CURRENCY DEVALUATION ANNOUNCEMENT AND SHARE PRICES OF DEPOSIT MONEY BANKS IN NIGERIA

717 Users found this project useful

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 mix 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 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 the 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 trading prior to the announcement. The study also established the presence of statistically significant cumulative abnormal return 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 positive market reaction by investors of DMBs in Nigeria and the positive trend continued for fifteen trading days succeeding the announcement. The study recommended that import substitution policy should be implemented to ensure persistent of the positive returns as this would encourage an upsurge in the foreign portfolio and increase the liquidity base of the Deposit Money Banks as well as the Nigerian Stock Exchange. This would enhance their readiness to lend to the real sector of the nation‟s economy.

Background to the Study

In all economies, banks are the principal players in 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 over emphasized. 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 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 bepressure on the currency to devalue. However, if the deficit in trade is counterbalance 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 thendevaluation becomes unavoidable (Taylor, 1998).

Emerging economies such as the Nigerian economy is not an exemption from the above global scenario, as the Nigerian government was forced to devalue its Naira due to the sharp decline in the global oil prices which serves as the major source of capital inflow for the nation. Moreover, the inability of the apex monetary authority to sustain her defence of the Nigerian Naira via the nation‟s external reserves which was on a serious decrease also precipitates the devaluation. In this regard,Emefiele (2015) argued that the Central Bank of Nigeria (CBN) had to devalue the naira to protect the reserves. This is due to the fact that the CBN has spent a substantial amount of its reserves in shoring up the naira and in contrast, inflow of foreign exchange(FOREX) into the banks or the country has been less than anticipated in view of dwindling oil prices. Thus, the CBN took the decision that it would be sub-optimal to continue to heavily deplete the country‟s reserves in defending the naira.This is because the magnitude of a nation‟s reserve also serves as one of the indicators usually considered by foreign investors as to whether to direct their investment into such nation‟s stock market or not.