Currency Devaluation and Share Prices of Deposit Money Banks in Nigeria : Current School News

Currency Devaluation Announcement and Share Prices of Deposit Money Banks in Nigeria

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Currency Devaluation Announcement and Share Prices of Deposit Money Banks in Nigeria. 

ABSTRACT

 The sudden announcement of the devaluation of the Nigerian Naira to US Dollar by the Central Bank of Nigeria (CBN) on the 25th November 2014 has created an intense debate and a great deal of mixed responses among market analysts and the general populace. However, available opinions on the degree of effects such announcement might have on Deposit Money Banks (DMBs) stock prices can at best be adjudged as a mere presumption and not an outcome of empirical investigation.  

This study empirically examined Naira devaluation announcement of the 25th November 2014 and the share prices of Deposit Money Banks in Nigeria. Employing the standard event study methodology and correlational design on a sample of thirteen out of the sixteen registered DMBs with the Nigeria Deposit Insurance Commission (NDIC) and listed on the Nigerian Stock Exchange that traded on a historic day 

The study ascertained the significance of cumulative abnormal return on the fifteen trading days prior to the announcement, day of the announcement, and fifteen trading days succeeding the announcement day. The study documented a statistically non-significant cumulative abnormal return of 0.9078 percent on the fifteen tradings prior to the announcement.  

The study also established the presence of the statistically significant cumulative abnormal returns of 0.6851 percent and 3.0982 percent on the announcement day and fifteen trading days after the announcement. The study concluded that the sudden announcement of Naira devaluation led to a positive market reaction by investors of DMBs in Nigeria and the positive trend continued for fifteen trading days succeeding the announcement. 

TABLE OF CONTENTS

Title page…………………………………………………………………………………………………….
Declaration…………………………………………………………………………………………………. i
Dedication…………………………………………………………………………………………………. ii
Certification …………………………………………………………………………………………… iii
Acknowledgment………………………………………………………………………………… v
Table of Contents …………………………………………………………………. vii
List of Tables……………………………………………………………………………………………… ix
List of Appendices………………………………………………………………………………………. x
Abstract………………………………………………………………………………………………………. xi

1.0 INTRODUCTION
1.1 Background to the Study ———————————————————- 1
1.2 Statement of the Problem ———————————————————- 5
1.3 Research Questions —————————————————————– 6
1.4 Objectives of the Study ————————————————————- 6
1.5 Statement of Hypotheses ———————————————————– 7
1.6 Significance of the Study ———————————————————- 7
1.7 Scope of the Study —————————————————————— 8
1.8 Limitations of the study ————————————————————- 9

2.0 LITERATURE REVIEW
2.1 Introduction —————————————————————————– 10
2.2 Concept of Currency Devaluation ———————————————— 10
2.3 Concept of Share Prices Reaction ————————————————- 12
2.4 Determinants of Share Prices Reactions —————————————— 13
2.5 Review of Empirical Studies ——————————————————- 21
2.5.1 Currency Devaluation Announcement and Share Prices ———————- 21
2.6 Theoretical Framework ————————————————————– 31

3.0 RESEARCH METHODOLOGY
3.1 Introduction ————————————————————————– 33
3.2 Research Design ——————————————————————— 33
3.3 Population and Sampling of the Study ——————————————– 33
3.4 Sources and Method of Data Collection —————————————— 35
3.5 Method of Data Analysis ———————————————————– 36

4.0 DATA PRESENTATION AND ANALYSIS
4.1 Introduction —————————————————————- 44
4.2 Data Presentation ——————————————————————– 43
4.3 Data Analysis ————————————————————— 44
4.4 Discussion of Findings —————————————————– 59
4.5 Policy Implication of the Study —————————————————- 61
4.6 Theoretical Implication of the Study ——————————————– 61

5.0 SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
5.1 Summary —————————————————————————- 62
5.2 Conclusions ———————————————————————— 62
5.4 Recommendations —————————————————————– 63
5.5 Suggestions for Further Study ————————————————– 63
REFERENCES ——————————————————————– 65

INTRODUCTION  

Background to the Study In all economies, banks are the principal players in the financial market for the intermediation of funds from the surplus economic units to the deficit units for productive and investment purposes and as such, the relevance of Deposit Money Banks (DMBs) in the Nigerian financial system cannot be overemphasized. Taylor (1998) posited that globally, a number of nations had at one time or another devalued their currencies.

The main motive for devaluation in most of these countries is that the fixed exchange rate was upheld by these nations over a period of time which eventually became unsustainable. Theoretical evidence suggests that fixed exchange rates reduce exchange rate risk as far as the exchange rate remains fixed. Thus, if the supply of a country’s currency surpasses the demand for the currency, the currency will be forced to decline in value.

Also, if a country imports more goods than it exports, there will be pressure on the currency to devalue. However, if the deficit in trade is counterbalanced by capital inflows into the country for investment purposes, the country can maintain the trade deficit without being forced to devalue.

Though, if the capital inflows are no more obtainable, the available option for the country to avoid devaluation is by buying or supporting its own currency in the market through its currency reserves in order to augment the meagre capital inflow, but once currency reserves run out then devaluation becomes unavoidable (Taylor, 1998). 

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