Vol. 7, No. 6, 2016, 296-301 Corporate Crime Announcement and Share Prices of Deposit Money Banks in Nigeria Yusuf Musa Muhammad 1, Kabiru Umar 2 Abstract This study analyses the impact of Crime announcement in Central Bank of Nigeria on the share prices of Deposit Money Banks (DMBs) in Nigeria. It tries to determine whether or not corporate crime announcement for a sample of 20 DMBS resulted in an abnormal return around the announcement day in the Nigerian Stock Exchange. Using event study, the abnormal returns for the event window days (-5, +5) are calculated over estimation parameter (-120, -6 days), employing the Market Model. For test of statistical significance, t-statistics was employed. The findings of the study indicate that, there is positive, but insignificant abnormal return on share prices of DMBs before, on, and after the day of announcement of crime in Central Bank at 5% level of significance. Thus, the study concludes that, there is no significant abnormal return before, on the date and after crime announcement in Central Bank of Nigeria for share prices of DMBs in Nigeria. Therefore, the study recommends that the Apex Bank and other regulatory bodies should be more proactive in devising mechanisms towards eliminating or deterring criminal activities among employees. Keywords: Corporate Crime, Central Bank, Share prices, and DMBs 1. Introduction Banks in carrying out their primary functions of financial intermediation between the surplus and deficit units of the economy, often encounter varying criminal acts ranging from presentation of dud cheques, money laundering, cash suppressions etc, which may constitute a threat factor to the corporate existence of the Banks. The global expansion of information system and technological advancement has contributed to the growth of white collar crime, which becomes a bigger problem in today s society than in the past decade. Since Malaysian society has modernized, these criminals behavior become increasingly sophisticated, organized and systematic with the post 1990s era experienced the changes in the trend and modus operandi of white collar crime (Lim, 2005). Generally, these changes occurred due to the changes in demographic shifts, economic and technological forces, as well as societal aging, such as higher level of education. These criminals adopt highly in specialized activities such as high-tech cheque scams (cloning of cheques by Melaka and Penang State Governments), share scams, ATM/credit card frauds, internet fraud, Flight by Night scams and money laundering (Lim, 2005). As technology advances, a new type of crime has been created through the internet and in turn, increased the occurrence of corruption particularly in large companies. In order to raise society s awareness of white collar crime, the law enforcement agencies should have more education about white collar criminals to minimize the occurrence of this crime (Williams, 2006). The Nigeria Banking sector has been ravaged by different types of criminal acts which has become nightmare to the banks, customers and the Central Bank of Nigeria (CBN). Thus, this has consequently led to evolving eagle eyes measures geared at curtailing the frequency of occurrence. It should be noted that most crimes committed in the Nigeria banking industry are trace or connected to deposit money banks, but recently the Central bank of Nigeria came into limelight as a result of suppressions of mutilated currency by 1 Department of Economics and Management Science, Nigeria Police Academy Wudil, Kano Nigeria. 2 Department of Economics and Management Science, Nigeria Police Academy Wudil, Kano Nigeria. 2016 Research Academy of Social Sciences http://www.rassweb.com 296
some bad eggs within the apex bank and DMBs (6 CBN staff and 16 DMBs staff) saddled with the task of destroying old currency which value stood at $40.2 million. During a routine internal audit of the Bank s Cash Destruction activities in September 2014, the CBN Briquetting Panel comprising Senior Bank Staff from different branches noticed some anomalies at the Ibadan Branch, and immediately reported this to the Bank s Management. On further investigation ordered by the Governor, it was discovered that a systematic scheme, which has been on for several years, was being run in which mutilated higher denomination notes originally meant for destruction were swapped with lower denomination currencies. This practice known as interleafing, basically labels a box with a higher value than its true content (CBN, 2015).This resulted in charging the culprit to court for prosecution after an in house investigation by the apex bank and DMBs. Despite the prevalence of corporate crimes in the Nigeria banking industry, the announcement by CBN came as a shocker to Nigerians. The announcement is expected to be received as bad news in the market, thus share prices are expected to react accordingly. Thus, the study is anchored to provide empirical answers to the following basic research questions: (i) To what extent do share prices of DMBs in Nigeria exhibit significant abnormal return five trading days before crime announcement in Central Bank of Nigeria? (ii) To what degree do share prices of DMBs in Nigeria show significant