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1.1 Background to the Study
Globally, portfolio management and firm performance have in recent years become popular topical issue in both developed and developing countries. They have succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of investment firm and society in general (Thorpe and Morgans, 2007). Thus, it is widely believed in finance literature that, the field of portfolio management is not only a tool for maximizing returns and minimization of risk of investors and investment companies but is also a medium through which the economic development of a nation could be enhanced.
Portfolio management is the act and practice of making investment decisions in order to make the largest possible return (Balzer, 2001). It is a technique for optimizing the organizational returns from investments by improving the strategy and ensuring resource sufficiency (Muller & Turner, 2005). Specifically, to optimize the outcomes from investment, proper selection of security is required (Killen, 2008). Organizations that do not align their portfolio with organizational strategies and governance will tend to increase the risks of running investments that are low priority. As a result, there will be critical resource shortages; as such investments and firm performance will not be optimized. Thus, application of the techniques of portfolio management within the context of organizational governance provides reasonable assurance that the organizational objectives can be achieved.
The ultimate objective of any firm is to maximize returns while also preserving its risk occurrence (Pandey, 2007). Therefore, Kaplan (2003) is of the view that when more and more securities are included in a portfolio, the risk of both individual security and firm security in the portfolio are reduced. Hence, the firm performance would be achieved when risk is totally reduced to the barest minimum. More importantly, Calvin (2005), state that investors are usually attracted by the performance of a sector before committing their funds in the investment firm. This is the more reason why investors rush to buy stock of some companies even at a higher price relative to the market situation. Additionally, Blomquist and Müller (2006) have summarized the importance of portfolio management as not only to keep the environment of the firm intact but also to ensure investment safety. They further stated that, the rationale behind any investment is to reap good benefit in the future. Specifically, it has been reported that firm performance is likely to be strongly influenced not only by task performance of each individual investors but also by the performance of portfolio management (Blomquist & Müller, 2006).
However, the primary function of any firm is to promote high rate of returns among investment participants (Acharyya & Ball, 2011). If firm employees fail to perform their roles or responsibilities, it will be very unlikely that the firm goals will be achieved. Indeed, past studies have confirmed that work behavior measured in terms of employee cooperation, conformity, commitment, morale and participation, are part of the conditions for measuring the achievement of firm efficiency and goals (Li, 2002). However, success of a firm depends not only on the performance of the expected roles or responsibilities of employees but also on the commitment of the Portfolio Management (PM). How well both firm goals and investment participants’ goals could be achieved will largely be dependent on the portfolio management.
Importantly, firm performance is essential to all investors and the investment firm. For instance, investors pay attention to current returns and the potential for future profits because of their interest in the market price of their investments (Kaplan, 2003). Firm performance is driven by the quality of allocation to tangible and intangible assets including corporate risk management (Onafalujo & Eke, 2011). Performance according to, Yazid, Razali, & Hussin (2012) is driven by past activities of the company which impact on the current and the future. Major concern had always been the measurement of firm performance. Acharyya & Ball (2011) stress that the primary goal of measuring performance is to assess the progress of achieving corporate objectives which can either be financial or non-financial.
Most often, combining assets into a portfolio carries the opportunity of risk reduction and at the same time acquiring a higher return compared to single asset investment. How well this is achieved depends on the portfolio manager is able to forecast economic conditions and the future prospects of companies, and to accurately assess the risk of each security under consideration. For example, Laslo & Goldberg (2008) have reported that higher firm performance can be achieved when managers learn that they have no basic differences in interests. More specifically, it has been revealed from the study of not only in Nigeria but also across the globe that effective portfolio management can be achieved by applying both fundamental and technical analysis. Additionally, Dye and Penny (2000) have summarized that, selection of securities is a goal-driven process which increase the portfolio value by investing and divesting in a timely manner. They further stated that, selection of securities is made by studying their historical trends and performance. In other words, portfolio management requires continuous attention as high market risks which can be exacerbated by speculation, particularly in relation to the investments in the equity market. However, portfolio by nature is a combination of investment in various assets or securities. Thus, investors are generally assumed to be risk averse as such, they try as much as possible to have a well diversified portfolio in order to optimize high level of returns (Dye & Packer, 2000).
Given the foregoing analysis, some authors (Killen, 2008; Laslo & Goldberg, 2008; Cheng & Yu, 2011) have identified the firm performance as one of the key issue that enable investment firm to have continuity. The bulk of the performance problems and deficiencies of the investment firms in Nigeria could more appropriately be attributed to managerial inefficiencies and inappropriate selection of securities. Specifically and summarily, there is a general consensus that the managements of investment firms can achieve both investors and firm performance through diversification, human resources, proper selection of right securities, good investment climate and deploying the resources where appropriate (Bello, 2005).
In any part of this globe, firm performance and better return on investment are the ultimate goals of not only to individual investors but also to the nation at large (Tullani & Halil, 2010), and therefore, governments are charged with the responsibility of creating enabling environment through which the investment firm can operate effectively. Thus, firm performance can guarantee the proper functioning of the economy and enhancing the standard of living of the individuals (Bello, 2005). Firm performance involves a broad range of activities including good policy, governance, infrastructure, human resources, access to finance and better atmosphere.
