The Effects of Macroeconomic Factors on Firm Value: Empirical Evidence from Nigeria

International Journal of Economics and Management Studies

© 2020 by SSRG - IJEMS Journal

Volume 7 Issue 12

Year of Publication : 2020

Authors : Shamsuddeen Muhammad Ahmad, Rosni Bakar, Mohd Zukime Bin Mat Junoh

10.14445/23939125/IJEMS-V7I12P123

How to Cite?

Shamsuddeen Muhammad Ahmad, Rosni Bakar, Mohd Zukime Bin Mat Junoh, "The Effects of Macroeconomic Factors on Firm Value: Empirical Evidence from Nigeria," SSRG International Journal of Economics and Management Studies, vol. 7,  no. 12, pp. 160-169, 2020. Crossref, https://doi.org/10.14445/23939125/IJEMS-V7I12P123

Abstract:

The study examines the effects of macroeconomic factors on listed Nigerian companies' firm value using panel data analysis from 2008 to 2017. The population of the study consists of 300 firm-year observations. Using the EV/EBITDA ratio as a proxy for firm value, the study found that GDP growth and Inflation have a significant negative and positive effect on firm value, respectively. However, the exchange rate has a significant and positive effect on firm value. Further, the study uses three control variables: board size, firm size, and firm growth. While board size and firm size have no significant effect on firm value, firm growth negatively affects firm value. Thus, the study concludes that macroeconomic factors influence the firm value of listed firms in Nigeria. Generally, the findings are in line with the previous literature, suggesting that macroeconomic factors such as GDP growth rate, inflation rate, and exchange rate are beyond the control of an organization, hence, the need for companies to predict the diverse effects of these macroeconomic factors on future business performance.

Keywords:

Macroeconomic Factors, Firm Value, Nigeria.

References:

