ABSTRACT
This
study focused on investigating the impact of risk management on performance of
firms in manufacturing sector in Nigeria within the period of 2007 to 2015.
This study was carried out to investigate the impact of working capital
management and investment capital management on firm’s performance in the
manufacturing sector in Nigeria and to also ascertain which of working capital
or investment capital is managed more, using working capital and investment
capital as proxies for risk management while using return on asset and return
on equity as proxies for performance.
Secondary
data were collected from the publicly available audited financial statement of
the companies selected. Ordinary least Squares Regression was adopted in
testing the relationship between risk management and performance of the seven
companies respectively while descriptive analysis was done with the use of
graph in analyzing changes in the variables over time.
The
result from the ordinary least squares (OLS) regression analysis showed that
four of the seven companies have significant relationship between investment
capital and return on asset while three have significant relationship between
working capital and return on asset, and on the other hand there was
significant relationship between investment capital management and return on
equity of three companies while the other four have no significant relationship
between working capital and return on equity.
The
study therefore concluded that risk management have impact on performance of
firms in the manufacturing sector and also that firms in the manufacturing
sector tend to manage their investment capital more than their working capital.
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
Risk may be defined as the probability
of occurrence of an adverse event. Risk refers to the uncertainty that
surrounds forthcoming events and outcomes. It is the expression of the
likelihood and impact of an event with the potential to affect the achievement
of an organization's goals (Heinz, 2010). Risk can be seen as a state where
there is a likelihood of a loss but also a hope of gain (Emma & Gabriel
2012). The term risk can also be defined and elucidated in many different ways
depending on the aim and perspective of a discussion. Kaplan and Garrick (1981)
stated that a risk is a doubt joint with damage or a loss. They mean that
something that is indeterminate does not have to incur a risk; however, if an
event is considered as both indeterminate and a loss is included, it can be
defined as a risk. The Society for Risk Analysis (2012), defines as “The
potential for realization of unwelcome, adverse consequences to human life,
health, property, or the environment”.Since one would never jeopardize the loss
if there were no chance of a win. To realize the existence of a risk, one must
be aware of both the gains and losses incurred and therefore a risk can be
reflected as individual and relative to the observer (Kaplan & Garrick, 1981).
All these definitions seek to make known that risk is to be seen as part of
daily life, and the presence of risk in any environment should not be a problem
but the focus should be on how those risks are being managed and in turn
minimizing their potential effect.
Risk management on the other hand deals
with the process of identifying and controlling potential risks that can be
faced by an organization. Risk management is about identifying the risk to be
managed, risk to leave unattended and risk that need to be hedged. Risk management
is recognized in today’s business world as an integral part of good management
practice. In its broadest sense, it entails the systematic use of management
policies, procedures and practices to the tasks of identifying, analyzing,
assessing, treating and monitoring risk. Risk management refers to a practice
of identifying loss exposures faced by an organization and selecting the most
appropriate procedures for treating these particular spotlights effectively
(Rejda, 2003). Risk management is the identification, assessment, and
prioritization of risks followed by coordinated and economical application of
resources to mitigate, monitor, and control the probability and/or impact of
unfortunate events or to maximize the realization of opportunities (Wenk, 2005).
Effective
risk management can bring far payoffs to the company irrespective of what type
it is. These paybacks include, superior financial performance, better basis for
strategy setting, improved service delivery, better competitive advantage, less
time spent firefighting and fewer unwanted surprises, increased likelihood of
change initiative being achieved, closer internal focus on doing the right
things properly, more efficient use of resources, reduced waste and fraud, and
better value for money, improved innovation and better management of contingent
and maintenance activities (Wenk, 2005). Risk management in manufacturing
sector is about the categories and types of risks that can be opened to
companies in the manufacturing industries and the approach which the companies
adopt in managing those risks. The ways and manners which companies adopt in
managing their risks can have either of positive or negative effect on their
performance. Here are some of the risks that manufacturing companies can be exposed
to; environmental risk, reputational risk, technological risk, and legal risk.
1.2 Statement of the
Problem
The effect of risk management on the
performance of firms is a vital and an important issue to be examined
especially when there have been cases of companies failing after spending huge
amount as a result of their failure in managing their potential risks in an
adequate and efficient manner. Thus, this study focuses on how sound
organizations manage their working capital, investment capital or both as the
case may be. Also to know which of the two (either of working capital or
investment capital) is managed more and what effect do their choices have on
the performance. Managing both working capital and investment capital is a key
factor as to how well every organization will perform and this in turn will
limit their risk exposure and also reduce the amount that could be lost as a
result of their failure in managing their risk. Working capital management
talks about how well a company manage it current asset as well as current
liabilities, examples of current asset are cash at hand, cash at bank, debtors,
receivables, creditors. It must be known that failure in managing the working
capital can expose the company to liquidity risk (the risk of not having enough
money in meeting their short term obligations as at when due). Investment
capital on the other hand talks about the organization’s approach in managing
their long term asset and long term liabilities examples of investment capital
are. equity, debenture, plant and machineries, buildings, and failure in
managing their investment capital can also expose the organization to different
types of risk e.g. leverage risk (the risk of their debt rising to a very
critical point that can increase the probability of the company having
financial distress and also increase in bankruptcy cost). Mismanagement of both
working capital and investment capital can expose a company to reputation risk
(the risk that a company’s reputation with the general public (stakeholders) or
the reputation its product will suffer damage).
