BANKRUPTCY AND LIQUIDATION OF COMPANIES IN NIGERIA ABSTRACT This study was carried out with the aim of appraising Bankruptcy and Liquidation of Companies in Nigeria. In order to actualize the objectives of the study, various literature and theoretical issues were discussed. The instrument used for the purpose of this research was gathered through primary source. The mass of information generated from the questionnaires was summarized in form of table and analyzed using simple percentage. The researcher administered one hundred (100) questionnaires to respondents, out of which eighty (80) were retrieved for the purpose of presenting and analyzing responses to issues raise in the questionnaires. The data collected was analyzed using Z-test statistical tool. The findings from analysis revealed among other things that the restructuring procedure of bankruptcy company allow the company to continue its activity during the re-organization. TABLE OF CONTENTS CHAPTER ONE: INTRODUCTION Background to the Study Statement of the Research Problems Objectives of the Study Research Hypothesis Scope of the Study Significance of the Study Limitation of the Study References CHAPTER TWO: LITERATURE REVIEW Corporate Bankruptcy in Emerging Markets Ownership Structure Governmental Quality Financial Development Effects of Bankruptcy Procedures on Firm Restructuring Liquidity Liquidity Costs Measuring Liquidity References CHAPTER THREE: RESEARCH METHODOLOGY Introduction Research Design Population Sample Size Sampling Technique The Research Instrument Method of Data Analysis Justification for the Use of Z-Test References CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION 4.1 Introduction 4.2 Descriptive Statistics 4.3 Test of Hypothesis CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION 5.1 Introduction 5.2 Summary of Findings 5.3 Recommendations 5.4 Conclusions Bibliography Appendix CHAPTER ONE INTRODUCTION BACKGROUND TO THE STUDY Bankruptcy is arguably the most important outlet to resolve distress in developed markets. During the past decade, over 30,000 bankruptcy cases were filed with the U.S. Bankruptcy Court (American Bankruptcy Institute) each year and thousands of cases were filed in the U.K. and continental Europe (Davydenko and Franks 2008). The possibility of ex-post bankruptcy and the associated costs weigh heavily on the ex-ante determination of firm capital structure and cost of capital (Modigliani and Miller 1958, Brealey and Myers 1996). Given its importance, scholars have devoted numerous studies to understanding bankruptcy and designing the optimal approach to resolve distress. Despite the recent debate on the pros and cons of the liquidation-based (i.e. Chapter 7 in the U.S.) and the reorganization-based (i.e. Chapter 11 in the U.S.) approach, it is widely accepted in developed economies that the enforcement of bankruptcy laws and close external monitoring by stakeholders (i.e. corporate bond holders and large institutions) play important roles in disciplining financially distressed firms, influencing corporate financial decisions, and determining creditor recovery in the event of distress. The situations are different in emerging markets. First of all, the prevalent ‘soft lending’ practice in emerging markets (La Porta et al. 2000b, Dinc 2005) provides easy and cheap access to capital to some companies, inducing firms to irresponsible budgeting and consequently disappointing performance and financial distress (Lin et al. 2008). Once companies get into distress, the weak legal enforcement and loose corporate governance environment in emerging markets make it complex to resolve such distress. Cross country studies find that the actual use of bankruptcy law and the degree of creditor enforcement critically depend on a country’s institutional environment: the effectiveness of judicial system (Claessens, Djankov, and Klapper 2003, Claessens and Klapper 2005), the protection of investor rights (Dahiya and Klapper 2007), and legal origin (Djankov, Hart, McLeish, and Shleifer 2007). In emerging markets where institutional environments are weak, creditors often have difficulty in liquidating distressed firms or seizing distressed firm assets. Relationship banking, which arguably helps monitor the debtor companies in developed markets, is more likely to backfire during distress in emerging markets, because of the multiple layers of agency problems. Such weak legal environment and monitoring mechanisms result in greater bargaining power to debtors (Degryse and Ongena 2005, Petersen and Rajan 1994), than their counterparts in the developed markets. STATEMENT OF THE RESEARCH PROBLEMS Undoubtedly, bankruptcy is an extremely important business decision for a company and it has a profound influence not only on the bankrupt firm, but also other related parties such as competitors, suppliers, and creditors. Traditionally, bankruptcy is often viewed