Effect of Bank Asset Default Risk on DMBS Firm Value in Nigeria
Keywords:
Deposit Money Banks, Asset Default Risk, Firm Valuation, Banking Sector, Financial Intermediation, Financial StabilityAbstract
The banking sector is pivotal to economic growth by facilitating financial intermediation, promoting efficient capital allocation, and ensuring financial stability. In Nigeria, Deposit Money Banks (DMBs) play a central role in the financial system by mobilizing savings and providing credit to businesses and individuals. However, persistent asset default risks, characterized by loan defaults and declining asset quality, threaten the sustainability and value of Nigerian banks. This study examines the relationship between asset default risk and firm value, employing Tobin’s Q as a proxy for firm valuation. Using panel data from 10 commercial banks spanning 2010–2022, the research incorporates key indicators of default risk, including bank losses (IB), Capital Adequacy Ratio (CAR), Provisioning Coverage Ratio (PCR), and Non-Performing Asset Ratio (NPAR), alongside economic trends (ET). The findings reveal that loan loss provisioning (PCR) and non-performing assets (NPAR) significantly influence firm value, with a positive relationship to Tobin’s Q. This counterintuitive result suggests that Nigerian banks experiencing higher default risks maintain or even improve market value, potentially due to investor perceptions or regulatory allowances. However, the overall explanatory power of the model remains weak, with an R-squared value of 1.9%, indicating that other unexamined factors, such as macroeconomic conditions, management efficiency, or investor confidence, significantly impact firm value. Diagnostic tests confirm the reliability of the regression results, with no evidence of heteroskedasticity or cross-sectional dependence. The study highlights the importance of robust credit risk management frameworks to mitigate asset default risks and improve firm stability. Policymakers and bank managers are encouraged to adopt stricter risk assessment measures, strengthen capital buffers, and enhance regulatory oversight to address the challenges posed by asset defaults. Future research should incorporate additional macroeconomic and institutional variables to provide a more comprehensive understanding of the determinants of bank firm value in Nigeria.
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