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This study empirically examined the determinants of manufacturing firms’ financial performance in Nigeria using a panel data for 12 years across 10 manufacturing firms listed on the Nigerian Stock Exchange for the period 2004 to 2015. The effect of revenue reserves, interest paid on borrowings and tax paid were examined on net worth, profit after tax and return on asset.

The data was analyzed using descriptive and inferential analysis. The study was based on the microeconomic theory of production. The hausman test was used to determine the appropriateness of the fixed effect and random effect estimators that were employed. A robust check was carried out on the effect of borrowings.

The results revealed that the mean profit after tax, net worth and return on asset was N11,800,000,000, N67,200,000,000 and 10.441% respectively. From the panel regression estimates, revenue reserve had insignificant effect on net worth, profit after tax and return on asset. Tax paid had a negative significant effect on the net worth and profit after tax of manufacturing firms. However it had no significant effect on return on asset. The amount of borrowings had a positive significant effect on profit after tax and net worth of manufacturing firms. However, its effect on return on asset was insignificant. Interest paid on borrowings was not a significant determinant.

The study concluded that the high tax paid by the manufacturing firms significantly explain declines intheir financial performance. The amount of borrowings available to manufacturing firms determines improvements in their financial performance. Tax reductions and subsidies as well as greater access to borrowings are important for improving the financial performance of manufacturing firms.

Keywords: Financial performance, Manufacturing firms, Tax and Borrowings.

Word Count: 282











Content                                                                                                                                   page

Title Page                                                                                                                                i

Certification                                                                                                                            ii

Dedication                                                                                                                               iii

Acknowledgements                                                                                                                iv

Abstract                                                                                                                                  v

Table of Contents                                                                                                                   vi

List of Tables                                                                                                                          x

List of Figures                                                                                                                         xi


  • Background to the Study 1
  • Statement of the Problem 2
  • Objective of the Study 3
  • Research Questions                                                                                                    3
  • Hypotheses 3
  • Scope of the Study 4
  • Significance of the Study 4
  • Justification for the Study                                                                                                     4
  • Operational Definition of Terms 5


2.1 Conceptual Review                                                                                                           6


Content                                                                                                                                   Page

2.1.1 Financial Performance                                                                                                   6

2.1.2 Measures of Financial Performance                                                                               7

2.1.3 Overview of Manufacturing Firms’ Financial Performance in Nigeria                         7

2.1.4 Financial Performance Analysis                                                                         10

2.1.5 Working Capital Analysis                                                          12

2.1.6 Financial Structure Analysis                                                                                          13

2.1.7 Concept of Activity Analysis                                                                                        16

2.1.8 Concept of Profitability                                                                         16

2.1.9 Techniques of Financial Performance Analysis                                                 18

2.2 Theoretical Review                                                                                                           19

2.2.1 Theory of Production                                                                             19

2.2.2 Walker’s Theory of Profit                                              20

2.2.3 Clark’s Dynamic Theory                                                                                                20

2.2.4 Hawley’s Risk Theory of Profit                                                             21

2.2.5 Knights Theory of Profit                                                                                               21

2.2.6   The Modigliani- Miller Theorem                                                                                  22

2.2.7    Tobin Q Theory of Investment                                                                                   22

2.3 Empirical Review of Literature                                                                                        23

2.3.1 Review of Studies for Developed Countries                                                                 23

2.3.2 Review of Studies for Developing and Emerging Countries                                        25

2.3.3 Review of Studies for Nigeria                                                                                       31


Content                                                                                                                                    Page

2.4 Summary and Gap in Literature                                                                                       37


3.0 Introduction                                                                                                                      38

3.1 Research Design                                                                                                               38

3.2 Population                                                                                                                         38

3.3 Sources and types of data                                                                                                 38

3.4 Model Specification                                                                                                          39

3.5 Model Estimation Techniques                                                                                          40

3.7 Ethical Issue                                                                                                                      40




4.1 Data presentation                                                                          41

4.2 Data Analysis                                                                                            51

4.2.1 Estimated results                                                                                    52

4.2.2 Return on Asset                                                                                     53

4.2.3 Profit after Tax                                                                          53

4.2.4 Robust Checks                                                                           54

4.2.5 Net worth                                                                                               55

4.2.6 Return on Asset                                                                         55

4.3 Discussion of Findings                                                                                                     57



Content                                                                                                                                   Page



