ECONOMIC CHARACTERISTICS AND FINANCIAL PERFORMANCE OF SELECTED MANUFACTURING COMPANIES IN NIGERIA

ABSTRACT
Firms make several financial and strategic decisions which are usually moderated by the workings of operating business environment. Understanding how the fluctuations of these economic variables moderate variations in firms’ financial performance is crucial and germane to meeting cooperate goals and objectives. Insensitive to how these economic variables affect financial performance may lead to wrong decisions and may have implications on performance. Consequently, this study investigated the impact of economic characteristics of a firm’s operating environment represented by; Government Expenditure, Inflation, Interest rate and Exchange rate fluctuations on financial performance expressed by earnings per share (EPS), Return on Equity (ROE), Return on Asset (ROA), and Tobin’s Q (TQ) of Nigeria manufacturing firms
The study adopted ex-post facto research design. Stratified and random sampling methods were used to select 31 out of the 45 manufacturing firms listed on the Nigeria Stock Exchange as at 2014. Secondary data were obtained from the Nigerian Stock Exchange library, the Central Bank of Nigeria publications, National Bureau of Statistics and the Internet.  A critical analysis of the financial statements of the selected manufacturing firms over a period of 5 years (2010– 2014) was conducted. Diagnostic tests were conducted using Hausman specification test. Fixed effects estimator was employed and regression analysis to test the formulated hypotheses.
The findings revealed that the impact of economic characteristics on firm’s financial performance existed but in diverse magnitude;  economic characteristics proxy  by  interest rate, rate of inflation, exchange rate and Government expenditure showed a negative and significant relationship with ROA and EPS at R2= 0.586702, F= 0.00000<0.05; R2= 0.838035, F =0.00000<0.05 respectively. Also exist a negative and insignificant relationship between our independent variable and ROE at R2 = 0.002824, F = 0.354468>0.05; TQ related negatively with economic characteristics variables at R2 = 0.866519, F = 0.00000<0.05. There is an overall negative significant relationship between economic characteristics and firm’s financial performance at R2= 0.817989, F= 0.00000. All at 5% level of significance.

In conclusion, the study showed that each of the financial performance indicators earlier specified, relate with each element of economic variable in a unique manner. It was therefore recommendedthat the monetary policies most importantly foreign exchange policies should given serious attention, business manager of manufacturing firms should monitor the movement of economic variable to take an informed decisions, government should pursue a balanced monetary and fiscal policy and have holistic review of monetary and fiscal policy as there is an overall significant negative relationship between economic characteristics and firm’s financial performance. 

TABLE OF CONTENTS
Title Page
Abstract
Table of Contents
List of Tables
List of Figures  

CHAPTER ONE:     INTRODUCTION
1.1       Background to the Study
1.2       Statement of the Problem
1.3       Objective of the Study
1.4       Research Questions
1.5       Hypotheses
1.5.1    Rationale for Hypotheses
1.6       Significance of the Study
1.7       Scope of the Study
1.8       Operationalization of Variables

CHAPTER TWO: REVIEW OF LITERATURE
2.1       Conceptual Model
Theoretical Framework  
2.3       Empirical Framework  
2.4       Gaps in Literature

CHAPTER THREE: METHODOLOGY
3.1       Research Design
3.2       Population
3.3       Sample size and sampling Technique
3.4       Source of Data
3.5       Data Analysis Technique
3.5.1    Regression Analysis
3.6       Model Specification
3.7       Apriori Expectations
3.8       Ethical Consideration

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND
                                   DISCUSSION OF FINDINGS        
4.1       Descriptive Analysis
4.2       Descriptive Statistics
4.3       Empirical Analysis
4.3.1    Test of Main Hypothesis
4.3.1    Interpretation of Result
4.3.2    Test of Hypothesis one
4.3.1    Interpretation of result
4.3.2    Test of Hypothesis Two
4.3.1    Interpretation of result
4.3.2    Test of Hypothesis Three
4.3.1    Interpretation of result
4.3.2    Test of Hypothesis Four
4.3.1    Interpretation of result 

CHAPTER FIVE:  SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1       Summary
5.1.1    Summary of Findings
5.1.3    Policy Implications of Findings
5.2       Conclusion
5.3       Recommendations
5.4       Contributions to Knowledge
5.5       Limitation of the Study
5.6       Suggestion for Further Studies
            References
            Appendix 

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Organizations are institutions deliberately designed to achieve and accomplish certain goals and objectives which in turn maximize the shareholders' wealth in the context of the definition of the organization objective. Activities in these organizations are affected by both identified operating environment and firms' specific characteristics. The state of a nation's economy affects the performance of its organizations. Whenever the economy is performing well the general expectation of most investors and shareholders is that companies would perform well and thus shareholder's wealth is maximized.

