IMPACT OF MACRO ECONOMICS VARIABLES ON FIRMS’ PERFORMANCE IN NIGERIA

IMPACT OF MACRO ECONOMICS VARIABLES ON FIRMS’ PERFORMANCE IN NIGERIA

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ABSTRACT

Nigeria  has experienced vibrant activity relating to the acquisition of local firms by Private enterprises (PE) and the size of PE transactions. Some notable PE firms are well known and are listed on the NSE. PE as its name suggests, is very reclusive, private and confidential in nature; and the exact information about financial deals are difficult to ascertain. The research objective was to establish the effect of macroeconomic variables on firms’ performance in Nigeria. The variables selected were those that were perceived by the researcher and supported by previous empirical studies, to have the highest effect on financial performance of firms as measured by Return on investment (ROI). These are inflation rate, GDP growth rate, bank interest rates, exchange rate and systematic risks. ROI was taken to be the dependent variable while inflation, GDP growth rate, interest rates, exchange rate and systematic risk were taken to be the independent or predictor variables. The study also considered an error term as a representative of other non key variables which had not been included in the model. The study period ranged from 2005 to 2012 within every quarter of a year, therefore consisting of 32 observations. The data was analyzed using SPSS version 11 for Windows. Multivariate regression model was employed in the study. To further ensure the model’s significance and goodness of fit, an F test and Analysis of Variance (ANOVA) were used. Out of the private enterprises (PE) firms sampled, the study established

that PE firms’ in Nigeria ROI was heavily influenced by the selected macroeconomic variables with GDP having the largest influence and systematic risk having the least impact. The computed R2 was established to be of 0.728 which shows there is a positive and strong correlation between the selected macroeconomic variables and ROI. 72.80% of ROI is influenced by the selected variables while 18.2% shows ROI affected by other variables not included in the regression, more specifically the error term. The study also established positive correlation between the dependent and independent variables albeit to varying degrees. Gross domestic product, inflation and banks interest rates in that respective order were established to be the macroeconomic factors that had the greatest positive effect on PE firms’ financial performance while exchange rate showed a negative relationship albeit to a small extent. Hence, these macro economic variables should be carefully be considered by all stakeholders in the PE industry. Therefore this study proves, lends credence and confirms the researcher’s theory that the financial performance of PE firms is affected by fundamental macroeconomic factors such as GDP, inflation, currency exchange rate, interest rates and market risk. In summary, the aforementioned macroeconomic should be closely monitored and taken to account by PE funds and firms managers since they have an effect on the overall financial performance of PE firms.


CHAPTER ONE

INTRODUCTION

1.1    Background To The Study

Every company operates within the internal and external environments of business.  The internal environments are within a firm such that the prevailing factors are most times very subject to the control of the managers.  The external environment has to do with the larger business environments in which a firm operates; and the factors therein are not subject to the control of the managers. 

The factors in the external environment not subject to the control of a manager generally can be regarded as macro economic factors or variables. The corporate managers cannot control the macro economic variables but the government can control them through several policies.  Thus, like all experts, the government in order to do a good job of managing the economy, will have to study, analyze and understand the major variables that affect or determine the current behavior of the macro-economy.  Examples of the macro-economic variables that affect the economy and firms majorly include exchange rate, foreign direct investment, inflation rate, interest rate, money supply, etc. 

The management of these variables is usually done through fiscal and monetary policy by the government and her agencies e.g. the Central Bank. Another macro economic variable that may impact on firms’ performance is exchange rate.  Firms’ financials are presented in terms of the home currency.  Exchange rate increases or decreases the value in home currency of revenues and cost incurred in foreign currency. 

According to Lars (2003), exchange rate increases or decreases earnings in home currency share of total costs.  In other words, exchange rate increases or decreases earnings in home currency before interest costs.  Against this backdrop, the study examines the impact of macro economic variables on corporate performance in Nigeria.

1.2    Statement Of Problem

Researches on the relationship between macro economic variables and firm’s performance have been on going in advanced countries of the world with little or no research in developing countries of the world such as Nigeria.  It is this existing gap that informed the rationale behind this study.  In the light of the above, the following research questions are raised:

a.   What is the effect of inflation rate on corporate performance in Nigeria?

b.   What is the relationship between exchange rate and corporate performance in Nigeria?

c.   How does interest rate affect corporate performance in Nigeria?

d.   Is there a relationship between money supply and the performance of corporate organizations in Nigeria?

1.3    Objectives Of The Study

The general objective of the study is to evaluate the impact of macro economic variables on corporate performance in Nigeria.  However, the specific objectives are stated as follows:

a.   To ascertain the effect of inflation rate on corporate performance in Nigeria.

b.   To find out if there is a significant relationship between exchange rate and corporate performance.

c.   To determine how interest rate affect corporate performance in Nigeria.

d.   To examine the relationship between money supply and the performance of corporate organizations in Nigeria.

1.4     Research Hypotheses

In order to validate the relationship between macro economic variables and corporate performance in this study, the following alternative hypotheses are specified:

a.     H1:     Exchange rate influences corporate performance.

b.     H2:     there is a relationship between inflation rate and corporate performance.

c.      H3:     Foreign direct investment influence corporate performance in Nigeria.

d.     H4: There is a relationship between money supply and the performance of corporate organizations in Nigeria.

e H5: Interest rate affect corporate performance in Nigeria.

1.5   Scope Of The Study

This study examines the effects of macro -economic variables on corporate performance in Nigeria.  The time period the study covers is 2002 to 2011.  In other words, the study is a time series one.  The sample size is sixteen quoted firms which are listed on the floor of the Nigerian Stock Exchange.

1.6   Significance Of The Study

This study is expected to be relevant to a number of persons and institutions in Nigeria.  First, the Federal Government of Nigeria will find the outcome of this study useful in terms of making decisions relating to the macro economic environment; in other words, it will help the government to regulate the interest rate, inflation rate, exchange rate and others with a view to achieving macro economic stability so as to assist the companies operating in Nigeria.  The Central Bank of Nigeria definitely will find the study very much useful in terms of devising good monetary policy so as to enhance company’s performance and foreign investors into the Nigeria economy. Similarly, future researchers will find the study useful in terms of reference materials on a similar subject matter as this.

1.7 Limitations Of The Study

The limitations of this study include data constraint, inadequate research materials extensively dealing on the subject matter in Nigeria.  The sample size also limits the study due to time factor and its practicality.  Similarly, there is also the problem of generalizing the outcome of the study to other non-manufacturing firms in Nigeria in terms of how macro-economic variables may have affected their performance.



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