COMPARATIVE ANALYSIS OF THE FINANCIAL PERFORMANCE OF QUOTED AND UNQUOTED FIRMS IN NIGERIA

COMPARATIVE ANALYSIS OF THE FINANCIAL PERFORMANCE OF QUOTED AND UNQUOTED FIRMS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1        Background of the Study

The firm financial performance has been the focus in the literature and often emphasized in policy debate with many researchers associating it to entrepreneurship. Significantly, financial performance of a firm, which translates into liquid assets whether generated by the corporate cash flow from operations or by the attraction of new shareholders is considered the most important source of business continuance in the long-run. It has been one of the indicators most commonly used to define the success and failure of management. Financial performance is a measure of profitability that should be sustained, since firms can not invest or expand without profit. Markman (2002) remarked that growth used as a measure of financial performance is based on the belief that growth is a precursor to the attainment of sustainability, competitive advantage and profitability. This indicator has been a concern to shareholders who invested in the business and a worry to directors of the firm because the result reflects their capacity to keep the business moving. A firm’s rate of growth is a function of the rate of profit and the rate of interest when the firm is constrained in either the labour market or the output market. The most widely emphasized goal of a firm is to maximize the value of the firm to its owners which is the driving force that makes a firm to succeed (Kannadhasan, 2002). The investment the government and private sponsors are expected to make in an organization will depend on their social returns and profitability potentials. Moreso, in a capitalist economy, there is one and only one responsibility of a firm – to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game, which is to say engage in an open and free competition without deception or fraud.

The financial performance of firms in the 1980s under the military era did not spur profitability of firms. The economic environment was characterized by


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inconsistency of policy formulation and implementation, multiple taxation and a crop of civil servants that had no sense of duty, and who frustrated any would be investor, local or foreign. This led to the closure of many local firms and withdrawal of many foreign investors. On assumption of office in May, 1999 by a democratically elected government, there were economic transformations which created enabling environment for investors. For instance, in 2005, the twenty most capitalized firms on the Nigerian stock exchange generated more than N900 billion and paid a total sum of N40 billion as tax on profit (Okereke, 2006).

With the promulgation of the Nigeria Enterprises promotion Decree 1977, there was over 200 percent increase in the number of registered firms in Nigeria. They increased from 10,997 in 1972 to 33, 949 in June 1980, an increase of 22, 952 in a period of eight years (industrial directory, 1982). Investigations have shown that despite the large number of firms in Nigeria, only few are listed on the Nigeria stock exchange and fifteen on the second tier securities market. However, business financing in Nigeria reveals the existence of two groups of firms, the large experienced firms (quoted firms) and the small and medium inexperienced firms (unquoted firms) (Ezike, 1985).

The undeveloped economies are characterized by firms with limited access to the financial market. The reason being that either such markets do not exist or there are factors which prevent transactions between them. The experience here is that most newly established businesses do not go beyond an average life span of five years. For every five businesses established in Nigeria, only one survives and the others cease operation or change ownership within one year. For instance, Econet telecommunication that has changed ownership from Econet- Vmobile- Celtel and Zain within the periods 2001 to 2008. A similar thing was experienced in Britain in 1963 and 1970 where twenty three (23) percent of small firms in manufacturing and construction sectors went into liquidation, ceased trading or were taken over by large firms. In Nigeria, the mortality rate has been attributed to lack of finance and hostile environment.


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Firms that have access to the financial markets have the advantage of obtaining long-term capital for growth and development. The steady growth in the concentration of industries have been a feature of most advanced economies. Economic theory attempts to establish this process in terms of technical, managerial, marketing and financial factors affecting existing firms. However, official statistics reveal very little about the financial performance of small firms in the country. The process of growth and performance both financially and otherwise has been analyzed at the macro economic level to the detriment of smaller firms. Therefore, the comparison of the financial profile of firms with access to and those without access to the financial market is necessary.