The economic performance is judged by the stability in macroeconomic variables, such as exchange rate, the rate of inflation, consumer price index, GDP, stock market index and interest rates, the policy makers at both the macro and micro levels expect that economic condition would remain stable and favorable to sustain business performance. Moreover, it is the wish of potential and existing investors that these macroeconomic elements remain pleasant so as not to threaten the firm's ability to meet up with set objectives. Firms make several operational and strategic decisions which are usually moderated by the fundamentals of business operating environment; these include financing decision, investing decision and operational decision.  Hence, firms must pay particular engrossment than before to their operating environments when formulating and implementing survival and growth strategies  (Otokiti & Awodun, 2003).

A firm's decision in financing, investing and any other decision pattern is primed on the trend of the behavior and disposed characters of its operating environment. Organisational performance has been a source of influence on the actions taken by companies and the degree to which an organisation realizes its goals as well as the stated objectives through the stated strategies and policies of the organisation (Folan & Browne, 2005). The search for improvement on performance has always been a fundamental issue for firms. As it implied in the natural habitat where the survival of the inhabitants depends largely on the environmental phenomena, such as sunlight, rainfall, and humidity, so it applies in corporate life. A firm is as good as the workings of the fundamentals of its environment. The interplay and the relationship pattern between a firm and its operating environment are symbiotic in nature, as a change in one also causes changes in other. The impact of the manufacturing sector as the key driver for meaningful economic growth cannot be over emphasized. This relationship is characterized by the fact that a group of healthy firms will build-up a healthy economy. Therefore, in Nigeria, the government has made a concerted effort in the emergence, and continuous improvement in the activities of capital market regulation and operations and an attempt is made to make the private sector the key driver of the nation economy

 Duncan (1972) defines firms' environments as been characterized of "the facility of physical and social factors that are taken directly into consideration in the decision-making behavior of the organization''. Variation in firms' performances can be attributed to the general macro and micro economic factors which are the economy, industry and firms' specific factors. The behavioral character of a business environment plays major role in accommodating or constraining business activities. Where there is lack of good understanding of the external business environment, the attendant effect of this on firm's performance cannot be over emphasized. After all, it is the enhanced performance (effectiveness, efficiency, and economy) that can ensure the sustainability of the organisation in relation to its corporate goals and objectives.

An accommodating business environment is one that encourages firms to operate efficiently. Such conditions encourage firms to innovate and to increase productivity, maximize shareholders wealth and ultimately improve overall performance. In turn, it expands employment and contributes taxes necessary for public development. In contrast, a poor business environment increases the obstacles to conducting business activities and decreases firms' prospects for reaching its potential regarding sustainable performance and wealth creation (Owolabi, 2013). It must be noted, that amidst the economic scanning and because the Nigerian business environment is fast changing and this deserves the means by which future opportunities and problems can be anticipated by an organisation and company executives and administrators needs adequate attention. (Gado, 2015).

The explanation for this phenomenon has been a subject of extensive research during the past decades. Hence, a large body of theoretical and empirical research on the determinants of firm performance exists. Two alternative research streams dominate the literature on performance factors. Industrial Economic Scholars emphasize the role of industry characteristics on firm performance (Bian 1968) cited in Nina and Andrews (2010). From a resource-based view, a firms' resources and capabilities are the basis of comparative advantages and superior performance (Barneu, 1991).

