THE EFFECT OF FINANCIAL LEVERAGE ON FINANICIAL PEFORMANCE OF QUOTED MANUFACTURAING FIRMS IN NIGRERIA

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Product Code: 00007525

No of Pages: 56

No of Chapters: 1-5

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ABSTRACT


This study investigates the impact of financial leverage on the financial performance of manufacturing companies in Nigeria, using ten selected manufacturing as our case study. The study covers a period of 7 years (2014-2020). The data for the study was gathered, presented, analysed and interpreted. From the result of analysis, the following findings were made: Leverage ratios which were captured using short-term debt, log-term debt and total debt ratios jointly have significant effect on returns on asset though the individual variable do not have specific significant effects on returns on capital employed. But the conclusion was arrived with respect to their residual statistics which shows that the three independent variables can explain to a significant, extent the changes that occur in returns on capital assets when considered jointly. In the analysis of hypotheses, the study found showed that short-term debt ratio has no significant effect on the returns on asset of the ten selected companies. Hence the null hypothesis was accepted. Again, the study found from the outcome of the beta co-efficient of long-term debt ratio that there is negative and no significant association between the variable and returns on asset of the selected companies. On the analysis of the third hypothesis, the study found a positive and no significant association between total debt ratio and returns on asset of the selected companies. The findings made on this analysis informed the acceptance of the null hypothesis at the juncture. Recommendation were made that the management of manufacturing companies in Nigeria should employ competent accountants to help monitor their financial performance and profitability position through efficient leverage management.






TABLE OF CONTENTS

Cover page                                                                                                                              i

Title page                                                                                                                                ii

Declaration                                                                                                                             iii

Certification                                                                                                                           iv

Dedication                                                                                                                              v

Acknowledgements                                                                                                                vi

Abstract                                                                                                                                  ix

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study                                                                                           1

1.2       Statement of the problem                                                                                          3

1.3       Objectives of the Study                                                                                             4

1.4       Research Questions                                                                                                   4

1.5       Research Hypotheses                                                                                                 5

1.6       Significance of the study                                                                                           5

1.7       Scope of the Study                                                                                                     6

1.8       Definition of Terms                                                                                                   6

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1       Conceptual Framework                                                                                             8

2.1.1    Concept of Leverage                                                                                                 8

2.1.1    Forms of leverage                                                                                                      9

2.1.1    Operating Leverage                                                                                                   10

2.1.1.1 Effects of Operating Leverage                                                                                  10

2.1.1.2 Uses of Operating Leverage                                                                                      11

2.1.2    Financial Leverage                                                                                                    11

2.1.2.1 Benefits of Leverage in a Capital Structure                                                               11

2.1.2.2 Degree of financial leverage.                                                                                    12

2.1.2.3 Common Misconceptions about Financial Leverage                                                            13

2.1.3    Combined leverage                                                                                                    14

2.1.4    Concept of Financial performance                                                                            14

2.2       Theoretical Framework                                                                                              16

2.2.1    Modigliani and Miller Theory (M and M Theory)                                                    16

2.2.2    Pecking Order theory                                                                                                 18

2.2.3    Agency Theory                                                                                                          19

2.2.4    The static trade-off theory                                                                                         20

2.2.5    Market Timing Theories                                                                                            21

2.3       Empirical Studies                                                                                                      23       

2.4       Gap in Literature                                                                                                       26

CHAPTER THREE

METHODOLOGY

3.1       Research design                                                                                                         28

3 .2      Population of the Study                                                                                              28

3.3       Sample size and Technique                                                                                        28       

3.4       Sources of data collection                                                                                         28

3.5       Variables formulation and measurement                                                                  29

3.5.1    Independent Variable                                                                                                29

3.5.2    Dependent Variable                                                                                                   30

3.6       Method of data Analysis                                                                                            30

3.7       Model Specification                                                                                                  30

3.8       Data Analysis Technique                                                                                          31

CHAPTER FOUR

DATA ANALYSES AND DISCUSSION

4.1       Descriptive Statistics                                                                                                 32

4.2       Test of Hypotheses                                                                                                    33

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1       Summary of findings                                                                                                 39