The present study is about exploring the effect of portfolio management practices (PMP) on firm through the mechanism of corporate risk management, diversification, and security choice. Performance of firm in relation to investors return by employees can be an important solution for improving performance and effectiveness in the Nigeria investment industries. Literature has offered support to the role of PM in improving effective functioning of organizations (Jonas, 2010). Research has also indicated that PM and their responsibility in a firm is significantly and negatively correlated (Drury, 2000), which means that a firm with PM will not likely exhibit signs of positive effect on their performance except management organize the right selection of security in the portfolio. Kano State Investment and Properties Limited is expected to improve its’ performance when the organization practice the concept of management skill and motivate development of good relationship among their employees in the firm.
Generally, the nature of policy of investment in Nigeria is not consistent. In essence, portfolio management practice is critical to promote investors with relevant information and availability of securities. Thus, the rationality of investors has prompt portfolio management to tailor the portfolio to their needs rather than to beat the market. The aim of this study is to examine the effect of Portfolio Management Practices (PMP) on the performance of Kano State Investment and Properties Limited, Nigeria. This is the focus of the present study.
1.2 Statement of the Problem
Globally, different studies on portfolio management and performance have been conducted with various findings; Such as Blomquist and Muller, (2006) Kearns, (2006) Kang, (2007) Pandey, (2007) Killen, (2008) Cheng and Yu, (2011) Acharyya and Ball, (2011) and Yazid, et al, (2012). Importantly, literatures revealed that information asymmetry, especially in emerging economies have been identified as one of the major bottlenecks in investment decision making (Aboody, David; Lev & Baruch, 2000). Inappropriate selection of securities (Blomquist & Muller, 2006); lack of management support (Tunali & Halil, 2010); insufficiency of resources (Elonen and Artto, 2003); low level of commitment and poor information flow on how to diversify (Elonen & Artto, 2003; Blomquist & Muller, 2006), and imperfect nature in the security market (Crawford & Helm, 2009).
However, a number of scholars and researchers have provided insight, theoretically as well as empirically into the portfolio management theories (Elonen & Artto, 2003; Kearns, 2006; Thorpe & Morgan's, 2007; Martinsuo & Lehtonen, 2007; Tunali & Halil, 2010; Izedonmi & Abdullahi, 2011; Crawford & Helm, 2009). In addition, bypass of managers established rules and processes which leads to distrust and poor cooperation (Kang, 2007); loss of transparency and effectiveness of the overall project (Elonen & Artto, 2003).
It is clear from the forgoing literature that most of the studies related to portfolio management, firm performance, roles and responsibilities were conducted in the United State of America and other western countries of the world but few has being conducted in Nigeria. Moreover, there is a dearth of a study on the relationship between Portfolio Management on the performance of Kano State Investment Company. The aim of this study is to investigate the effect of Portfolio Management Practices on the performance of Kano State Investment and Properties Limited, Nigeria.
In view of the focus and context of the previous studies, some gaps exist for future studies to fill in. First and foremost, previous studies did not exhaust test of questionnaire instrument on Kano State Investment and Properties Limited, Nigeria. For a broader understanding, there is a need to test the instrument on Kano State Investment and Properties Limited, Nigeria. Hence, this study aims at just achieving that by testing the instrument within the Nigeria context. Secondly, this present study aims to guide the investors on how to diversify their investment to earn better returns and minimize risk. Literature reveals that no single study has examined the effect of PMP on FP of Kano State Investment. Thus, this study will examine the effect Portfolio Management Practices (PMP) has on the performance of Kano State Investment and Properties Limited, Nigeria.
1.3 Research Questions
Based on the foregoing problem statement, the broad question to which this study attempts to answer is: what is the influence of Portfolio Management Practices on the Performance of Kano State Investment and Properties Limited, Nigeria. Based on the main research question, the specific research questions are raised in order to guide this study.
1. To what extent does corporate risk management enhance the performance of Kano State Investment and Properties Limited, Nigeria?
2. To what extent does diversification enhance the performance of Kano State Investment and Properties Limited, Nigeria?
3. To what extent does security choice enhance the performance of Kano State Investment and Properties Limited, Nigeria?
1.4 Research Objectives
Consistent with the above research questions, this study main objective is to determine the effect of Portfolio Management Practices on the Performance of Kano State Investment and Properties Limited, Nigeria. The specific objectives of this study are:
1. To examine the extent to which corporate risk management enhance the performance of Kano State Investment and Properties Limited, Nigeria?
2. To examine the extent to which diversification enhance the performance of Kano State Investment and Properties Limited, Nigeria?
3. To examine the extent to which security choice enhance the performance of Kano State Investment and Properties Limited, Nigeria?
1.5 Hypotheses of the Study
The following hypotheses are formulated for empirical testing and validation. This study has one independent variable (portfolio management) and one dependent variable (firm’s performance).
H1. Corporate risk management is significantly related to the Performance of Kano State Investment and Properties Limited, Nigeria.
H2. Diversification is significantly related to the Performance of Kano State Investment and Properties Limited, Nigeria.
H3. Security choice is significantly related to the Performance of Kano State Investment and Properties Limited, Nigeria.
1.6 Significance of the Study
This study, which is about investigating the effect of Portfolio Management Practices on the performance of Kano State Investment and Properties Limited Nigeria, is important to both theory and practice. This study is going to make several contributions to portfolio management and investors.
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