1.2        Statement of the Problem

Unquoted firms in Nigeria have not performed creditably well and hence have not played the expected vital and vibrant role in the economic development of Nigeria. This situation has been of great concern to the government, citizenry, and organized private groups. Year in year out, the governments at federal, state and even local levels through budgetary allocations, policies and pronouncements have tried to energize them. There has also been fiscal incentives, grants, bilateral and multilateral agencies support and aids as well as specialized institutions all geared towards making unquoted firms vibrant, (Ngwuonugu, 2005a) In fact, some of the identified problems are constrained access to money and capital market, inadequate equity capital, poor management practices, low equity participation from promoters because of insufficient personal savings due to poverty and low return on investment, high rate of enterprise morality etc. The unquoted firms have faced difficulty in obtaining formal credit or equity. This is because the maturities of commercial bank loans extended to them are often limited to a period too short to pay off any sizeable investment. Moreover, banks in many developing countries prefer lending to the government which offers less risk and high return. Such practices have crowded out most private sector borrowers and increased cost of


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capital for them (Levitsky,1999). The situation is equally prevalent in Nigeria economy where commercial banks prefer lending to the government, trade in foreign exchange (FOREX), and finance buying and selling. On the other hand, several related empirical studies on financial performance of firms had neglected the inclusion of unquoted firms. Among such studies are (Ahmadu, Amina and Tukur 2005, Henrik 2002, Englbert and Michaela 2005, Sanghoo, 2006 ) who concentrated on corporate governance, ownership structure, profit sharing, managerial ownership and financial performance. Again, official statistics ignored the financial performance of unquoted firms. They fail to consider that the financial performance of unquoted firms is very important because of their role in a national economic development. Obitayo (2001a), remarked that unquoted firms are engine of economic growth and industrialization.

Moreso, empirical studies comparing financial performance of quoted and unquoted firms have shown contradictory results. Some studies like (Walker and Petty, 1978), (Anderson and Reeb, 2002), found evidence that unquoted firms out performed quoted firms while Binder (1994), Tomas (2008), Obiora (1987), negated this assumption. Authors that support former line of reasoning, Daily and Dollinger (1992), argue that unquoted firms are more likely to out perform management controlled firms. This is because owners of unquoted firms are more likely to maximize firm value, enabling them to personally realize any financial and economic gain. In contrast, professional managers of quoted firms may not pursue profit- maximizing and growth oriented strategies because they prefer to maximize their own benefits by pursuing other activities such as maximizing short- run sales revenues.

In addition, the present down- turn of the world economy has not excused that of Nigeria. Many stock markets of countries, from USA to Britain, China to Japan, Russia, France and others are in serious trouble. The Nigerian capital market is not insulated from this global malignant. Its market capitalization has fallen from N13.5 trillion in March, 2008 to less than N4.6 trillion by the second week of


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January 2009. Besides, the All-Share Index (a measure of the magnitude and direction of general price movement) has also plummeted from about 66000 to less than 22000 points in the same period. The stock prices have experienced a free-for-all downward movement regime with more than 60% of slightly above 300 quoted securities on constant offer (supply exceeding demand) on a continuous basis. Consequently, many of the quoted stocks lack liquidity as their holders are trapped, not being able to convert them to cash to meet their domestic and other investment needs. On the other hand, fresh investors are cautious of jumping into a vehicle that does not seem to have a brake should they wish to disembark. Many quoted companies like Dunlop Nigeria Plc and Michelin Nigeria Plc have closed down shops. Most of the textile industries have also stopped production, leading to the crash of their share prices. The shares of Dunlop Nigeria Plc that sold above N6 per share now trade below N0.6 per share. However, this resulted to loss of confidence in the Nigeria economy, as many investors prefer to convert their naira to foreign currencies, especially the dollar and hold them through their domiciliary accounts. This sharp down-turn in the stock market and the general disillusion with the performance of quoted firms induced massive withdrawal of foreign investors from the Nigerian Stock Market pulling the sum of N556 billion or S4 billion leading to its steep decline and crashing and one begin to wonder if quoted firms are still fertile ground for investment (Olisaemeka, 2009).

Given the above scenario, one is apt to ask, Do quoted firms perform well financially in Nigeria? Are unquoted firms viable in Nigeria? Is there any difference between the financial performance of quoted and unquoted firms in Nigeria?


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1.3        Objectives of the Study

The overall objective of this study is to compare the financial performance of quoted and unquoted firms in Nigeria. In particular, the study seeks to:

i.              Examine the financial performance of quoted firms in Nigeria.

ii.           Examine the financial performance of unquoted firms in Nigeria.

iii         Compare the difference between the financial performance of quoted and unquoted firms in Nigeria.

1.4       


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