5.2       Conclusion                                                                                                                 40

5.3       Recommendations                                                                                                     40

 

 

 

 

 

 

CHAPTER ONE

INTRODUCTION


1.1 Background to the study

In almost all economies today, the role of government occupies a position of paramount importance. One reason for this is that it directs the process of achieving a country’s macroeconomic objectives such as full employment, economic growth and development, price stability and poverty reduction. Another is the perceived failure of the market system to efficiently and equitably allocate economic resources for social and infrastructural development (Agbonkhese and Asekhome, 2014).Government basically performs two functions: protection and provision of public goods. Protection involves the enforcement of the rule of law and property rights. These functions helps to minimise risk, protect life and property and the nation from both internal and external aggression as well as provide roads, schools, electricity and communication to name a few.

Public expenditure is an important instrument for government in controlling the economy. Okoro (2015) defines it as the value of goods and services provided through the public sector. Government expenditure can also be described as the expenses incurred by the government in the provision of public goods and services. Government expenditure can be broadly categorized into capital and recurrent expenditures. Capital expenditure refers to expenses on capital projects like roads, airports, health, education, electricity generation, etc., Capital expenses are usually aimed at increasing the assets of a state and they give rise to recurrent expenditure. Recurrent expenditure refers to government expenses on administration, security, maintenance of public goods, interest payment on loans, etc. Economic growth is an important macro-economic objective because it enables improved standard of living and job creation. A fast-rising growth rate not only commands international recognition, it also paves a way for development. Economic growth implies the expansion of a country’s productive capacity. It refers to an increase in the amount of goods and services produced in a country over a period of time. Economic growth indicators include Gross Domestic Product (GDP), Inflation rate, Employment rate, Gross National Product (GNP), National debt, Trade balance, Credit rating and Distribution of wealth amongst others. Gross Domestic Product (GDP) is considered the broadest economic growth indicator. It represents the market value of all goods and services produced in an economy during a given period usually a year. The relationship between government expenditure and economic growth is particularly important for developing countries. This is due to the need to extract themselves from the jaws of abject poverty and set themselves in the path of rapid development.  Government of developing countries have embarked on various spending programs in order to achieve this goal. Unfortunately, economic theories do not automatically generate strong conclusions about the effect of government expenditure on economic growth. Indeed, it has generated a series of controversy among scholars.  Some scholars believe that a rise in government expenditure is necessary for increase in output and can reverse economic downturns. For instance, Agbonkhese and Asekhome (2014), Akpan and Abanag (2013) and Okoro (2013) in their different studies of the relationship between government expenditure and economic growth concluded that government expenditure has a positive and significant effect on economic growth. Other scholars are of the opinion that a rise in government expenditure (especially when it is funded by borrowing) may impede economic growth. These include Egbetunde and Fasanya (2013), Folster and Henrekson (2001) who suggested in their work that there is no significant relationship between government expenditure and economic growth. The relationship between government expenditure and economic growth has continued to gather dust over the years. Expenses on social and economic infrastructures such as health, education, roads, telecommunication, schools and electricity usually have a positive impact on national output. But in developing countries, increase in government expenditure usually implies increase in tax or borrowing. This reduces per capita income and the desire to work thus reducing aggregate demand.  All these spikes up interest in knowing what influence government expenditure has on economic growth.


1.2 Statement of the Problem

Government expenditure on social and economic services (such as health, education, agriculture and infrastructural facilities) raises the productivity of labour, increases profitability of firms and increases national output/income.  A rise in government expenditure sometimes culminates in increased tax rate and/or borrowing by the government. The increased tax rate reduces per capita income and may generate a disincentive to work. In the same vein, higher corporate tax increases production costs and reduces the profitability of firms. Most firms lay off workers due to this. Increased borrowing by the government (especially from banks) crowd out private investments and this reduces initiatives and productivity. In Nigeria, available statistics show that federal government expenditure has continued to rise over the years. This is due to receipts from oil and non-oil revenue as well as an increasing demand for public goods such as roads, electricity, education, health and security. Federal government recurrent expenditure which stood at N4.85b in 1981 increased to N579.3 billion in 2001 and N3,109.38 billion in 2010. Government capital expenditure on the other hand witnessed a rise from N6.57 billion in 1981 to N438.7 billion in 2001 and N883.87 by 2010 (CBN Statistical bulletin, 2014). However, the increase in government expenditure over the years may not have translated into meaningful economic growth as many Nigerians are still living in poverty. Data from World Development Indicator (2014) place about 63.1 percent of Nigeria’s total population living below $1.25 a day.  Although the Nigerian economy is projected to be growing, the gap between the rich and the poor continues to widen. Hence there is a need to evaluate the relative impact of government expenditure on economic growth in Nigeria.


