CHAPTER ONE INTRODUCTION

1.1       Background to the Study

The sensitivity of Nigeria‟s petroleum industry is clearly reflected in its importance to the

Nigerian economy, because as a major foreign exchange earnerit contributes over 80% of

government revenues and also provides for the development of Nigeria‟s infrastructures and

other industries (Anya, 2002; Chukwu, 2002; Mathiason, 2006). According to the British

Petroleum (BP) Statistical Energy Surveyas cited in Mbendi (2014), Nigeria is a leading oil and

gas producer in Africa and is ranked as the tenth largest oil producer in the world with proved oil

reserves of about 37.2 billion barrels, and estimates in excess of 187.5 trillion standard cubic feet

of natural gas as at the end of 2011.

The foregoing underscores the vast investments potentials of the Nigerian petroleum

industry; hence, investment decisions is likely to be influenced by the value of firms in the

industry.Given that the maximization of firm value depends upon the financial health of the firm,

which involves the evaluation and selection of appropriate governance strategies and financial

structures that can influence the firm‟s value. Thus, the aim of firm executives is to maximize the

value of the firmand its stock (Namazi&Kirmani,2009).

Consideringthat the operations of firms associated with the Nigerian petroleum industry

are volatile and the characteristics of its assets and liabilities are opaque, leading to an

asymmetry of information, less transparency and a greater ability to obscure existing and

developing problems, good corporate governance is seen as a necessary instrument that will

complement effective supervision and allow managers and supervisors to better allocate scarce

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resources to improve firm value in the industry. It is also believed that the implementation of

good corporate governance would protect the interests of stakeholders, build and maintain public

confidence and ultimately contribute to the integrity and stability of the industry as well as

improve the overall value of the firms.

Several studies (Fama & Jensen, 1983; Baysinger & Hoskisson, 1990; Bathala & Rao,

1995; Christensen, Kent & Stewart, 2010) view the predominant role of corporate governance as

concerned with the structure of rights and responsibilities among the parties with a stake in the

firm, and is reflected in accounting and finance literature as the