FIRMS CHARACTERISTICS AND FIRMS VALUE: A STUDY OF QUOTED MANUFACTURING COMPANIES IN NIGERIA
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
In ascertaining a firm or company’s financial health or taking its ownership, the most crucial aspect is the firm’s value. The greater the value of a firm, the better is the position of the firm financially and better is the prospects for prospective investors. Market capitalization has been taken as a proxy for firms’ value in many literatures. Market capitalization is determined by multiplying number of outstanding shares and the current market price of one share. Considering number of outstanding shares to be constant, except in the case of buy out or split share, the firm’s s value is largely affected by market price of firm (Rajni and Kawalpreet, 2013)
For firms to create value, they have to make investments that will generate positive net present value cash flows. These cash flows are generated from the use of the firm’ assets, these assets are then in turn financed by the sources of financing. In general, the three main ways of financing is to issue new shares, to use retained earnings, or to borrow money through debt instruments. These different sources of financing make up the capital structures of firms. One main objective that all firms should have in common is the maximization of shareholders wealth or value and the value of the business as a whole. The decisions financial managers make will impact on the overall performance of the firm and it will determine how the firm is perceived by investors and their shareholders (Annalien, 2010 p.3). Organizations are institutions deliberately designed to achieve and accomplish certain goals and objectives which in turn maximize the share shareholder’s wealth in the context of the organization objective and further make the value of the firm greater. Activities in these organizations are affected by both identified operating environment and firms specific characteristics. (Owolabi, 2017).
In the securities market, be it the primary market or secondary market, the price of shares is significantly influenced by a number of firms characteristics or factors such as the book value of the firm, dividend per share (DPS), earnings per share (EPS), price earnings ratio (PER) and dividend cover (Somoye, Akintoye & Oseni, 2009). Sunde and Sanderson (2009) summed up the factors that affect share price to include corporate earnings, management strength, news of law suit, mergers, takeovers, market liquidity, market stability, availability of substitute, government policies, analyst reports, macroeconomic issues, investor’s perception and technical influences.
There are some internal factors that influence share price in a firm. These internal factors are otherwise known as firms characteristics, which is the major scope covered by this research work and what constitutes this firms characteristics has been viewed by different researchers in different ways. Suhaila, Mahmood and Mansor (2008) states that firms characteristics typically include firm size, growth, liquidity and interest coverage ratio, investment opportunity, profitability, risk and tangibility. Others include firm age and size, cash flow, dividend, leverage, operating expenses and internal governance mechanisms (Hassan & Ahmed, 2013; Abdullahi, 2016). So, the components of firms’ characteristics are chosen based on the interest of the researcher. Likewise, there are also some external factors that influence the price of shares that are beyond the control of the firm and are seen as macroeconomic characteristics and these external factors include gross domestic product (GDP), inflation, exchange rate and monetary policies. Studies that have examined these macroeconomic variables are concerned with time series analysis of how this factors determine firms value (Mohammed, 2017)
Researchers have tried to use different types of information to explain firm value. For example, the change in economic and financial factors have been commonly used to explain the behaviour of different stock markets around the world. Investors seek to maximize their returns by purchasing stocks of firms that reports high profits. In addition, the stock market has been the major driver for economic growth and plays a significant role in allocation of economic resources into the productive activities of the economy in both emerging and developed countries. (Sudhahar and Raja, 2010)
Various studies have been carried out in finance, accounting, strategic management, finance, which are related to this particular study, but not directly related ,mostly on firms characteristics and firms performance, so this study will attempt to look into the effects of these selected firms’ characteristics (firms size, liquidity, operational efficiency and leverage) on firms value, and this study will specifically focus on quoted manufacturing companies in Nigeria.
1.2 Statement of the Problem
Prior to this research work, studies have been carried out in relation to this area; firms characteristics, board characteristics, chief executive officer characteristics, on firms performance, capital structure, on different sectors in the economy, but none of this studies are directly connected to this research work and also attention has not really been paid to the manufacturing sector in the context of firms characteristics on value. Share value has been measured as the average price of shares as most of the studies used only the value as at last day of the year. This approach is unsuitable because investors react to corporate outcomes which is reflected in the price of shares when the information is available. So, measuring firm value as the share price at the end of the financial year will not give a true pictures of the relationship between firms characteristics and firms value. (Mohammed, 2017)
Previous studies has not included operating efficiency as a proxy of firms attributes or characteristics despite the strong relationship that has been established in the literature between operational efficiency and firms value by other influential studies. Investigating operating efficiency in relation to firms value is desirable because it depicts the link between how well the management utilized the firms resources in getting corporate wealth and hence corporate value. (Mohammed, 2017). Also, the age of a firm is seen in some previous studies as the number of years of the incorporation of the company while some other previous studies see it as the number of years of listing of the company.
This study is set to proffer solution to the way operational efficiency has not been included has part of firms characteristics in previous studies and examine the effects of these selected firms characteristics on firms value of these quoted manufacturing companies as attention has not been given to it.
1.3 Objective of the Study
The main objective of this study is to evaluate the effect of firms’ characteristics on firms’ value of quoted manufacturing companies in Nigeria with a view to ascertaining how these characteristics have effects on firms value of these manufacturing companies.
The specific objectives are:
- To determine the effect of firms’ size on the firms’ value of quoted manufacturing companies in Nigeria.
- To evaluate the effect of liquidity on the firms’ value of quoted manufacturing companies in Nigeria.
- To assess the effect of operational efficiency on the firms’ value of quoted manufacturing companies in Nigeria.
- To determine the effect of leverage on the firms’ value of quoted manufacturing companies in Nigeria.
- To evaluate the effect of firms’ age on the firms’ value of quoted manufacturing companies in Nigeria.