1.3
Objective of the Study
The
specific objectives are to:
1. determine
whether working capital or investment capital management have impact on the
performance of firms in manufacturing sector and
2. determine
which of working capital management or investment capital is managed more by
manufacturing firms within the context of risk management.
1.4 Research Questions
This
study seeks to answer the following questions:
1. Does
either of working capital management or investment capital management have any
impact on manufacturing firm’s performance?
2. Which
of working capital and investment capital is managed more by firms in
manufacturing sector in Nigeria?
1.5 Hypotheses
The hypotheses of this study are
structured to examine if good risk management process affect the performance of
companies in manufacturing sector in Nigeria. To offer useful answers to the
research questions and realize the study objectives, the following null
hypotheses are proposed.
Ho1:
Working capital and investment capital
management have no impact on the performance of firms in the manufacturing
sector in Nigeria.
Ho2:
There is no difference in the
risk management of working capital and investment capital of manufacturing
firms in Nigeria.
1.6
Justification for the Study
Risk management was
introduced into organizations so as to make known to the company as well as it various
stakeholders what risk the company is exposed to also find adequate measure of
managing and controlling the various types of risk they are exposed to. This
research was examined in order to study and understand the risk management
process and how it contributes to the value of listed companies in Nigeria.
Manufacturing industry is one of major key players in every economy as they
serve as an important aid in the process of economic growth and development. So
therefore this study was studied to know how they manage their risk and to
understand what the effect of their risk management is on their performance.
1.7
Significance of the Study
It is important to know the impact of
risk management on the performance of firms in the manufacturing sector in
Nigeria. This study was carried out to ascertain the effectiveness of risk
management process. It is well believed that good risk management process and
implementation have large impact on the performance of firms and in turn on the
economy as a whole. Thus this would make all stakeholders to have a good
understanding of how the risk management process affect firms in manufacturing
sector in Nigeria. Also the study would be a contribution to the existing
knowledge concerning risk management process and firm performance by examining
some organizations in the manufacturing sector in Nigeria.
1.8 Scope
of the Study
The study examined the
impact of risk management on firm performance and to also provide additional
insight into the relationship between risk management process and firms
performance in Nigeria. The variables employed in this study to measure Firm
performance include return on asset and return on equity. A total of 7
manufacturing firms were examined between year 2007 and 2015 to investigate
what way the companies manage their working capital and investment and what the
effect is on the respective companies. The data used for this research were
gotten from the audited financial statement of the firms listed on the Nigerian
stock exchange (NSE).
1.9
Operational Definition of Terms
Risk:
Risk
may be defined as the probability of occurrence of an adverse event. Risk
refers to the uncertainty that surrounds forthcoming events and outcomes. Also
risk work along with uncertainty i.e. when there is possibility of more than
one outcome in a particular situation.
Risk
Management: Risk management is defined as the
culture, structures and processes that are focused on achieving possible
opportunities yet at the same time control unwanted results. The Cadbury Report
(1992) described risk management as the process by which executive management,
under board supervision, identifies the risk arising from business and
establishes the priorities for the control and particular objectives.
Liquidity
Risk: liquidity risk is the risk that the company will be
unable to make payment to settle liabilities when payment is due. It can occur
when a company has no money in the bank, is unable to borrow more money
quickly, and has no assets that it can sell quickly in the market to obtain
cash.
Reputation
Risk: Reputation risk is the risk that a company’s
reputation with the general public, or the reputation of its product ‘brand’
will suffer damages. Damages can arise in many different ways: incidents that
damage reputation are often reported by the media. Companies that might suffer
losses from damage to their reputation need to be vigilant and alert for any
incident that could create adverse publicity. Public relation consultants might
be used to assist with the task.
Working
Capital: Working capital refers to the use of short term
financing method on carry out the activities of the organization and it is
divided into current asset and current liabilities. Working capital is defined
as the investment of the firm in the current or short-term assets such as cash,
short-term securities, accounts receivable and inventories (Ghahderijani,
2006).
Investment
Capital: This can be otherwise called capital structureand it
is said to be the mix of long term finances for carrying on organization operations
and it usually the mix of debt and equity as sources of financing.
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