FIRM CHARACTERISTICS, MACROECONOMIC INDICATORS AND FINANCIAL PERFORMANCE: EVIDENCE FROM NIGERIA (A CASE STUDY OF LISTED FIRMS IN EDO STATE)

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

Firms can be distinguished from one another on the basis of different financial and non-financial characteristics including size, value, profitability, structure, leverage, liquidity etc. These characteristics are unique to specific companies and raise a perception in the mind of the users of that information regarding the performance and future of the company. According to Safdar et al., 2013, in the current era where all critical decisions of firm management quickly reach the markets as well as information users, an important issue regarding financial research is the impact of these characteristics on financial performance.  Firm size is one of the most influential characteristics in organizational studies. Chen and Hambrick (2013), and Mintzberg (1979) provide a summary and overview of the importance of firm size. Firm size has also been shown to be related to industry- sunk costs, concentration, vertical integration and overall industry profitability (Dean et al., 2014). Larger life companies are more likely to have more layers of management, greater number of departments, increased specialization of skills and functions, greater centralization and greater bureaucracy than smaller life insurance companies (Daft, 2013). Firm age (measured as the number of years a company is operating in the market since it was founded) is an important determinant of financial performance and stock returns (Kaguri, 2013). Past research shows that the probability of firm growth, firm failure, and the variability of firm growth decreases as firm’s age (Evans, 1987; Yasuda, 2005).According to the life cycle effect, younger companies are more dynamic and more volatile in their growth experience than older companies (Kogan, 2012). Maturity brings stability in growth as firms learn more precisely their market positioning, cost structures and efficiency levels and these influences stock prices. Micro and macroeconomic factors affect the performance of a firm. Microeconomic factors exist within the company and under the control of management; they include product, organizational culture, leadership, manufacturing (quality), demand and factors of production (Broadstock et al., 2011; Adidu and Olanye, 2006). Macroeconomic factors exist outside the company and not under the control of management; they include social, environmental, political conditions, suppliers, competitors, government regulations and policies (Adidu and Olanye, 2006). Key economic factors include the Consumer Price Index (CPI), unemployment, gross domestic product (GDP), stock market index, corporate tax rate and interest rates (World Bank Group, 2015; Broadstock et al., 2011). These factors (i.e. macro) can pose a positive or negative threat to the performance of a firm. While micro factors are within the control of management, the macro factors are beyond the control of management (Dioha et al., 2018). And presently, the recession witnessed in Nigeria, which business analysts opined that led to the delisting of some companies, has brought to limelight the implications of macroeconomic factors on corporate performance (Zeitun et al., 2007). For instance, the monetary policy of a country affects all sectors through the cost of debt and the availability of money/credit, which could affect a firm’s ability to access external sources of fund. Fiscal policies affect a firm’s after tax net cash flow, its cost of capital, and potentially the demand for its products, and survival (Zeitun et al., 2007). Also, increases in the nominal interest rate and inflation rate intensify the aggregate rates of failure or default (Robson, 2011). In most developing countries, for instance Nigeria, macroeconomic factors, such as hyperinflation and increasing exchange rates, are some of the factors affecting the performance of manufacturing firms (Owolabi, 2017). However, the performance of a firm is not affected by macroeconomic factors. According to the resource-based view (RBV), the internal attributes of an organization determine its position in the competitive environment (Denizel and Özdemir, 2006). The attributes of a firm’s physical, human and organizational capital enable the firm conceive of and implement strategies that improve its efficiency and effectiveness (Barney, 2012). Industry and corporate specific factors have been shown to be significant determinants of corporate performance (Oyebanji, 2015; Rajkumar, 2014; Akinyomi, 2013; Akintoye, 2008). The subject of financial performance has received significant attention from scholars (Kaguri, 2013). It has been of primary concern to various stakeholders in all forms of businesses because of its implications on organizational health and ultimate survival. Therefore, its measurement and determining factors have gained increased attention, more especially in developing countries in the area of business and corporate finance literature (Dioha et al., 2018). The subject of financial performance has received significant attention from scholars in the various areas of business and strategic management. It has also been the primary concern of business practitioners in all types of organizations since financial performance has implications to organization’s health and ultimately its survival. High performance reflects management effectiveness and efficiency in making use of company’s resources and this in turn contributes to the country’s economy at large (Naser, and Mokhtar, 2014). High performance reflects management effectiveness and efficiency in making use of company’s resources and this, in turn, contributes to the country’s economy at large (Naser and Mokhtar, 2014).