1.4 Research Questions
- To what extent does firms’ size have effect on the firms’ value of quoted manufacturing companies in Nigeria?
- How can we evaluate the effect of liquidity on the firms’ value of quoted manufacturing companies in Nigeria?
- How do we assess the effect of operational efficiency on the firms’ value of quoted manufacturing companies in Nigeria?
- To what extent does leverage have effect on the firms’ value of quoted manufacturing companies in Nigeria?
- How can we evaluate the effect of firms’ age on the firms’ value of quoted manufacturing companies in Nigeria?
1.5 Research Hypotheses
The hypotheses to be tested for the purpose of this work in line with the objectives are stated thus:
Hypothesis 1
Ho: Firms’ size has no significant effect on the firms’ value of quoted manufacturing companies in Nigeria.
Hypothesis 2
Ho: Liquidity has no significant impact on the firms’ value of quoted manufacturing companies in Nigeria.
Hypothesis 3
Ho: Operational efficiency has no significant impact on the firms’ value of quoted manufacturing companies in Nigeria.
Hypothesis 4
Ho: Leverage has no significant effect on the firms’ value of quoted manufacturing companies in Nigeria.
Hypothesis 5
Ho: Firms age has no significant effect on the firms’ value of quoted manufacturing companies in Nigeria.
1.6 Significance of the Study
This study may be employed by future scholars who may wish to research further on this topic as it will provide them with information that is, the study will form as a foundation or serve as a basis of reference for developing the findings further for those who may wish to test the existence of these firms’ characteristics in other industries of their interest, that is, other than manufacturing companies.
The result or outcome of this study is expected to vastly contribute to the existing body of knowledge as there are lots of studies relating to this topic. The study will also make significant contribution to the finance and accounting discipline in Nigeria.
The management of these quoted manufacturing companies under this study will be provided with an understanding of how these firms characteristics has effects on the firms’ value of their companies. It will give the management the competitive advantage against the firms’ competitors and also enable them craft strategies that will excessively boost their firms’ value.
Further, it will enable the investors know the effect of these firms’ characteristics on firms value as they invest their funds in anticipation of expected value.
1.7 Scope of the Study
The focus of this research work is to examine the effect of firms’ characteristics on firms’ value of quoted manufacturing companies in Nigeria. The population for this study is the quoted manufacturing companies in Nigeria. There are about seventy one (71) manufacturing companies quoted on The Nigerian Stock Exchange (NSE) as at 31st December,2017. Random sampling method will be used to select the sample size and secondary data using the financial statements of these companies will be used to gather the data needed.The analysis of the data for this study and the interpretation will be done in Babcock University, Ilishan Remo, Ogun State. The time frame for the completion of this research work is from September 2018 to March 2019.
The variables adopted by this study involves firms value which is measured by market capitalization while the dependent variable , firms characteristics is represented by firms size, liquidity, operational efficiency, leverage and firms’ age.
1.8 Operationalization of Variables
The relationship between firms characteristics and firms value are correlated:
Y= f(X)
Where Y represents Dependent variable, while X represents the Independent variable
Y= f(X)
Y= firms value (FVE) – Dependent Variable
X= firms characteristics (FCS) – Independent Variable
Firms value = f (firms characteristics)
FVE= f (FCS)
Then y1 to y4 = FV
Firms’ characteristics can be broken down into:
X=(x1, x2, x3, x4,x5)
X1=Firms size (FSE)
X2=Liquidity (LIQ)
X3= Operational efficiency (OEF)
X4=Leverage (LVG)
X5= Firms’ age (FGE)
Functional Relationship
FVE= f(FSE)…………………………..Function 1
FVE= f(LIQ)……………………………..Function 2
FVE= f(OEF)……………………………..Function 3
FVE= f(LVG)……………………………..Function 4
FVE= f(FGE)………………………………Function 5
Therefore, FVE=f (FSE, LIQ, OEF, LVG, FGE)
Function 1,2,3,4 and 5 are the main functional relationship in this study used to determine the effect of firms characteristics on firms value of quoted manufacturing companies in Nigeria.
1.9 Operational Definition of Terms
The following terms are important to the study and their meanings are given below:
Firms Value: this is also known as enterprise value, it is an economic concept that reflects the value of a business. It is the value that a business is worthy of at a particular date. It is an amount that one needs to pay to buy or take over a business entity.
Firms Characteristics: it is the wide varieties of information disclosed in the financial statement of business entities that serve as the predictors of the firms’ quality of accounting information and performance.
The firms characteristics used in this study are firms’ size, liquidity, operating efficiency and leverage.
Firms Size: It has been variously referred to as the total assets, scale of operations and number of employees among others. It can be measured in different ways such as asset, employment, sales and market capitalization.
Liquidity: This refers to the availability of cash or cash equivalents to meet short term operating needs. It also measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them. It describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.
Operational Efficiency: It encompasses several strategies and techniques used to accomplish the basic goal of delivering quality goods to customers in the most cost-effective and timely manner. Resource utilization, production, distribution and inventory management are all common aspects of operating efficiency.
Leverage: It is an investment strategy of using borrowed money specifically, the use of financial instruments or borrowed capital to increase the potential return of an investment. It results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital.
Firms’ age: It is defined as the number of years of incorporation of the company, that is, the number of years a company has been incorporated.
Inflation: This is the persistent increase in the general price level of goods and services in an economy over a period of time.
Exchange rate: It is the rate at which one currency can be exchanged for another. It is also regarded as the value of one’s country’s currency in relation to another currency.
Gross domestic product: It is a measure of the economic production of a particular territory in financial capital terms over a specific time period.
Quoted Manufacturing Companies: These are the manufacturing companies that are listed on the Nigerian Stock Exchange (NSE).
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