These factors are conditions outside the influence of the organization and are mostly influenced by state and structure of the country within which the firm operates; this falls under porter's (PESTLE analysis) which are the political environment, economic environment, socio-cultural environment, technological environment, legal environment, and ecological environment. These are basic factors upon which performance is based and which shape strategy. Despite the great amount of interest in economic conditions as determinants of firms' performance, there is still a lack of concordity in the literature on the conceptualization and measurement of economic variables. Economic environment and corporate performance have shown controversial findings

Enterprises are sustained in the environment in which they operate. Thus, the vagaries and extremities of the environment affect the fortunes of firms (Kennerly and Nelly 2003).  Considering the fact that performance is crucial to organization, the structure and decision-making is influenced by economic  characteristics so as to sustain the going concern of the enterprise, lack of critical understanding of the workings of macro-economic policies of an operating business environment could lead to disasters in the form of wrong investment decision, financing and operational.

1.2 Statement of the Problem
The modern business manager operates in a more dynamic environment. The changes in the environment have been rapid and largely unpredictable, economic variables have been complex in every sphere and impact on the practice of businesses  in every aspect of the world economy without any bias to either developed, emerging, developing, or underdeveloped economy all forms of business enterprise are faced with peculiarity and behavioral pattern within its operating environments. The most significant influence in organisational policy and strategy is the environment that operates outside the organization (Carant 1999).
There is a considerable literature on the effects of macroeconomic uncertainty and volatility on firm profitability in developed countries. Jorion (1990), Amihud (1993), Bartov and Bodnar (1994), and Bartov, Bodnar, and Kaul (1996) based on US multinational firms, for example, found a negative effect of uncertainty and volatility on firms profitability. Literature also shows an increase in the fluctuation in the earnings of firms in both developed and developing countries for the last three decades (Grabel, 1995; Comin & Mulani, 2006; Wei & Zhang, 2006). Macroeconomic volatility level is has been much higher in developing countries than developed ones. In the case of growth volatility, while it declined in developed countries during the 1990s (McConnell & Perez-Quiros, 2000), Montiel and Serven (2004) report an increase in one third of 77 developing countries, with an overall volatility twice higher than the developed ones. Likewise, terms of trade volatility is found to be more than three times higher in developing countries.

Increased globalization, emerging markets, and high competition has made the business environment to become turbulent and unpredictable. Macroeconomic uncertainty, volatility, and risk on firms are having an effect on their profitability and especially in developing countries. Financial factors such as hyperinflation/deflation, high-interest rates and increasing exchange rates are some of the factors in the current business environment that are affecting the performance of manufacturing firms.  Furthermore, in Nigeria, the level of growth in manufacturing sector has been affected negatively because of high lending rates, which invariably is responsible for high cost of production (Adibiyi, 2001 & Rasheed, 2010). Okafor (2012) further observed that the level of Nigerian manufacturing sector performance has continued to decline because of low implementation of government budget and difficulties in assessing raw materials.

It has been argued that the persistent poor performance of the manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other variables which has resulted in the reduction in capital utilization and output of the manufacturing sector of the economy (Tomola, Adebisi & Olawale, 2012). Thus, the manufacturing sector is a key variable in an economy and they motivate conversion of raw materials into finished goods. Charles (2012), posited that the manufacturing industries create employment which helps to boost agriculture and diversifying the economy in the course of helping the nation to increase its foreign exchange earnings. Nigerian export history over this period is the history of its oil exports and the very large changes in the price of oil on the worldmarket. The rich endowment of oil has important implications for the tradable sector of the economy generally and the manufacturing sector in particular, and it is often argued that Africa's resource endowments mean that it will not be able to export manufactures (Wood, 1997). The World Bank (2000) discusses the need for African countries to diversify their exports. This is highly relevant in the case of Nigeria; the failure of exports to grow essentially reflects the failure in manufacturing contribution

Financing is also another major determinant justification of firms' performance variance; Firms capacity to meet up with investment demands, financing demands, and transactions are limited in respect to financial ability and access to funding, which are either from equity source or through debt financing. The interest rate is one of the major factors to consider in debt financing decision making. Therefore, firm's exposure to these risks is not without consequence on performance, as this is a line charge on firms' earnings. Lending in excess of inflation rates is viewed as pre-requisite for successful and sustainable financing ‘‘positive interest rate'' (Buckley, 1999). The excessive high-interest rate in Nigeria had strongly discouraged long-term investments and constrained the ability to grow with nominal interest rates varying from 20 – 30% the private sector is unable to borrow to finance long-term investment.