1.2 STATEMENT OF THE PROBLEM

Firms make several operational and strategic decisions which are usually moderated by the macroeconomic environment; these include financing decision, investing decision and operational decision (Owolabi, 2017). Thus, performance is often gauged from stability in the macro economy, such as exchange rate and inflation rate fluctuations, the CPI, level of government expenditure, interest rates, among others. However, macroeconomic volatility is much higher in developing countries than developed ones (Owolabi, 2017). For instance, the Nigerian economy has shown volatility in exchange rate, inflation, interest rate, among several others (Agu et al., 2014; Ogbole et al., 2011). Analysts opine that growth in the manufacturing sector is hindered negatively from high lending rates, which invariably is responsible for high cost of production (Rasheed, 2010). Studies have extensively examined the effect of macroeconomic factors on firm performance in developed countries (Barakat et al., 2016; Broadstock et al., 2011; Kandir, 2008; Stock and Watson, 2008; Ibrahim and Aziz, 2015). However, there is little empirical evidence how macroeconomic variables impact on the performance of manufacturing firms in Nigeria (Owolabi, 2017). In Nigeria, major macroeconomic indicators have shown significant fluctuations over time, more especially as the country emerges from recession. For instance, inflation rate as measured by the CPI is presently at double-digit level 14.33 as at February 2018. Exchange rate increased tremendously from to over 300 as at April 2018. The CBN had earlier projected a money supply growth of 10.29 percent for 2018 (Vanguard, 2018). The GDP at current basic prices has also steadily increased. Studies have extensively focused on the banking sector (Ogunbiyi and Ihejirika, 2014; Osamwonyi and Michael, 2014). However, survival and growth of firms also depend on interaction of macroeconomic factors and firm characteristics. Using data from nine African countries, Lemma and Negash (2013) found evidence that income level, growth rate and inflation influence the capital structure of firms. However, this is further affected by industry- and firm-specific characteristics. Ghareli and Mohammadi (2016) reported mixed findings for the effect of firm-specific characteristics on financial reporting quality. Studies have also substantiated the effect of firm characteristics on financial performance (Dioha et al., 2018). For instance, firm characteristics such as firm age (Swiss, 2008), firm size (Malik, 2011), liquidity (Dogan, 2013) and leverage (Mule and Mukras, 2015) have been associated with profitability. The recent study by Foyeke et al. (2015) on a sample of firms from both financial and non-financial sectors in Nigeria revealed a significant positive relationship between financial performance and firm size with the level of corporate governance disclosure. Thus, given the interaction of the two factors in determining performance, there is a need for additional evidence on the joint association between macroeconomic factors, firm characteristics and financial performance in developing countries (Adeoye and Elegunde, 2012). More so, Izedonmi and Abdullahi (2011) have shown that the influence of macroeconomic factors varied from sector to sector. Therefore, there is a need to examine using such firms from the consumer goods sector. Therefore, the thrust of this study is to examine macroeconomic factors, firm characteristics and financial performance of selected listed firms in Nigeria.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine firm’s characteristics, macroeconomic indicators and financial performance in Nigeria. Other general objectives of the study are:

1. To examine the effect of firm size on the financial performance (Return on Assets) of firms in Nigeria.

2. To examine the effect of firm age on the financial performance (Return on Assets) of firms in Nigeria.

3. To examine the effect of firm loan on the financial performance (Return on Assets) of firms in Nigeria

4. To examine how exchange rate influences financial performance (Return on Assets) of firms in Nigeria.

5. To examine how inflation rate influences financial performance (Return on Assets) of firms in Nigeria.

6. To examine the relationship between GDP and the financial performance (Return on Assets) of firms in Nigeria.

1.4 RESEARCH QUESTIONS

1. What is the effect of firm size on the financial performance (Return on Assets) of firms in Nigeria?

2. What is the effect of firm age on the financial performance (Return on Assets) of firms in Nigeria?

3. What is the effect of firm loan on the financial performance (Return on Assets) of firms in Nigeria?

4. How does exchange rate influences financial performance (Return on Assets) of firms in Nigeria?

5. How does inflation rate influences financial performance (Return on Assets) of firms in Nigeria?

6. What is the relationship between GDP and the financial performance (Return on Assets) of firms in Nigeria?

1.5 RESEARCH HYPOTHESES

H01: Firms size has no significant effect on the Financial Performance (Return on assets) of firms in Nigeria

H02: Firms age has no significant effect on the Financial Performance (Return on assets) of firms in Nigeria

H03: Firms loan has no significant effect on the Financial Performance (Return on assets) of firms in Nigeria

H04: Exchange rate has no influence on the Financial Performance (Return on assets) of firms in Nigeria

H05:  Inflation rate has no influence on the Financial Performance (Return on assets) of firms in Nigeria

H06: There is no significant relationship between GDP and financial performance (Return on Assets) of firms in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study findings will provide pertinent information on how firm characteristics and macroeconomic indicators affect the financial performance of firms in Nigeria. The study findings will be of interest to the government of Nigeria, shareholders, and firms, as well as scholars and academicians. The study will benefit scholars and academicians who would wish to undertake further studies and increase the body of knowledge on the effect of firm characteristics, macroeconomic indicators and financial performance of listed firms. It will increase knowledge on the relationship between macroeconomic variables and performance of manufacturing industry. It will also suggest areas where gap in literature exist and where further research studies are required so that scholars in the field of finance and economics can do further studies in them. The government will understand the forces of economic growth mainly in the manufacturing industry and try to develop a mixture of policies that will be suitable for curing such variables like inflation, interest rate and exchange rate fluctuations. Corporate bodies will benefit from the study by getting information on how firm characteristics, macro-economic indicators affect the industry thus they will provide data and information on better strategies that can be used to deal with firm characteristics, macro-economic indicators, improve financial performance in the industry.

1.7    SCOPE OF THE STUDY 

The study is based on firm’s characteristics, macroeconomic indicators and financial performance: evidence from Nigeria, a case study of listed firms in Edo state.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Macroeconomics:  Macroeconomics is the branch of economics that studies the behaviour and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation.

Performance:  The accomplishment of a given task measured against preset known standards of accuracy, completeness, cost, and speed. In a contract, performance is deemed to be the fulfilment of an obligation, in a manner that releases the performer from all liabilities under the contract.

Firm: A firm is an organization which sells or produces something or which provides a service which people pay for.