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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 world market. 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


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, inf

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