the
company to set their dividend payments.
Abu (2012) constructed an empirical model for selected
commercial banks in Bangladesh which led to recommendations
that further developed the dividend payout policy for banks and
other industry listed in Dhaka and Chittagong Stock Exchange
(DSE & CSE). The results reveal that current earnings and
liquidity has potential roles for firms to determine payout policy.
In an attempt to contribute to solving the dividend puzzle.
Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 7
In a related study, Afza and Mirza (2011) states that as company
becomes mature, its growth opportunities shrink. Intuitively, in
early stages, companies have to grow and a large amount of their
funds are usually committed to undertake the investment and
growth projects resulting in higher level of capital expenditures
and less availability of free cash flows. However, as companies
pass through their establishment phase, more free cash flows are
available since they have less capital expenditure and hence are
able to pay higher dividends.
Wu and Yeung (2010) document that whereas companies that
actually pay dividends already have high ratios of retained
earnings-to-total-equity (RE/TE) and high propensities to pay
(PTP) early on, companies that actually do not pay dividends
have persistently low RE/TE and low PTP even after 20 years of
growth. They proposed a growth type view, in which low growth
type can accommodate the popular distribution-retention trade-
off argument in the lifecycle expectation for high RE/TE and
PTP, but high growth type is responsible for persistently low
RE/TE and PTP. They showed that the growth type view can
explain why low RE/TE and PTP can be surprisingly long-lived.
The study points out that those typical non-payers, deliberately,
do not pay dividends even when they can, because doing so may
confuse the market.
In his own contribution, Orwel (2010) defines retained earnings
as a ratio, commonly known as retention ratio or plough back
ratio. The retention ratio is also known as the retention rate of an
organization.
The review of previous studies on determinants of stock price
was done by Ruhani and Islam 2010). The study made a special
focus on three determinants, dividend, retained earnings and
earnings per share that were indicated by several studies as co
integrated and significantly influential on stock prices. They
state that various factors have emerged as determinants of share
prices for different markets, in which dividend policy and
earnings management were found very active contributor of
share price volatility. Their study shows that dividend policy,
more specifically, information contents of dividend, information
asymmetry, signaling theory, dividend clientele effect and
dividend yield have significant impact on market price of
common stock.
The determinant of dividend policy at the Nairobi stock
exchange was gauged by Ndungu (2009) through the study of
fifty five firms for a period of five years beginning 2004 to 2008
and used multiple regression analysis. The study concluded that
company profitability, size, growth, liquidity influenced the
dividend payout ratio.
Methodology
3.1 Research Design
The study is an ex post facto (after the facts) research. Asika
(2005) opines that ex post facto research is expected to provide
a systematic and empirical solution to research problems. This is
because the research makes use of data which are in existence
and available.
3.2 Area of Study
The research is conducted in Nigeria; in the Oil and Gas industry
of the economy with more than fifty private and publicly quoted
firms as at 31st December, 2017 in both upstream and
downstream categories
3.3 Sources of Data
Time series data (2003 – 2017) was extracted from the annual
reports and accounts of the selected listed oil and gas firms. Data
on corporate reserves and financial performancevariables such
as retained earnings, depreciation provision, amortization fund,
employee benefits and return on equitywere extracted from the
annual report and accounts of the fiveselected listed firms Total
Oil Nig. Plc, Mobil Oil Plc (1991), Conoil Plc (1989), MRS Oil
Nig. Plc and Oando Plc (1991) within the Nigeria oil and gas
industry.
Historical details about the selected firms were obtained from
the Nigerian Stock Exchange Fact Book and their library
division, from 2003 to 2017. Publications of the Securities and
Exchange Commission (SEC) and their operational arm, the
Nigeria Stock Exchange, also provided information regarding
the listed firms.
Data with particular importance to review of related literature
were gathered from academic journals, libraries, websites and
internets. African Institute for Applied Economics (AIAE), the
British Council, University of Nigeria Enugu Campus Library,
National Library, Enugu State Library, Port Harcourt Library via
password access.
