Effect Of Hedge Accounting On The Financial Performance Of Listed Deposit Money Banks In Nigeria

ABSTRACT

The study examined the effect of hedge accounting on the financial performance of listed deposit money banks in Nigeria. The specific objectives of the study were; to examine the effect of hedge accounting (derivative asset and derivative liability) on the return on asset of listed commercial banks in Nigeria, to determine the effect of hedge accounting (derivative asset and derivative liability) on the return on equity of listed commercial banks in Nigeria, to examine the effect of hedge accounting (derivative asset and derivative liability) on earnings per share of listed commercial banks in Nigeria and to ascertain the effect of hedge accounting (derivative asset and derivative liability) on profit after tax of listed commercial banks in Nigeria. To achieve the objectives of the study the ex-post facto research design was adopted. For this study, secondary data was used through the use of annual reports and accounts of the selected commercial banks. The population of the study was made up of 14 listed commercial banks as at December 2020 while the sample size was 10 selected banks. Data was analyzed using panel data regression analysis. The finding revealed that (i) Hedge accounting (derivative asset and derivative liability) has no significant effect on the return on asset of listed commercial banks in Nigeria, (ii) Hedge accounting (derivative asset and derivative liability) has a significant effect on the return on equity of listed commercial banks in Nigeria, (iii)Hedge accounting (derivative asset and derivative liability) has no significant effect on earnings per share of listed commercial banks in Nigeriaand (iv)Hedge accounting (derivative asset and derivative liability) has a significant effect on profit after tax of listed commercial banks in Nigeria. Based on the findings, the study recommended that banks should improve on accounting for hedging through derivative by fully adopting the prescription made by IFRS 7 and 9, this will give confidence to intending investors and in turn increase the return on asset of banks in Nigeria. Also, more funds should be committed to the use of derivatives for hedging against interest rate fluctuations that possibly affects the earnings of the banks.

TABLE OF CONTENTS

Title Page                                                                                                                                i

Declaration page                                                                                                                     ii

Certification                                                                                                                            iii

Dedication                                                                                                                               iv

Acknowledgement                                                                                                                  v

Table of content                                                                                                                      vi

Abstract                                                                                                                                   x

CHAPTER 1: INTRODUCTION

1.1 Background to the Study                                                                                                  1

1.2 Statement of the Problem                                                                                                           4

1.3 Objectives of the Study                                                                                                    6

1.4 Research Questions                                                                                                           7

1.5 Research Hypotheses                                                                                                        7

1.6 Significance of the Study                                                                                                 8

1.7 Scope of the Study                                                                                                           9

1.8  Limitations of the Study                                                                                                   9

1.9  Operational Definition of Terms                                                                                       9

CHAPTER 2: REVIEW OF RELATED LITERATURE

2.1 Conceptual Framework                                                                                                     11

2.1.1 Concept of hedging                                                                                                       11

2.1.2 Benefits of hedge accounting                                                                                        13

2.1.3 Hedging techniques                                                                                                       15

2.1.4 Hedging strategies                                                                                                         18

2.1.5 Concept of derivative accounting                                                                                 19

2.1.5.1 Uses of derivatives                                                                                                      25

2.1.6        Dealing with problems of derivatives valuation                                                         31

2.1.7        Accounting of derivatives                                                                                          32

2.1.7.1  Accounting for derivative under SFAS (161)                                                            32

2.1.7.2  Accounting for derivatives under IFRS 9                                                                  34

2.1.8 Concept of firm performance                                                                                         37

2.1.9 The relationship between hedging strategies and financial performance of firms         38

2.1.10 Determinants of firm performance                                                                          39

2.2 Theoretical Framework                                                                                                  40

2.2.1 Optimal hedging theory                                                                                                 41

2.2.2 Manager’s personal utility maximization theory.                                                           41

2.2.3 The purchasing power parity theory                                                                               42

2.2.4 The international fisher effect                                                                                        42

2.3 Empirical Review                                                                                                              43

2.4 Summary of Literature Review                                                                                         61

2.5 Gap in Literature                                                                                                               62

CHAPTER 3: METHODOLOGY

3.1 Research Design                                                                                                                63

3.2 Area of the Study                                                                                                             63

3.3  Population of the Study                                                                                                   63

3.4 Sample and Sample Size Determination                                                                           63

3.5 Method of data Collection and Data Sources                                                                  64

3.6 Data analysis Technique                                                                                                    64

3.7 Model Specification                                                                                                          65

3.8 Description of the Variables of the Study:                                                                       65

CHAPTER 4: DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.1 Data Presentation                                                                                                              67

4.2 Pre-estimation Tests                                                                                                          67

4.2.1 Stationarity/ unit root tests                                                                                             67

4.2.2 Cointegration test results                                                                                               68

4.3 Data Analysis                                                                                                                    72

4.3.1 Hausman test for hypothesis one                                                                                   72

4.3.2 Panel data test                                                                                                                73

4.3.3 Hausman test for hypothesis two                                                                                   74

4.3.4 Data analysis for hypothesis two                                                                                   75

4.3.5 Hausman test for hypothesis three                                                                                 76

4.3.7 Data analysis for hypothesis three                                                                                 77

4.3.5 Hausman test for hypothesis four                                                                                  79

4.3.7 Data analysis for hypothesis four                                                                                   80

4.4 Discussion on Results                                                                                                       81

CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings                                                                                                       84

5.2 Conclusion                                                                                                                        84

5.3 Recommendations                                                                                                            85

5.4  Contribution to Knowledge                                                                                              86

5.5 Area of Further Research                                                                                                  86       

            References                                                                                                                   87

            Appendices                                                                                                                 98

LIST OF TABLES

Page

4.1. Augmented Dickey Fuller (ADF) Test                                                                            67

4.2: Table for co-integration test                                                                                             68

4.3 Descriptive statistics                                                                                                         69

4.4: Hausman result for hypothesis one                                                                                  72

4.5: Regression Result for hypothesis one                                                                              73

4.6: Hausman result for hypothesis two                                                                                  74

4.7: Regression Result for hypothesis two                                                                              75

4.8: Hausman result for hypothesis three                                                                                76

4.9: Regression Result for hypothesis three                                                                            77

4.10: Hausman result for hypothesis four                                                                               79

4.11: Regression Result for hypothesis four                                                                           80