Public expenditure is one of the most important instruments of government policy. Some theories believe that increasing government expenditure promotes industrial growth, while some other theories assert that increasing government expenditure leads to dividing economy; this is backed up by the claim from literature that most government administrations in Nigeria engage in unproductive ventures which are not aiding industrial growth. The nature of the relationship that exists between public expenditure and economic growth via sector performance has stimulated serious concern among researchers (Tawose, 2012).  Nigeria economy is characterized by fluctuating  macro-economic indicators with continuous drop in oil prices at the international market and government intension to diversify the economy and promoting the local content agenda, the current negative performance index of manufacturing sector in relation to the contribution to GDP and the potential the sector has for the economy in terms of employment, government revenue, foreign earrings and potential contribution to GDP, any effort toward this direction should be considered an effort in the right direction. Also, empirical evidence is lacking or limited with little documentation showing how macroeconomic variables impact on the performance of manufacturing sector in Nigeria. Therefore the thrust of this study is to examine economic characteristics and financial performance of selected manufacturing companies in Nigeria.

1.3 Objective of the Study
The main objective of this study is to assess the impact of economic characteristics on firm financial performance. The specific objectives are to:
1.                  determine the impact of economic characteristics on the earnings per share (EPS) of manufacturing sector in Nigeria;
2.                  determine the impact of economic characteristics on the return on asset (ROA) of manufacturing sector in Nigeria;
3.                  determine the impact of economic characteristics on the return on equity  (ROE) of manufacturing sector in Nigeria and
4.                  examine the implication of economic characteristics on Tobin’s Q (TQ) of manufacturing sector in Nigeria

1.4 Research Questions
Emanating from the above objectives, the questions are.

1.                  In what ways do economic characteristics impact on the earnings per share (EPS) of the manufacturing sector in Nigeria?
2.                  How do economic characteristics influence the return on asset (ROA) of the manufacturing sector in Nigeria?
3.                  What is the impact of economic characteristics on the return on equity (ROE) of the manufacturing sector in Nigeria?
4.                  How do economic characteristics affect Tobin’s Q (TQ) of manufacturing sector in Nigeria?

1.5 Hypotheses
In line with the specific objectives of this study and in search of answers to the various questions above, the following hypotheses are tested:
H01: Economic characteristics does not have a significant impact on the earnings per share (EPS) of manufacturing sector in Nigeria
H02: Economic characteristics does not have a significant influence on the return on asset (ROA) of manufacturing sector in Nigeria
H03: Economic characteristics does not have a significant impact on the return on equity (ROE) of manufacturing sector in Nigeria
H04: Economic characteristics does not have significant influence on the firm value of Nigerian
firms.

1.5.1 Rationale for Hypotheses
Theories and Empirics show a relationship between firms operating economic environment  and performance variation, Although contrast to significant number of existing literature in accounting and finance which focus on how industry-specific factors such as size, leverage, Asset tangibility, ownerships structure, capital structure, etc. impact corporate performance (Slade, 2004), Oyebanji (2015), this study focuses on how factors external to firms and corporations influence performance. The goal is to ascertain how economy-wide or anticipated economy-wide conditions instead of firm-specific factors, influence corporate performance. It is of great importance to managers, as business environment is a prime suspect for explaining the poor enterprise performance (Sodebom 2010).

This study revolves around fundamental assumption suggesting that adverse economic conditions or the potential for the occurrence of such conditions could have significant negative impact on corporate performance, or on firms' ability to identify macroeconomic variables that are more likely to constrain the goals and objectives of corporate performance growth should be of great concern to firms. Such information could help corporate decision makers in targeting specific external threats to performance. In the literature uncertainty emanating from persistent variability in economic activity has been shown to significantly influence corporate performance. Although, industry and corporate specific factors have been shown to be significant determinants of corporate performance (Oyebanji (2015), Rajkumar (2014) Akinyomi (2013), Bihults and Abbas (2012), Akintoye (2008).