as the last resort for distressed companies and managers tend to avoid it at any cost. More recently, some researchers expressed a different view. For example, Bower and Gilson (2003) discuss the possibility that companies in a competitive industry use bankruptcy strategically in order to gain advantage over their competitors and suppliers. On the other hand, it is widely accepted that corporate failures (liquidation) have negative effects on the clients of the failed corporation. The client firms of a failed institution lose an efficient relationship-based source of funding that mitigates asymmetric information problems that are intrinsic to finance. Recent event studies that analyzed capital market reactions to corporate failures have provided evidence that corporate failures adversely affect the market value of the bank’s corporate borrowers (e.g. Slovin et al. (1993), Yamori and Murakami (1999) and Ongena et al. (2003)). Motivated by the above examples and debate, the following research questions are raised: Does bankruptcy procedure allow the court to determine the financial situation of the debtor? Does the restructuring procedure of a bankrupt company allow the company to continue its activity during the reorganization? Should bankruptcy proceedings have a bankruptcy council, administrator and board of creditor? OBJECTIVES OF THE STUDY The objective of this study is to examine bankruptcy and liquidation of companies in Nigeria. The specific objectives are: To determine whether bankruptcy procedure allow the court to determine the financial situation of the debtor. To examine if the restructuring procedure of a bankrupt company allow the company to continue its activity during the reorganization. To verify if bankruptcy proceedings have a bankruptcy council, administrator and board of creditor. RESEARCH HYPOTHESIS The hypotheses that would be tested in the course of the work are: Hypothesis I Ho: Bankruptcy procedure does not allow the court to determine the financial situation of the debtor. H1: Bankruptcy procedure allows the court to determine the financial situation of the debtor. Hypothesis II Ho: The restructuring procedure of a bankrupt company does not allow the company to continue its activity during the reorganization. H1: The restructuring procedure of a bankrupt company allows the company to continue its activity during the reorganization. Hypothesis III Ho: Bankruptcy proceedings should not have a bankruptcy council, administrator and board of creditor. H1: Bankruptcy proceedings should have a bankruptcy council, administrator and board of creditor. SCOPE OF THE STUDY This research work is an empirical study on bankruptcy and liquidation of companies in Nigeria. The population of the study is entire banks quoted in the Nigeria Stock Exchange, while the sample is selected banks operating in Nigeria. The length of period covered by the study was three years (2007 – 2011). Geographically, the research will be conducted in Benin City, Edo State since most pre-requisite data needed for the work can be obtained within the area. SIGNIFICANCE OF THE STUDY It is expected that this study would consolidate existing literature on the issues surrounding the relationship between bankruptcy and liquidation. The study would also facilitate the examination of the effects of bankruptcy and liquidation in an organization and thus boosting the empirical evidence from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected variables examined in the study. The result of the study would be of benefits to investment analysts, investors and corporations in examining the effect of bankruptcy and liquidation in an organization. It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economies like Nigeria. Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study. LIMITATION OF THE STUDY The major constraints of this project are sourcing enough materials for this buildup. This is as a result of newness of the subject of research. Also, the unco-operative attitude of some respondent greatly affected the adequate collection of data from the fieldwork. REFERENCES Bower, J., S. Gilson (2003). The social cost of fraud and bankruptcy. Harvard Business Review 81:12–20. Davydenko, S, and J. Franks, 2008, “Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K.,” Journal of Finance, 63, 565-608. Modigliani, F., and M. Miller, 1958, “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review, 48, 261-97. Brealy, R., and S. Myers, 1996, Principles of Corporate Finance, McGraw-Hills Publishers. Dinc, S., 2005, “Politicians and Banks: Political Influences on Government-owned Banks in Emerging Markets,” Journal of Financial Economics, 77, 453-479. La Porta, R., F. López-de-Silanes, and G. Zamarripa, (2000), “Soft Lending and Hard Lending: Related Lending in Mexico,” working paper, Yale School of Management.
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