3.4 Population of the Study
The Nigeria oil and gas industry has a population of 14 firms
listed on the Nigeria Stock Exchange in its upstream and
downstream categories as at 31st December, 2017. However, this
number excludes the oil servicing firms and the firms under
special contract arrangements with the multinational oil
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pg. 8
companies and the Nigerian National Petroleum Corporation
(NNPC). The study considered a representative sample from the
firms listed on Nigeria Stock Exchange. Hence, this study
evaluates the corporate reserves variables that exert varied level
of influence on the financial performance of Oil and Gas firms
in Nigeria.
3.5 Sample Size and Selection Technique
The researcher reiterates that disparity which produces spurious
results may be caused by wrong assumptions, unrepresentative
sample size, as well as insufficient observations from short time
frame. Consequently, availability of data and sufficiency of
observations are important factors of consideration in a study of
this nature. Over the years, fluctuations in the number of oil and
gas firms listed in the Nigeria Stock Exchange (NSE) was
observed by Oke and Obalade (2015) who identified Oando,
Mobil, Total, MRS Oil, Conoil and Eterna oil as firms in the
industry that regularly publish their annual reports.
3.6 Analytical Technique
The analytical technique involve the graphical representation of
the movements in the various variables used; descriptive
statistics in terms of measures of central tendency and
dispersion; unit root test of stationary of data series using
Augmented-Dickey-Fuller Test; re-confirmed by Phillips-Perron
Test; firm and industry wide regression analysis; estimated
coefficients to be used to evaluate the predictable power of each
independent variable on the dependent; coefficient of multiple
determination (R2) and adjusted coefficient of multiple
determination.
3.7 Model Specification
The model is specified in line with previous related literature in
the area of the study. Koutsoyiannis (2003) as cited in Inyiama
(2013), model specification involves the determination of the
dependent and explanatory variables which will be included in
the model, the theoretical expectations about the sign and the size
of the parameters of the function.
3.8.1 Hypothesis One
Hypothesis one states that Retain earnings does not have
significant and positive effect on depreciation provision of firms
in Nigeria oil and gas industry.
The Model is specified as:
DPt = βo + β1REt + Ԑt -
- - (5)
Where,
DP = Depreciation Provision
RE = Retain Earnings
Ԑ = Error Term
βo = Coefficient (constant) to be estimated
β1 = Parameter of the independent variable to be
estimated
t = Time
3.8.2 Hypothesis Two
Hypothesis two states that retain earnings does not have significant and positive effect on amortization fund of firms in Nigeria oil and
gas industry.
The Model is specified as:
AFt = βo + β1REt + Ԑt
- - - -
(6)
Where,
AF = Amortization Fund
RE = Retained Earnings
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Ԑ = Error Term
βo = Coefficient (constant) to be estimated
β1 = Parameter of the independent variable to be
estimated
t = Time
3.8.3 Hypothesis Three
Hypothesis Three states that retain earnings does not have significant and positive effect on employee benefit of firms in Nigeria oil and
gas industry.
The Model is specified as:
EBt = βo + β1REt + Ԑt - -
- - -
(7)
Where,
EB = Employee Benefit
RE = Retained Earnings
Ԑ = Error Term
βo = Coefficient (constant) to be estimated
β1 = Parameter of the independent variable to be
estimated
t = Time
3.8.4 Hypothesis Four
Hypothesis Four states that retain earnings does not have significant and positive effect on return on equity of firms in Nigeria oil and
gas industry.
The Model is specified as:
ROEt = βo + β1REt + Ԑt - -
- - (8)
Where,
ROE = Return on Equity
RE = Retained Earnings
Ԑ = Error Term
βo = Coefficient (constant) to be estimated
β1 = Parameter of the independent variable to be
estimated
t = Time
3.9 Model Validity and Justification
Ordinary least squares (OLS) of the form of general multiple regression analysis is used to assess the relationships among the variables
identified in this work. For each hypothesis, a dependent variable, yit, is related to the explanatory variable through a linear equation that
was expressed in the form of;
Yit= β0 + β1xit + eit - - - - - -
- (9)
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et is an error term that incorporates the cumulative effect on y, of all the factors not explicitly included in the model. If xi were increased
by one unit, y would change by an amount, β1.
The reliability of this model is dependent on the satisfaction of the assumptions that a linear relationship exists between the dependent
and the independent variable.