5.1 Summary                                                                                                   60

5.2 Conclusion                                                                                    60

5.3 Recommendations                                                                                                            61

5.4 Contribution to Knowledge                                                                                              61

5.5 Suggestion for Further Studies                                                                                         61

References                              62

Appendices                                                                             67














Table                                Page

4.1 7UP Bottling Company                                        41

4.2 Cadbury Nigeria Plc                                                                                 42

4.3 Unilever Nigeria Plc                                                                      43

4.4 Berger Paint Nigeria Plc                                       44

4.5 Guiness Nigeria Plc                                                                                   45

4.6 Nascon Allied Industries Plc                                                                    46

4.7 Vitafoam Nigeria Plc                                                                                47

4.8 Flour Mills of Nigeria                                                                   48

4.9 Pz Cussons Nigeria Plc                                                                                                     49

4.10 Cutix Plc                                                                                                 50

4.11 Descriptive Statistics                                                                              51

4.12 Random Effect Estimates                                                           52

4.13 Random Effect Estimates                                                                     53

4.14 Random Effect Estimates                                                                       54

4.15 Fixed Effect Estimates                                                                           55

4.16     Fixed Effect Estimate                                                             56

4.17 Random Effect Estimate                                                                        57



Figure                                                 Page

Return on asset (ROA)                                                                                                           8

Profit after tax (PAT)                                                                                                             8






















  • Background to the Study

The manufacturing sector plays a catalytic role in a modern economy and has many dynamic benefits that are crucial for economic transformation. In a typical advanced country, the manufacturing sector is a leading sector in many respects. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capita income which causes consumption patterns to increase (Ogar & Charles 2014). Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has been overtaken by the services sector in a number of organizations for Economic Co-operation and Development (OECD) countries (Anyanwu, 2003).

Before independence, agricultural products dominated Nigeria’s economy and accounted for the major share of its foreign exchange earnings. Initially, inadequate capital investment permitted only modest expansion of manufacturing activities (Ariyo, 2005). Early efforts in manufacturing sector were oriented towards the adoption of an import substitution strategy in which Light Industry and assembly related manufacturing ventures were embarked upon by the formal trading companies up to about 1970, the prime mover in manufacturing activities was the private sector which established some agro-based Light manufacturing units such as vegetable oil extraction plants, turneries tobacco processing, textiles, beverages and petroleum products (Ariyo, 2005). The strategy of light and assemblage manufacturing shifted somewhat to heavy industries from the period of the Third National Development Plan (1975-1980) when government intervened to establish Core Industrial Plants to provide basic imports for the downstream industries. The import dependent industrialization strategy virtually came to a halt in the late 1970s and early 1980s when the Liberal Import Policy expanded the imports of finished goods to the detriment of domestic production (Ariyo, 2005).

Using data from the CBN Statistical Bulletin 2015, an analysis of the contribution of manufacturing sector to the growth of the economy is thus presented.The contribution of manufacturing sector to total output (GDP) was 13% in 1982. A slight decline of 12% was recorded in 1984 and further declined by 3% in 1986.  An increase to 15% was recorded in 1988 and huge increase of 33% was obtained in 1990.  From 1991, it decreased by 3% in 1992 and by 1994 a further decrease of 2% was recorded. A huge increase of 46% was obtained in 1996. However, it declined by 12% in 1998. From 2000, the contributions of this manufacturing sector only increased by 3% and further increased to 8% in 2002. Further fluctuations have therefore been recorded as seen from an increase to 11% in 2004 and also increased by 9% in 2006. By 2010 an increase of 7% was recorded and further increased to 14% in 2015.

1.2   Statement of the Problem

Manufacturing sector is a leading sector in many respects. It is an avenue for increasing productivity related to import replacement and expansion, creating foreign exchange earning capacity and raising employment. In spite of continuous policy strategies to attract credits to the manufacturing sector, most Nigerian manufacturing enterprises have remained unattractive because of the various charges imposed by financial institutions and government causing reduction in the net worth of the firms. Despite the important role of the manufacturing sector in development, Nigeria is still backward as shown by the several declines of the manufacturing sector to the GDP. Also from the financial statement of some manufacturing firms, as seen in Nascon Allied Idustries Plc which  recorded 37% of its return on asset in 2007 but declined to 13% in 2015. Nigerian Flourmill Plc recorded return on asset of 13% in 2007 and further declined to 1% in 2015. Cutix Plc recorded 19% of its return on asset in 2007 and further decreased to 8% in 2015.