[1] Abor, J., The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. The journal of risk finance., (2005).
[2] Abor, J., Debt policy and performance of SMEs: Evidence from Ghanaian and South African firms. Journal of Risk Finance, 8(4) (2007), 364–379.
[3] Adidu A., and Olanye A.. Basic Small Business Entrepreneurship- A Modern Approach, Royal Pace Publisher, Agbor, (2006) 1-10.
[4] Aggarwal, D., & Padhan, P. C. Impact of capital structure on firm value: evidence from Indian Hospitality Industry. Theoretical Economics Letters, 7(4) (2017) 982-1000.
[5] Athanasoglou, P. B., & Brissimis and M, S. N.S., and Delis, M.(2008). Bank-specific. Industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets. Institutions and Money., (2005).
[6] Beck, T., & Maksimovic, V., Financing patterns around the world: the role of institutions (2905). World Bank Publications., (2002).
[7] Bhullar, P. S., & Bhatnagar, D.. Theoretical framework EV vs. Stock price–A better measurement of firm value. International Journal of Commerce, Business and Management, 2(6) (2013) 335-343,
[8] Broadstock, D. C., Shu, Y., & Xu, B,. The Heterogeneous Impact of Macroeconomic Conditions on Firms, Earnings Forecast. In Proceedings of Macao International Symposium on Accounting and Finance, Macao.,(2011).
[9] Central Bank of Nigeria, CBN, ,Inflation Rate (Percent), retrieved 03/03/2020 from www.cbn.gov.ng/rates/inflrates.asp. (2017).
[10] Chan, K. C., Seow, G. S., & Tam, K.. Foreign exchange risk and firm value: an analysis of US pharmaceutical firms. Managerial Finance, (2002).
[11] Chen, J., Chen, M., Liao, W., & Chen, T.. Influence of capital structure and operational risk on profitability of life insurance industry in Taiwan. Journal of Modelling in Management, 4(1) (2009) 7–18.
[12] Chen, Roll & Ross, Economic Forces andthe Stock Market. Journal of Business, 39 (3),(1986),383403.
[13] Djalilov, K., & Piesse, J,. Determinants of bank profitability in transition countries: What matters most? Research in International Business and Finance, 38 (2016) 69-82.
[14] Doukas, J. A., Hall, P. H., & Lang, L. H.. Exchange rate exposure at the firm and industry level. Financial Markets, Institutions & Instruments, 12(5), (2003), 291-346.
[15] Egbunike, C. F., & Okerekeoti, C. U. Macroeconomic factors, firm characteristics, and financial performance. Asian Journal of Accounting Research, (2018).
[16] Egbunike, C. F., & Okerekeoti, C. U,. Macroeconomic factors, firm characteristics and financial performance: A study of selected quoted manufacturing firms in Nigeria. Asian Journal of Accounting Research, 3(2) (2018) 142-168.
[17] Ekpo, A. H., & Umoh, O. J., An overview of the Nigerian economic growth and development, (2003).
[18] Flota, C., The impact of exchange rate movements on firm value in emerging markets: The case of Mexico. ProQuest Dissertations and Theses, 4 (2009) 118.
[19] Fraser, S. P., & Pantzalis, C.,Foreign exchange rate exposure of US multinational corporations: a firm-specific approach. Journal of Multinational Financial Management, 14(3) (2004) 261-281.
[20] Ghareli, S., & Mohammadi, A. A study on the effect of macroeconomic variables and firm characteristics on the quality of the listed firms' financial reporting in Tehran Stock Exchange. Journal of Fundamental and Applied Sciences, 8(2), (2016) 1777-1797.
[21] Hair Jr. J. F., Black, W. C., Babin, B. J., & Anderson, R. E.. Multivariate Data Analysis (7th. Ed.). UK: Pearson International edition, (2014).
[22] He, J., & Ng, L. K., The foreign exchange exposure of Japanese multinational corporations. The Journal of Finance, 53(2) (1998) 733-753.
[23] Hidayati, A.N,. The influence of Inflation, BI rate, and exchange rate on Sharia bank profitability in Indonesia. An-Nisbah, 1(1), (2014),73- 97.
[24] Hodder, J. E. (1982). Exposure to exchange-rate movements. Journal of International Economics, 13(3-4),375-386.
[25] Hutchinson, M., & Gul, F. A., Investment opportunity set, corporate governance practices, and firm performance. Journal of Corporate Finance, 10(4), (2004),595–614.
[26] Ibrahim, M. H., & Aziz, H,. Macroeconomic variables and the Malaysian equity market. Journal of economic studies, (2003).
[27] Ifeanyi, N., & Chukwuma, U. & Ugwu C.,An Empirical Analysis of Inflationary Impacts on Profitability and Value of Selected Manufacturing Firms in Nigeria. Research Journal of Finance and Accounting .,7(12), (2016), 19-26.
[28] International Monetary Fund, IMF Country Report No. 17/81. Washington, D.C. 20090, (2017).
[29] Issah, M., & Antwi, S., Role of macroeconomic variables on firms’ performance: Evidence from the UK. Cogent Economics & Finance, 5(1) (2017),1405581.
[30] Jensen, M. C., the Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. Journal of Finance, 48(3), (1993).
[31] Jubaedah, J., Yulivan, I., & Hadi, A. R. A., The Influence of Financial Performance, Capital Structure and Macroeconomic Factors on Firm’s Value–Evidence from Textile Companies at Indonesia Stock Exchange. Applied Finance and Accounting, 2(2) (2016) 18-29.
[32] Kakanda, M. M., Bello, A. B., & Abba, M,. Effect of Capital Structure on Performance of Listed Consumer Goods Companies in Nigeria. Research Journal of Finance and AccountingOnline), 7(8) (2016) 2222–2847.