abnormal return on the day of crime announcement in Central Bank of Nigeria? (iii) Do share prices of DMBs in Nigeria depict any significant abnormal return five days after crime announcement in Central Bank of Nigeria? Therefore, the primary objective of the study is to empirically examine the impact of crime announcement in Central Bank of Nigeria on the share prices of DMBs in Nigeria. Specifically, the study seeks to: (i) Determine the extent of abnormal return of DMBs share prices five trading days before the announcement of crime in Central Bank of Nigeria. (ii) Examine the significance of abnormal return of DMBs share prices on the announcement day of crime in Central Bank of Nigeria. (iii) Evaluate the level of abnormal return of DMBs share prices five trading days after the announcement of crime in Central Bank of Nigeria. The hypotheses tested are stated thus: H 01= There is no significant abnormal return on share prices of DMBs five trading days before crime announcement in Central Bank of Nigeria. H 02= There is no significant abnormal return on share prices of DMBs on the day of crime announcement in Central Bank of Nigeria. H 03= There is no significant abnormal return on share prices of DMBs five trading days after Central Bank of Nigeria Crime announcement. A study of share price reaction to crime announcement in Central Bank of Nigeria is of significance to Investors and portfolio managers, as such news tends to be perceived by the market to be bad news, thus the investors and portfolio managers will devise strategy to hedge against the negative effect on their share prices. For policy makers and regulatory bodies of the capital market, the extent to which the perpetrators are dealt with, will project a multiplier signal to market players on the decisiveness of the regulatory bodies to deal with sharp practices. It would be of significant interest to researchers, as it will contribute to the body of literature and act as a source of reference. The scope of the study is confined to assessing the impact of crime announcement on mutilated currency by CBN on share prices of DMBs around the period, 11 days event window (-5 to +5 days). 297
2. Literature Review Y. M. Muhammad & K Umar Mui (2014) used an event study methodology to examine the announcement effect of white collar crime towards the public listed firm on stock s performance in Malaysia. The sample consists of 17 public announcements by 16 established public companies charged by Securities Commission for committing the white collar crime from the period of 1996 to 2013 in Malaysia. In this study, the daily basis of Average Abnormal Returns (AARs) and Cumulative Average Abnormal Returns (CAARs) with an event window of 90 days prior to and after the announcements has been determined. The finding indicates that an announcement of white collar crime has negative abnormal return on share price. As the result, the market does not reacting efficiently towards the information released regarding the incidence of white collar crime. Osuala, Nto and Akpan (2013) investigated the reaction of share price in the Nigeria banking sector to the sudden removal of corporate Chief Executive Officer (CEOs) of some deposit Money Banks (DMBs), using a sample of five (5) DMBs that CEOs were suddenly sacked by the board of the Central Bank of Nigeria (CBN) on the 14th August 2009. Event study was employed to study abnormal returns around the event announcement. The result indicates that there is positive but statistically insignificant abnormal return for the sample banks. The study concluded that the non-significance of the observed positive abnormal return could be explained by the prompt intervention of the CBN through its timely injection of N420 billion in the affected banks. On the contrary, however, the statistical insignificance of abnormal return could be as a result of the violation of the requirement for normality of abnormal return as the evidence of such test was not presented in the work. King (2012) investigated the effect of bailout announcements by six countries the US, UK, France, Germany, the Netherlands and Switzerland on the default credit swap and stock prices of domestic banks and other foreign competitors. Using the standard event study methodology on a sample the 43 largest US and European banks, the study found that the average US bank stock price increased by 28 percent in response to the announcement, while the stock prices of UK banks, in contrast, decreased by only 11 percent. Furthermore, in the UK, France and the Netherlands, the US banks initially recorded 7.5 percent average abnormal return, and this declined to a negative average abnormal return of -14.4 percent when details of terms of the bailout agreement were subsequently announced. The study concluded that the negative correlation of bank stock returns around the announcement period is evidence of cross-border competition effects, with banks receiving foreign support outperforming foreign rivals. Afego (2011) explores the stock market reaction to annual earnings information releases using NSE. Event study was used to test the speed of the reaction of the market to annual earnings information releases, based on daily closing prices and