Operational Risks and Equity Returns: Dynamic and Static Panel Data Analyses

Abstract

This study investigated the effect of operational risk on equity returns of Deposit Money Banks (DMBs), using a population consisted of 19 listed deposit money banks in the Nigeria Stock Exchange. 15 DMBs were purposively selected for a period of 15 years 2005 to 2019. Descriptive and inferential statistics were explored for the data analysis which was sourced from the published financial statements of the banks, using dynamic and static panel data. Diagnostics tests were carried out since the application of the Hausman test provided the criteria for choosing between Random Effect Models and Fixed Effect Models. Breusch and Pagan Lagrangian multiplier test was employed to confirm the Hausman test results in order to decide between Random Effects and Pooled OLS. Correlation Matrix for multicollinearity test and cross-sectional dependent test were equally carried out for the study. Three models were estimated, based on the three proxies of the dependent variable. The study found that operational risk had a statistically positive significant effect on return on equity (ROE), while operational risk equally exhibited statistically positive significant effect on ROA. When the controlling variable of FSIZE was introduced, the study exhibited stronger effects which demonstrates that operational risk had a statistically positive effect on ROE, while operational risk with FSIZE had a statistically positive effect on ROA. The study recommends that DMBs managers should carefully carry out due diligence on loan applicants, to ascertain performance trend and creditworthiness of potential and prospective borrowers before advancing loans in order to reduce huge profiles of credit risk exposures.