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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