annual earnings announcement dates obtained for a sample of 16 firms listed on the NSE between 2005 and 2008. Findings show significant abnormal price reactions around earnings announcements which suggest that earnings announcements contain value-relevant information and that the magnitude of the cumulative abnormal returns is dominated by significant reactions 20 days before the earnings release date. This situation suggests that a portion of the market s reaction may be due to private acquisition and, possibly, abuse of information by insiders. The study therefore concludes that the persistent downward drift of the cumulative abnormal returns 20 days after the announcement, is inconsistent with the efficient markets hypothesis, and therefore suggests that the Nigeria stock market does not efficiently adjust to earnings information for the sample firms within the period of the study. The data used in the study is time series. The more robustness test which is the stationary test has been absent. 3. Research Methodology The study examined the daily abnormal return (AR) and cumulative abnormal returns (CAR) that accrue to shareholders of DMBs around the period of crime announcement in Central Bank of Nigeria. The test of share price effects around the time of crime announcement in Central Bank of Nigeria is tagged as an event study. Therefore, the event study has been employed for conducting the study. The populations employed in the study are the twenty-four (24) DMBs operating in Nigeria as at 21 st October, 2014. The justification for 298
the choice of DMBs as the target population and the choice of mutilated currency crime announcement by CBN for the study stem from the fact that uncertainty surrounded the involvement of DMBs employees in the crime, thus investors became curious to know. Due to the relative small number of share price observations in the study all the DMBs listed on the Nigeria Stock Exchange (NSE) were used as the sample size of the study. Thus, it resulted in a final sample of twenty (20) DMBs, from which study derived secondary data for the study. One (1) day event announcement date (31 st December, 2014) which has been used in the study, as day 0. The basis for the choice of this event date is that it was the day the CBN made press statement on the crime.. The event study estimation period is 120 trading days ending -6 days prior to the event day (21 st October, 2014), while the event window span from -5 to +5 (11 days event window). The window estimation period which is the 120 days pre-event window have been used to depict a normal return period prior to the announcement. Expected returns have been estimated using the standard market model across the estimation period as employed by Afego (2011) and King (2000). Thus the adopted market model is specified thus: Rit =αi+βi Rmt+εit.. (1) Where: Rit= returns on stock i at time period t Rmt= market returns at time t εit= error term In order to test for market reaction to announcements, abnormal returns (AR) for the time of announcement was estimated, for before and after the announcement. The abnormal return is obtained thus: the AR on the distinct day within the event window represent the differences between the actual stock return (R i,t) on that day and the normal return, which was predicted based on the two inputs; the typical relationship between the firm s stock and its reference index (expressed by the α and β parameters), and the actual reference market return (Rm t). AR it= R it (α+βirm t). (2) The AR is the percentage change in share price below or above what would normally be expected to occur. This refers to the, return which would have occurred in the absence of the announcement. This is determined within the estimation parameter window. To improve the informativeness of the analysis of abnormal returns, the average of ARs would be taken across the observations for all events N, using the model: ARt= 1 / N Σ ARit (3) The ARs are tested for statistical significance using the t-statistic: tar =ARt/ SD (ARt) (4) Where: SD (ARt) = standard deviation of ARt calculated over the estimation window. The data of sample DMBs was subjected to Stationarity test for unit root using the Augmented Dickey Fuller (ADF) test. 4. Discussion of Result The stationarity of the data was tested for unit root using Augmented Dickey Fuller (ADF) for both event and estimation windows (Raza, 2015; Raza et al., 2015). The event window results for fifteen of the sampled banks, depicts that their share returns were stationary at levels (1%, 5% and 10% respectively), but three sampled banks show stationarity at levels (5% and 10%) while share returns of two banks were stationary at level (10%). The results for estimation window share returns and market index for both periods (event and estimation window) show data stationarity for unit root at all levels. Thus, the hypothesis of existence of stationarity in time series data was accepted, for both the share return and market index series. 299