1.3 Objectives of the Study 

The major objective of this study is to examine the Effect of Government Expenditure on the Economic Indices of Nigeria. The specific objectives include:

1) To determine the effect of government expenditure on the Gross domestic product (GDP) of Nigeria.

2) To access the impact of government expenditure on the Human Development index of the Nigerian economy;

3) To ascertain the impact of government expenditure on the Unemployment rate of Nigeria


1.4 Research Questions

1.     How does government expenditure impact the Gross domestic product of the Nigerian economy?

2.     To what extent does government expenditure affect the Human Development index of the Nigerian economy?

3.     What effect does government expenditure have on the Unemployment rate of the Nigerian economy?

 

1.5 Research Hypotheses

H01: There is no significant relationship between government expenditure and the gross domestic product of the Nigerian economy. 

H02: There is no significant relationship between government expenditure and the Human Development index position of the Nigerian economy. 

H03: There is no significant relationship between government expenditure on the Unemployment rate of the Nigerian economy.


1.6 Significance of the study

The study will prove a valuable contribution to available literature on the discourse. This is because it focuses on evaluating the impact of federal government expenditure on economic growth in Nigeria. The scope of study as well as the method of analysis makes the research work a dependable reference material for students and researchers who may want to embark on a similar study.


1.7 Scope of the study

The study focuses on the impact of federal government expenditure on economic growth in Nigeria from 2010 to 2019. This study will rely mainly on secondary data from various sources. The data source include; Central Bank of Nigeria [CBN] Annual Reports and Statement of Accounts, and Statistical Bulletins, National Bureau of Statistics [NBS], Ministry of National Planning and other relevant sources. The variables used in the study are: federal government capital and recurrent expenditures, government fiscal deficit and real gross domestic product. Federal government capital and recurrent expenditures and government fiscal deficit represents the independent variable while real gross domestic product, national debt and credit rating represents the dependent variable.


1.8 Definition of Terms

1.     Gross domestic product [GDP]: This is the total value of goods and services produced within the boundaries of a country during a particular period of time usually a year.

2.     Government Expenditure:  This is the expenses of the government for its own maintenance, for the benefits of the society, the economy, external bodies and for other countries. Total public expenditure – This refers to all government spending in a country or an economy at a given period of time.

3.     Recurrent Expenditure: Recurrent expenditure are expenditure of government that occur regularly throughout the year.  They must be made regularly if the functions of government must be maintained.  It does not result in the creation of acquisition of fixed assets.  They include regular salaries of employees, money spent on administration and maintenance of infrastructural facilities.

4.     Capital Expenditure: capital expenditure are expenditures of government on the acquisition of things of permanent nature.  They include expenditures on capital projects such as buildings, construction of roads, bridges and all permanent structures and assets.

5.     Fiscal policy: This refers to the part of government policy which is concerned with the raising of revenue through taxation and other means and deciding on the level and pattern of expenditure for the purpose of influencing economic activities

6.     Gross National Product (GNP): GNP is calculated by adding to GDP the income earned by residents from investments abroad, less the corresponding income sent home by foreigners who are living in the country.

7.     National debt: National debt is the total outstanding borrowing of a country’s government (usually including national and local government).

8.     Trade balance: The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period.

9.     Credit rating: A credit rating estimates the credit worthiness of an individual, corporation, or even a country.

10.  Distribution of wealth: The distribution of wealth is a comparison of the wealth of various members or groups in a society. It differs from the distribution of income in that it looks at the distribution of ownership of the assets in a society, rather than then current income of members of that society.


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