DATA PRESENTATION AND ANALYSIS
Data for this study is as presented in the Appendix
Data Analysis Table 1 Johansen Cointegration Analysis – Pooled Data
Date: 12/23/18 Time: 14:00
Included observations: 75
Trend assumption: Linear deterministic trend
Series: RE ROE AF DP EB
Lags interval (in first differences): 1 to 2
Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.511971 80.99062 69.81889 0.0049
At most 1 0.256020 36.51297 47.85613 0.3709
At most 2 0.143968 18.17698 29.79707 0.5530
At most 3 0.119598 8.539211 15.49471 0.4097
At most 4 0.010300 0.641890 3.841466 0.4230
Trace test indicates 1 cointegratingeqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.511971 44.47765 33.87687 0.0019
At most 1 0.256020 18.33599 27.58434 0.4674
At most 2 0.143968 9.637766 21.13162 0.7779
At most 3 0.119598 7.897321 14.26460 0.3892
At most 4 0.010300 0.641890 3.841466 0.4230
Max-eigenvalue test indicates 1 cointegratingeqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
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pg. 11
Source: Author’s Eview 8.1 Statistical software Result 2018
The trace test and max-eigen statistic shown in Table 4.2.18,
indicate that there is just one cointegrating equation at 5 per
cent significance level among the variables under study.
Consequently, it could be concluded that a long run relationship
does exist between Return on Equity, retain earnings,
amortization fund, depreciation provision and employee
benefits of the sampled oil and gas firms.
4.3 Test of Hypotheses
In the test of hypotheses of this study, the decision rule is that the
null hypothesis is accepted when the strength of the relationship
between the dependent variable and the independent
variabledoes not measure up to 50 percent. However, when it
does, the null hypothesis is rejected in favour of the alternate
hypothesis.
4.3.1 Test of Hypothesis One
Ho: Retain earnings does not have significant and positive effect
on depreciation provision of firms in Nigeria oil and gas
industry.
Table 4.3.19 Correlation Analysis For Test of Hypothesis
One
DP RE
DP 1.000000
RE 0.395417 1.000000
Source: Author’s Eview 8.1 Statistical software Result 2018
The strength of the relationship between depreciation provision
and retain earnings is 39.5% which falls below 50% that depicts
significance at 0.05 level as such the H0 (Nul hypothesis) was
accepted. The implication is that retain earnings does not have
significant and positive effect on depreciation provision of firms
in Nigeria oil and gas industry.Also the relationship is positive.
4.3.2Test of Hypothesis Two
Ho: Retain earnings does not have significant and positive
effect on amortization fund of firms in Nigeria oil and gas
industry.
Table 4. 2 Correlation Analysis For Test of Hypothesis Two
AF RE
AF 1.000000
RE -0.008317 1.000000
Source: Author’s Eview 8.1 Statistical software Result 2018
The strength of the relationship between amortization fund and
retain earnings is 0.8% which falls so much below 50% that
depicts significance at 0.05 level thus the H0( Null hypothesis)
was accepted. The implication is that retain earnings does not
have significant relationship and effect on amortization fund in
the Nigeria Oil and Gas Industry, and that the relationship is
negative.
4.3.3 Test of Hypothesis Three
Ho:Retain earnings does not have significant and positive
effect on employee benefit of firms in Nigeria oil and gas
industry.
Table 4.4 Correlation Analysis For Test of Hypothesis
Three
EB RE
EB 1.000000
RE -0.118702 1.000000
Source: Author’s Eview 8.1 Statistical software Result 2018
The strength of the relationship between employee benefits and
retain earnings is 11.87% which falls so much below 50% that
depicts significance at 0.05 level the H0 (Null hypothesis) was
accepted . The implication is that retain earnings does not have
significant relationship and effect on employee benefits in the
Nigeria Oil and Gas Industry, and the relationship is negative.
4.3,4 Test of Hypothesis Four
Ho:Retain earnings does not have significant and positive effect
on return on equity of firms in Nigeria oil and gas industry.
Table 4.3.22 Correlation Analysis for Test of Hypothesis
Three
ROE RE
ROE 1.000000
RE -0.235577 1.000000
Source: Author’s Eview 8.1 Statistical software Result 2018
The strength of the relationship between Return on Equity and
retain earnings is 23.6% which falls so much below 50% that
depicts significance at 0.05 level thereby the H0 (Null
hypothesis) was accepted. The implication is that Return on
Equity does not have significant relationship and effect on
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pg. 12
retains earnings in the Nigeria Oil and Gas Industry, and the
relationship is negative.