Y. M. Muhammad & K Umar To test for hypothesis H 01: that there is no significant abnormal return five trading days before the announcement date. The CAR for the period day -5 to day -1 (days before announcement date) reported 1.2343 percent, while the standard deviation of AR over the estimation parameter window is 1.0576. The critical value table indicates that the t-statistic of -1.1734 is less than the critical value of 1.761 at 5% level of significance. Thus, the null hypothesis, that there is no significant abnormal return five trading days before announcement is failed to be rejected. Table 1: Extract of Results for Before Corporate Crime Announcement CAR 1.2343 Standard Deviation 1.0576 t- Statistics 1.1734 P-value 1.761 Source: Eview4.0, Critical value table and researcher computations 2015 The results for test of H 02: shows that the CAR on the date of crime announcement by Central Bank of Nigeria is 0.2142. The standard deviation of 1.0232 and the t-statistics is -0.2344, thus less than the critical value of 1.761 at 5% level of significance. Therefore, the study fails to reject the null hypothesis, that there is no significant abnormal return on the date of crime announcement by Central Bank of Nigeria on share prices of DMBs. Table 2: Extract of Results for day of Corporate Crime Announcement CAR 0.2142 Standard Deviation 1.0232 t- Statistics 0.2344 P-value 1.761 Source: Eview4.0, Critical value table and researcher computations 2015 The result for test of H 03: that there is no significant abnormal return five days after non-performing loans buy-out announcement of DMBs in Nigeria. The result have shown that after crime announcement by Central Bank of Nigeria, the CAR for the 5days is 1.3561, with standard deviation of 1.0301, while the t- statistics is reported at 1.2752 which is less than the critical value of 1.761 at 5% level of significance. The study failed to reject the null hypothesis that there is no significant abnormal return five trading days after crime announcement by Central Bank of Nigeria on share prices of deposit money banks in Nigeria. Table 3: Extract of Results for after Corporate Crime Announcement CAR 1.3561 Standard Deviation 1.0301 t- Statistics 1.2752 P-value 1.716 Source: E-view 4.0, Critical value table and researcher computations 2015 5. Conclusions and Recommendations Based on the review of related literature and the findings of the study, the following facts come to light: Though crime announcement by Central Bank of Nigeria shows some positive impact on share prices of DMBs for the three periods around announcement date, the study found that the impact was not significant enough as to cause abnormal return for the Banks. This finding of the study was supported by the work of Osuala et al (2013), which indicated a positive, but statistically insignificant abnormal return for the 5 sampled Banks. 300
However, the results of the study are in contrast to the findings of Mui (2014), who found a negative abnormal return on share prices of 16 public companies charged by Security Commission for committing the white collar crime for the period 1996 to 2013 in Malaysia. The study concludes that, there is no significant abnormal return on share prices of DMBs five trading days before, on the day of announcement, and after crime announcement in Central Bank of Nigeria. Therefore, the hypotheses formulated for the study cannot be rejected. The study further concludes that the insignificance of the positive abnormal return could be explained by the prompt intervention of CBN by taking appropriate action against the culprits. Recommendations Based on the findings of the study the following recommendations are proposed: 1. That the Central Bank of Nigeria should devise mechanisms to eliminate or deter criminal activities among employees in the Banking sector 2. That regulatory and anti graft agencies in Nigeria should be more proactive in tackling all fraudulent activities in the financial sector of the Economy 3. The Federal Government in Nigeria should establish special courts to deal with cases of financial crimes References Afego, P. (2011), Stock price response to earnings announcements: Evidence from the Nigerian Stock Market. MPRA Paper No. 33931. Online at http://mpra.ub.uni-muenchen.de/33931/ posted 07. October 2011 / 17:49 Central Bank of Nigeria (2015), Press Statement on Theft of Currency Notes. Central Bank of Nigeria. Press Release. King, M.R. (2009). Time to buy or just buying time: the market reaction to bank rescue packages. BIS Working Paper, 288. Mui, T.L. (2014), the Announcement Effect Of White Collar Crime On Stock Price By Public Listed Companies In Malaysia. This project is submitted in partial fulfillment of the requirement for the Corporate Master in Business Administration (CMBA) programme. Faculty of Economic and Business Universiti Malaysia Sarawak Osuala, A. E.; Nto, P. O; and Akpan,S. F.(2013), The Information Content of Sudden Removal of Corporate Chief Executives: Evidence from the Nigerian Banking Sector. International Journal of Economics and Finance 5 (8): 101 8. Raza, S. A., Shahbaz, M., & Nguyen, D. K. (2015). Energy conservation policies, growth and trade performance: Evidence of feedback hypothesis in Pakistan. Energy Policy, 80, 1-10. Raza, S. A. (2015). Foreign direct investment, workers remittances and private saving in Pakistan: an ARDL bound testing approach. Journal of Business Economics and Management, 16(6), 1216-1234. 301