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 recommended that 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.
Keywords: Operating environment, Economic characteristics, Manufacturing Firms and Financial performance.