Summary of Findings
1. Retained earnings does not have significant and
positive effect on depreciation provision of firms in Nigeria oil
and gas industry.The analysis depict that the strength of the
relationship between depreciation provision and retain earnings
is poor. The implication is that retain earnings does not have high
effect on depreciation provision of firms in Nigeria oil and gas
industry.
2. The retain earnings does not have significant and positive
effect on amortization fund of firmsin Nigeria oil and gas
industry. The findings shows that the strength of the relationship
between amortization fund and retain earnings is low. The
implication is that retain earnings does not have high effect on
amortization fund in the Nigeria Oil and Gas Industry.
3. The study findings portray that the strength of the relationship
between employee benefits and retain earnings is weak. The
implication is that retain earnings does not have high effect on
employee benefits in the Nigeria Oil and Gas Industry.
5. States thatretain earnings does not have significant and
positive effect on return on equity of firms in Nigeria oil and gas
industry.
The analysis shows the strength of the relationship between
Return on Equity and retain earnings is low. The implication is
that Return on Equity does not have high effect on retains
earnings in the Nigeria Oil and Gas Industry.
5.2 Conclusion
In line with the Signaling Theory, managers seek to use retain
earnings policies to signal to the shareholders about the financial
performance of their firms. However, as firms develop and age
through its’ life cycle, they tend to alter the some policies
depending on the financial demands of a particular stage. By
implication, firms at their early stages of growth are likely to
retain more earnings for expansion, thereby paying lesser
dividend than older firms. More matured and older firms are
likely to pay more dividends as growth opportunities would have
dwindled.
Depreciation provision is affected positively by retain earnings
in Nigeria Oil and Gas industry, while other variables utilized
were affected negatively by retain earnings. The extent of
influence of retained earnings on return on equity is both
negative and insignificant. This is the same scenario in Mobil
Plc, Conoil Plc. and Oando Plc. when the firms were taken in
isolation. The outcome of the analysis is in line with the a priori
expectations of the researcher and in accordance with the
theoretical framework of the study. Retained earnings is
expected to associate negatively for the variables under study, as
retained earnings are the residue after other fundamental
payments.
5.3 Recommendations
The researcher recommends that:
1. Firms should strive to improve on their retain earnings
so as to enhance depreciation provision in a consistent basis.
2. Management of the firms should also improve retain
earnings so as to enhance amortization of fund by allocating cost
prudently to intangible asset over a period of time.
3. Firms should endeavour to retain more earnings to
enhance employees’ benefit which will in turn stimulate
workers’ performance and firms’ profit.
4. Return On Equity should be enhanced and vigorously
pursued to retain investors and improve their well being. Other
sources of earnings should be exploited to increase profitability.
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APPENDIX:
One: Data for Analysis – Total Oil Nig. Plc
YEAR RE(Nm) AF(Nm) DP(Nm) EB(Nm) ROE(Nm)
2003 62.7 7 0.82 0.1 1.21
2004 66.7 9 0.99 0.1 1.01
2005 74.2 9 1.1 5.1 0.91
2006 87.4 9.5 0.89 5.2 1.12
2007 43.6 7.4 0.99 4.1 0.88
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2008 51.3 9.5 0.99 4.7 0.99
2009 60.4 12.93 0.99 2.4 1
2010 56.8 11.68 0.99 7.7 1
2011 60.8 8 0.49 3.4 2
2012 38 9 0.8 4.7 1.24
2013 41.3 11 0.79 8 1.25
2014 33.3 11 0.7 6.4 1.28
2015 33.2 11 0.7 7.4 1.41
2016 24.9 11 0.92 6.9 0.85
2017 62.78 17 0.39 5.9 2.56
Source: Computed from Annual Reports and Accounts, 2018 – Total Oil Nig. Plc
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Table 4.1.2: Data for Analysis – Mobil Nig. Plc
YEAR RE(Nm) AF(Nm) DP(Nm) EB(Nm) ROE(Nm)
2003 69 2.46 100 0.04 1
2004 212 6.06 100 0.05 1
2005 199 6.5 89 4.33 1.13
2006 73 6.65 94 1.24 1.07
2007 61 7.14 100 4.93 0.78
2008 50 4.7 100 28.1 0.66
2009 61 5 81 2.01 1.52
2010 68 7 74 8.4 1.89
2011 100 9.6 75 7.78 1.83
2012 91 5 42 4.21 1.42
2013 44 5 59 3.98 1.92
2014 36 6 63 4.85 1.93
2015 47 6.6 38 4.2 2.95
2016 32 7.2 53.29 3.14 2.04
2017 38.1 8 35.38 2.96 3.14
Source: Computed from Annual Reports and Accounts, 2018 – Total Oil Nig. Plc
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Table 4.1.3: Data for Analysis – Conoil Nig. Plc
YEAR RE(Nm) AF(Nm) DP(Nm) EB(Nm) ROE(Nm)
2003 12.3 1.19 92.96 0.01 1.08
2004 30 3.5 99.71 0.02 1
2005 29.1 2 62.69 1.6 1.59
2006 31 2.5 66.13 2.9 1.51
2007 24.87 2.75 67.9 3.8 1.47
2008 21.64 2.75 73.53 3.1 1.36
2009 15.31 1 38.17 1.4 2.62
2010 17.11 1.5 45.04 4.5 2.22
2011 18.28 2 60 5.2 2.01
2012 17.97 2.5 57.87 8.9 1.73
2013 4.57 1 97.09 4.4 1.03
2014 17.02 4 90.49 8.1 1.11
2015 5.18 1 83.33 3.1 1.2
2016 13.03 3 90 12.8 3.33
2017 15.37 3.1 75.79 9.19 1.36
Source: Computed from Annual Reports and Accounts, 2018 – Conoil Nig. Plc
Economics And Social Sciences Academic Journal
Vol.1, No.7 July- 2019
ISSN (5282 -0053);
p –ISSN (4011 – 230X)
Economics and Social Sciences Academic Journal
An official Publication of Center for International Research Development Double Blind Peer and Editorial Review International Referred Journal; Globally index
Available @CIRD.online/ESSAJ: E-mail: [email protected]
pg. 19
Table 4.1.4: Data for Analysis – MRS Oil Nig. Plc
YEAR RE(Nm) AF(Nm) DP(Nm) EB(Nm) ROE(Nm)
2003 65.09 2.99 0.74 0.2 1.74
2004 22.44 2.40 0.71 0.4 1.42
2005 39.83 3.06 0.92 0.7 1.08
2006 0.33 4.14 0.99 0.65 1
2007 0.38 5.12 0.99 0.6 1.6
2008 0.48 7.5 0.97 3.1 1
2009 17.2 3.27 0.81 2.4 1.23
2010 0.35 2.68 0.79 2.1 1.25
2011 0.09 1.26 0.17 1.9 5.01
2012 0.05 1.25 0.31 2.5 3.26
2013 0.01 0.7 0.86 2.8 1.17
2014 0.03 0.23 0.09 0.4 10.7
2015 0.04 0.75 0.25 1.6 3.92
2016 4.46 1.1 0.299 2.3 4.19
2017 6.16 0.88 0.165 2.5 4.85
Source: Computed from Annual Reports and Accounts, 2018 – MRS Oil Nig. Plc
Table 4.1.5: Data for Analysis – Oando Oil Nig. Plc
YEAR RE(Nm) AF(Nm) DP(Nm) EB(Nm) ROE(Nm)
2003 0.91 1.4 70 0.54 0.92
2004 13.33 2 83 0.06 1.22
2005 4.49 2 82 5.3 0.78
2006 5.04 3.12 75.47 8.7 0.96
2007 5.87 2.5 60.83 8.1 2.15
2008 4.83 3.62 48.2 6.8 2.39
2009 19.12 6 65.08 23.7 1.15
2010 15.1 3 26.5 6.1 3.72
2011 9.31 3 36.1 5.5 5.29
2012 2.6 3 36.19 16.9 1.05
2013 7.62 2.39 18.68 18.2 3.36
2014 2.22 0.3 13.43 1.6 1.8
2015 33.47 2.25 66.57 0 1.5
2016 7.95 2.25 94 0.11 1.1
2017 9.48 2.48 96 0.16 1.32
Source: Computed from Annual Reports and Accounts, 2018 – Oando Oil Nig. Plc