Financial performance as assessed using ROA and PAT has shown that there is a great need for improvement and also to identify those specific factors that affects financial performance and the magnitude of their effect on manufacturing sector. By so doing there is a need to narrow down the financial performance of these manufacturing firms in order to get a clearer picture of financial activities of these firms. This is because this study is looking at the strength of these firms which can help to make a decision on its overall financial performance and sustainability.

There has been a large agreement that the poor financial performance of manufacturing firms usually threatens their long term existence and affects their operations in the short run (Lawal, Edwin,Monica & Adisa 2014). However, there has been less agreement as to which of the key financial performance indicators or variables are important to the continue survival of manufacturing firms (Olorunfemi, Tomola, Felix & Ogunleye 2013). This study will therefore examine those factors that affect the financial performance of manufacturing firms in Nigeria.

1.3 Objective of the Study

The main objective of this study is to examine the determinants of manufacturing firms’ financial performance in Nigeria. The specific objectives are to:

  1. estimate the effect of revenue reserve on manufacturing firms’ financial performance;
  2. analyze the effect of tax paid on manufacturing firms’ financial performance and
  3. estimate the effect of interest paid on borrowings on manufacturing firms’ financial performance.
    • Research Questions
  4. What is the effect of revenue reserve on the financial performance of manufacturing firms?
  5. Does the tax paid have an effect on the financial performance of manufacturing firms?
  6. What effect does interest paid on borrowings has on financial performance of manufacturing firms?
    • Hypotheses

The hypothesis was tested at 5% significance level.

H01 Revenue reserve has no significant effect on the financial performance of manufacturing firms.

H02The amount of tax paid has no significant effect on the financial performance of manufacturing firms.

H03The amount of interest paid on borrowings has no significant effect on the financial performance of manufacturing firms.

1.6    Scope of the Study

The study examined the determinants of manufacturing firms’ financial performance in Nigeria. The period for the study is from 2004 to 2015 and 10 manufacturing firms in the country was used including only firms in the consumer goods and industrial goods sector.

1.7 Significance of the Study

The significance of this study would help government to find appropriate measure of manufacturing firms’ financial performance and interest charged on the overall performance of the firms being minimized in order to meet the needs of the consumers. This would help to improve the role that manufacturing sector plays towards contributing to and enhancing the economic development of Nigeria. These roles include: provision of the essential finished goods required by Nigerians; earning of foreign reserves for Nigerian economy; creation of employment opportunities for Nigerian citizens and reducing the importation of the finished goods they produce.

1.8 Justification for the Study

Several studies on the manufacturing sector exist, however only a few has focused on financial performance of manufacturing firms. For example, Ogar and Charles (2014) examined the effect of commercial bank credit on the manufacturing sector output in Nigeria from 1992 to 2011 using manufacturing output to capture manufacturing sector performance. Olorunfemi et al. (2013) examined factors influencing manufacturing performance in Nigeria for the period 1980 to 2008 using economic growth to measure manufacturing performance which is a function of investment, capacity utilization, exchange rate, export and import.

Lawal et al. (2014) carried out an empirical study on the effect of capital structure on manufacturing firms’ performance in Nigeria for the period 2002 to 2012 using return on asset, return on investment as firms performance variable and performance as a function of debt-equity ratio, long term debt to capital employed ratio, total debt ratio and age.Lawrence & Sanusi (2014) explored the extent of target costing system adoption and implementation by manufacturing industry in South-Western Nigeria using firm performance in terms of profitability as a function of return on investment and reduction in the cost of production. However this study intends to focus only on financial performance of manufacturing firms in Nigeria for the period of 12 years (2004-2015).

1.9 Operational Definition of Terms

Manufacturing Firms: This is a commercial business that converts raw materials or components into finished products with the aid of machinery for the purpose of meeting customers demand.

Return on Asset: This is a percentage of profit after tax over total asset of the firm. This gives an idea as to how efficient management is at using its asset to generate earnings. It is an indicator of how profitable a company is relative to its total asset.

Net Worth: This is the difference between the assets and liabilities of the firm. It is a key measure of how much an entity worth showing asset owned minus any debt owed.

Bank Credit: This is the aggregate amount of credit available to a person or business from a banking institution. It is the total amount of funds financial institutions provide to an individual or business.

Financial Performance: This is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. It shows the level of performance of a business over a specified period of time expressed in terms of overall profits and losses during that time.


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