This study suggests that the effect of economic characteristic condition transcends such firm or industry specific factors. This position makes us believe that unlike industry or corporate specific characteristics, operating economic, environmental characteristics are systemic and in most instances beyond the control of individual firm or industry. For instance, Triandatii, Brezeanu, Badea (2012) showed that macroeconomic-related variables to a large extent are the prime determinant of corporate profitability. Government expenditure pattern and financial performance of Nigeria firms', government expenditure can be classified in terms of purpose as recurrent and capital expenditure. The pattern of government spending has implications on private sectors, recurrent expenditure may though affect private investment through people's ability and willingness to work, save and invest. However, development expenditure raises economic growth both directly and indirectly. The impact of public expenditure in private investment behaviour remains a controversial issue.

A school of thought postulates that increase in government expenditure retards economic growth due to increased borrowing requirement and stifles private investment. Crowding out hypothesis, on the other hand, the opposing school suggest that any increase in government expenditure followed by equal increased in private savings has no first-order effects on private spending a concept referred to as Ricardian Equivalence. Therefore, this contrasting school of thought gave rise to several empirical studies attempting to assess the impact of public expenditure in private investment, hence,  justification for this hypothesis. Inflation rate as an explaining variable to financial performance variation of Nigeria firms. There are now substantial bodies of evidence indicating sustained likely predictable surprise in inflation can have adverse consequences on economy real growth. The effects of inflation could be viewed in two perspectives: effect on aggregate demand i.e. purchasing power and effect on the cost of production. During the period of high inflation, consumers with fixed income have low purchasing power due to the reduced real value of money, hence, reduced demand for product. Equally, inflation increases the cost of production, hence, reducing profitability (Osor & Ogeto, 2014).

Pandy (2009) argues that if capital markets were perfect the investment of equal risk should offer equal return in different countries, then, as per the fisher effects, the nominal rate of interest would adjust expertly for the change in the inflation rate. In agreement, Vong and Chang (2009) argue that available empirical evidence on the relationship between inflations and profitability is inconclusive, hence, requires further research. This conclusion is premised on the effect of interest rate on the financial performance of Nigeria firms; interest rate is a price that relates to present claims on resources relative to future claims on resource. It is the price a borrower pays in order to be able to consume resources now (Kwak, 2000). Interest rate represents the cost of borrowing for a given period. Due to the fact that borrowing is a significant source of finance for firms, the prevailing interest rate is of much concern; Also interest rate is a major determinant of firms' debt financing decision-making and access to finance is essential to the survival as well as the performance of any firm. No matter how well managed, no firm can survive without enough funds as working capital, fixed assets investment, man power, and product development.

Financial risk has a great impact on firm's performance. Our hypothesis links exchange rate risk on firms' financial performance, exposure to unanticipated changes in the exchange rate could have a devastating effect on performance. If foreign exchange markets are efficient such that purchasing power parity, interest rate parity and the international fisher effects hold true, a firm or investor does not need to protect against foreign exchange risk. However, the relaxation of frictionless and competitive market hypothesis introduces the notion exchange rate risk. (Jamal, Mohamed, Ali, & Abdalla 2014) Hence, hypnotized.

1.6 Significance of the Study
This study would be useful to the general public in updating their knowledge on the impact of macroeconomic variables and how they affect firms' financial performance and specific to;
The ability to determine and understand in depth the impact of operating economic characteristics assists management of a firm to improve on performance through formulating workable strategy with embedded systemic risk. The outcome of this study would assist managers of different sectors of Nigeria economy to determine the influence of their operating economic on financial performance variations management of Manufacturing Firms in Nigeria. The study might help managers to identify the economic factors that affect the performance of their firms and further know how each factor threatens their efficiency. This might help managers to design proper ways of managing or evading these threats to their capability and enable the firms to maximize their earnings. Managers have an important role to play in reconciling the shareholders objective of wealth-maximizing,  therefore reducing agency conflict between managers and the shareholders. The research would further highlight why the profitability levels of manufacturing keep on changing.
Manufacturing firms are viewed as the productive sector and an  essential element of any vibrant economy, hence the government should play a great role in the wellbeing of manufacturing firms in Nigeria. (Eze & Ogiji 2013) This study could help the government to identify the actual economic factors that cause fluctuations in the firms‟ profitability and further come up with strategies or policies to mitigate some threats such as inflation and increased exchange rate. If home companies are performing well, foreign and local investors could be attracted to invest in the industry and this would bring growth in GDP and thus loosen the hash economic conditions especially in the country.