[33] Khanna, S., Srivastava, A., & Medury, Y., The effect of macroeconomic variables on the capital structure decisions of Indian firms: A vector error correction model/vector autoregressive approach. International Journal of Economics and Financial Issues, 5(4) (2015) 968–978.
[34] Khrawish, H. A., Determinants of commercial banks performance: Evidence from Jordan. International Research Journal of Finance and Economics, 81(1) (2011) 148-159.
[35] Khrawish, H. A., & Al-Sa’di, N. M., The Impact of E-Banking on Bank Profitability: Evidence from Jordan. Middle Eastern Finance and Economics, 0(13) (2011) 142–158.
[36] Lemma, T. T., & Negash, M., Institutional, macroeconomic and firmspecific determinants of capital structure: The African evidence. Management Research Review 36 (2013).
[37] Lins, D. A., & Duncan, M., Inflation effects on financial performance and structure of the farm sector. American Journal of Agricultural Economics, 62(5) (1980) 1049-1053.
[38] Mak, Y. T., & Yuanto, K., Board size matters further evidence on the negative relationship between board size and firm value. Pulses by Singapore Stock Exchange, 15,(2003).
[39] Meric, I., & Meric, G. (1997). Inflation and the market value of the firm. Journal of Financial Education, 23, (1997), 88–91.
[40] Muller, A., & Verschoor, W. F., Foreign exchange risk exposure: Survey and suggestions. Journal of Multinational Financial Management, 16(4)(2006), 385-410.
[41] National Bureau of Statistics., Economic Outlook for the Nigerian Economy. Retrieved on 15/03/2020 online from www.nigerianstat.gov.ng,(2013).
[42] Otambo, T. D,. The effect of macro-economic variables on the financial performance of the commercial banking sector in Kenya. Unpublished MBA Project, University of Nairobi,(2016).
[43] Owolabi, B. A,. Economic characteristics and financial performance of selected manufacturing companies in Nigeria (Doctoral dissertation, unpublished master’s thesis, Department of Accounting, School of Management Sciences, Babcock University, Ogun State),(2017).
[44] Pallant, J. (2005). SPSS survival manual: a step by step guide to data analysis using SPSS (3rd. Ed.), Australia: Allen & Unwin.
[45] Parlapiano, F., Alexeev, V., & Dungey, M., Exchange rate risk exposure and the value of European firms. The European Journal of Finance, 23(2), (2017),111-129.
[46] Qayyum, A,. Money, Inflation, and growth in Pakistan. The Pakistan development review, (2006) 203-212.
[47] Ross, S.A., 1977, Return, risk, and arbitrage, in I. Friend and J.L. Bicksler, eds., Studies in risk and Return, 1 (Ballinger, Cambridge, MA).
[48] Samiloglu, F., & Demirgunes, K., The effect of working capital management on firm profitability: Evidence from Turkey. The International Journal of Applied Economics and Finance, 2(1), 44-50, (2008).
[49] Shapiro, A. C,. Exchange rate changes, Inflation, and the value of the multinational corporation. The Journal of Finance, 30(2) (1975) 485- 502.
[50] Sheikh, N. A., & Wang, Z., Determinants of capital structure. Managerial Finance, (2011).
[51] Sikarwar, E,. Exchange rate fluctuations and firm value: impact of the global financial crisis. Journal of Economic Studies, (2018).
[52] Šimáková, J,. The Impact of Exchange Rate Movements on Firm Value in Visegrad Countries. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(6) (2017) 2105-2111.
[53] Simiyu, C. N., & Ngile, L,. Effect of macroeconomic variables on profitability of commercial banks listed in the Nairobi securities exchange. International Journal of Economics, Commerce and Management, 3(4) (2015) 1-16.
[54] Simiyu, C. N., & Ngile, L., Effect of macroeconomic variables on profitability of commercial banks listed in the Nairobi securities exchange. International Journal of Economics, Commerce and Management, 3(4) (2015) 1-16.
[55] Smith Jr, C. W., & Watts, R. L., The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3), (1992),263-292.
[56] Smith, C. W., & Watts, R. L., The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3) (1992) 263–292.
[57] Stavarek, D., Stock prices and exchange rates in the EU and the United States: evidence on their mutual interactions. Czech Journal of Economics and Finance (Finance a uver), 55, (2005), (3-4), 141-161.
[58] Tan, Y., & Floros, C., Bank profitability and GDP growth in China: a note. Journal of Chinese Economic and Business Studies, 10(3) (2012) 267-273.
[59] Tripathi, V., & Seth, R,. Stock market performance and macroeconomic factors: the study of the Indian equity market. Global Business Review, 15(2) (2014) 291-316.
[60] Vejzagic, M., & Zarafat, H,. An analysis of macroeconomic determinants of commercial banks profitability in Malaysia for the period 1995-2011. Journal of Asian Economy and Financial Review, 4(1) (2014).
[61] Yazdanfar, D., & Öhman, P, Debt financing and firm performance: an empirical study based on Swedish data. The Journal of Risk Finance, 16(1)(2015) 102-118.
[62] Zeitun, R., & Tian, G. G,. Does ownership affect a firm's performance and default risk in Jordan?. Corporate Governance: The international journal of business in society., (2007).