One of the fundamental questions in finance, accounting and business administration is what are the factors responsible for firm performance variations? The firms' competitive advantage, specific characteristics or rather economic performance has been rather limited. There are a number of previous studies at the international level on the relationship of macroeconomic variables on firm's performance viz profitability, growth.  Rexford and Daisy (2013), Athanasqlou (2008), Baum (2001), Damir (2009). However, to identify what constitutes good economic characteristics to justify a firm's performance is being a very difficult task among researchers hence, responsible for differences in research findings. This study contributes to knowledge by establishing the consistence of the previous findings in an emerging economy like Nigeria. Nationally, a few studies have been carried out on the relationship between economic characteristics and corporate performance studies like Gado (2015), Aladejare (2013), Eze (2013) which are also sector base and made an attempt to reduce gaps and contributing to the ongoing discussion of the current trend in economic  characteristics and firm's; performance. In addition to various other important contributions of this study, it would also contribute to the existing literature as regards economic characteristics and corporate performance.

It is also of relevance and imperative for practitioners to have adequate understanding and give thorough attention to the investigation of the effect of economic characteristics on corporate performance. The findings of this study would strategically position consultants to provides cutting-edge consulting services into a thorough analysis in strategy planning with consideration to economic  variables which inhabit systemic risk, through a clear understanding of nature and extent to which these variable influence firms' performance.

1.7 Scope of the Study
This study examined the impact of economic characteristics on firm's financial performance,  it covers manufacturing firms operating in Nigeria listed on the Nigeria Stock Exchange (NSE). The study covered a period of five (5) years ranging from 2010 – 2014; the population of the study is made up of 45 firms producing consumables and industrial goods. The sample size for this study was 31 manufacturing firms listed on the NSE. The sampling method used for the study wer stratified and random sampling technique respectively.

The secondary data for the study were collated from annual publications such as Central Bank of Nigeria Bulletin, statistical publications and the National Bureau of Statistics.  The proxies used in this study for financial performance are, Earnings per share (EPS), Return on Equity  (ROE), Tobin's Q and Return on Asset (ROA), while proxies for economic characteristics are government expenditure, interest rate, exchange rate, and inflation. Therefore, the economic characteristics in this study is limited to macroeconomic characteristics

1.8 Operationalization of Variables
In order to evaluate the impact the independent variable has on the dependent variable, the research has the following construct: dependent variable is firms' financial performance, and the independent variables are the four economic characteristics interest rate, exchange rate, government expenditure and inflation, the above is mathematically constructed thus:
Y = f (X).
Where Y= Dependent variable (firms' financial performance)
 X= independent variable (Economic characteristics)
Firms' financial performance = f (Economic characteristics)
That is, FFP = f (EC)
Where FFP = Y and EC = X
X and Y are broken down as follows
Y= (y1, y2, y3, y4, y5)
y1=ROA
y2=ROE
y3=EPS
y4= Tobin's Q (TQ)
Y = firms financial performance (Return on Asset, Earnings Per Share, Return on Equity and Tobin's Q.)
Similarly, X = (x1, x2, x3, x4)
Where:
x1= Interest Rate
x2= Exchange Rate
x3= Inflation
x4= Government Expenditure
Functional Relationship
EPS= f (INT1, GEX2, INF3, EXC4,) …………..………….....   Function 1
ROA= f (INT1, GEX2, INF3, EXC4,) …………..………….....  Function2
ROE= f (INT1, GEX2, INF3, EXC4,) …………..………….....  Function3
TQ= f (INT1, GEX2, INF3, EXC4,) …………..………….....     Function 4

For more Accounting Projects click here
================================================================
Item Type: Postgraduate Material  |  Attribute: 108 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
================================================================

Share:

No comments:

Post a Comment

Select Your Department

Featured Post

Reporting and discussing your findings

This page deals with the central part of the thesis, where you present the data that forms the basis of your investigation, shaped by the...

Followers