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ABSTRACT

This study examined the determinants of profitability of listed industrial goods firms in Nigeria. The major objective of the study was to determine whether leverage, liquidity, board size, firm size, cash flows and audit committee meeting significantly affect profitability of listed industrial goods firms in Nigeria. This was necessitated by the conflicting findings documented by studies that have investigated determinants of profitability of firms. Correlational research design was used. Secondary source of data were gathered for a sample of 15 firms out of 21 firms in the industrial goods sector over a period of seven years from 2009-2015. The data were analysed using multiple regression analysis. Results show that firm size and cash flows have positive and significant relationship with profitability of listed industrial goods firms in Nigeria. The results also reveal that leverage, liquidity and board size have negative and significant relationship with profitability of listed industrial goods firms in Nigeria while audit committee meeting has no significant relationship with profitability of listed industrial goods firms in Nigeria. The study concludes that leverage, liquidity, board size, firm size and cash flows can drive profitability of listed industrial goods firms in Nigeria. Therefore, it is recommended that management of the firms should restrict the level of debt financing by limiting it to the tone of their assets. Also, management of listed industrial goods firms should invest more in assets as such would increase their size and ultimately profitability. In addition, minimum amount of liquidity should be maintained by listed industrial goods firms to reduce the extra cost attached to holding unnecessary liquid assets, while high proportion of cash flows should maintained. Finally, the firms should avoid having large board sizes so as to reduce high costs of maintaining large board sizes.

 

 

TABLE OF CONTENTS

 

Cover Page
Declaration – – – – – – – – – – i
Certification – – – – – – – – – – ii
Dedication – – – – – – – – – – iii
Acknowledgements – – – – – – – – – iv
Abstract – – – – – – – – – – v
Table of Contents – – – – – – – – – vi
CHAPTER ONE: INTRODUCTION
1.1 Background to the study – – – – – – – – 1
1.2 Statement of the Problem – – – – – – – – 6
1.3 Objectives of the study – – – – – – – – 8
1.4 Research Hypotheses – – – – – – – – 9
1.5 Scope of the Study – – – – – – – – 10
1.6 Significance of the Study – – – – – – – – 10
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction – – – – – – – – – 13
2.2 Conceptual Issues- – – – – – – – – 13
2.3 Review of Empirical Studies – – – – – – – 20
2.4 Theoretical Framework – – – – – – – – 49
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction – – – – – – – – – 54
3.2 Research Design – – – – – – – – – 54
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3.3 Population and Sample Size – – – – – – – 54
3.4 Sources and Method of Data Collection – – – – – – 56
3.5 Techniques of Data Analysis – – – – – – – 56
3.6 Variables Measurement and Model Specification – – – – 57
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction – – – – – – – – – 59
4.2 Descriptive Statistics – – – – – – – – 59
4.3 Normality Test – – – – – – – – – 61
4.4 Correlation Matrix – – – – – – – – 61
4.5 Robustness Tests – – – – – – – – 63
4.6 Regression Result – – – – – – – – 64
4.7 Policy Implications of the Findings – – – – – – 70
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary – – – – – – – – – – 72
5.2 Conclusion – – – – – – – – – 73
5.3 Recommendations – – – – – – – – 74
5.4 Limitations of the Study- – – – – – – – 76
5.5 Areas for Future Research – – – – – – – 76
5.6 Contribution to Knowledge – – – – – – – 77
References – – – – – – – – – 78
Appendices – – – – – – – – – 86
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CHAPTER ONE

INTRODUCTION
1.1 Background to the Study
With increase in global competition, survival of every business entity is a very pertinent question in business arena. In such a competitive environment, good performance is considered essential for business success. Thus, all over the world, the issue of firm performance has been a major focus by stakeholders as business organizations exist to make commensurate profit on their investment. It is this desire to make profit that prompts most investors to sacrifice their resources in anticipation of the profit. It can differentiate one company from the other. Therefore, a key measure of performance is profitability as business organizations are mostly concerned with profit and wealth maximization. Without profitability, a firm would find it difficult to attract investors and sustainability of business‟ operations in the long run would be at risk. Magaretha and Supartika (2016) posit that in a competitive marketplace, business owners must learn how to achieve a satisfactory level of profitability.
Profitability is a major aspect in current financial reporting by corporate bodies. The profitability of a company shows the company‟s ability to generate profit from utilization of its assets. Profit is realized when the amount of revenue gained from a business activity exceeds the expenses and the cost incurred to carry out the activity. Therefore, profitability measures the performance of a company in terms of profit it realizes from assets utilized or capital employed in business. Since most investors put their resources in expectation of commensurate returns, the profit earned by a business is often used to serve as a measure of success of that investment. Niresh and Velnampy (2014) explain that profitability is the amount of money a firm can create with whatever resources the firm has, implying that its inability to generate income is a loss.
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There is profit when income realized is greater than input cost, otherwise, it reflects poor performance.
Firm profitability and ways of improving it are extensively debated issues among managers and scholars (Pratheepan, 2014). This is born out of the fact that the primary objective of a business unit is to achieve maximum profit in addition to secondary objectives such as increase in sales, assets, and market share (Aparna, 2015). Profit is the indicator of efficiency of a business unit as it shows the level of efficiency with which a business unit makes use of funds or assets. The higher the profit, the more will be the efficiency of the business unit.
Some researchers such as Burja (2011), Saleem and Rehman (2011), Lobos and Szewczyk (2013), Asgari, Pour, Zedeh and Pahlavan (2015) contend that profit is affected by number of variables such as proportion of leverage, which affects the expense of the firm in terms of interest payment, firm size, liquidity, cash flows, corporate governance mechanisms such as board size, and audit committee meeting. It is the task of the firm‟s management to utilize right strategies from time to time taking into account of these factors that might exert considerable influence on the profit of the firm.
A number of studies such as Akinmulegun (2012), Syed (2013) and Siyanbola, Olaoye and Olurin (2015) document evidence suggesting that leverage has relationship with profitability. Such studies hold basis from the logic that use of debt subjects the firm under monitoring mechanisms which exert pressure on managers to run the business in a less costly manner as to easily generate profit to settle debt obligations. Contrary to this argument, it can be contended that use of debt attracts extra charges in terms of interest payments, which reduce profitability. This study conjectures that leverage positively affects firm profitability.
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The importance of liquidity management as it affects firm profitability in today‟s business cannot be over emphasized. Liquidity forms a crucial part in management of working capital as it ensures day-to-day running of business operations and settling recurring obligations (Eljelly, 2004). Therefore, liquidity plays a significant role in the successful functioning of a business firm. An essential dilemma in liquidity management is to achieve desired trade-off between liquidity and profitability (Ismail, 2016). While liquidity can be seen as being necessary for day to day running of the business, any level of liquid fund constitutes a cost to the organization. This cost is the opportunity cost for which the liquid (idle) funds would be invested to command positive returns. Moreover, availability of liquid funds constitutes agency costs as managers are prone to go for perquisites that are counter-productive. Managers will have the free will to run the company with extravagance. Therefore, following the tenets of agency theory, a negative relationship between liquidity and firm profitability can be hypothesized.
Several studies have established that board size influences firm profitability. Fauzi and Locke (2012), Saibaba and Ansari (2012) and Ujunwa (2012) argue that a large board size attracts more innovation, creativity, visionary thinking, strategic direction and investment proposals that would ultimately result to profitability. Smaller boards might lack capacity to make strategic changes due to their inefficiency in considering various alternatives for firm profitability. On the other hand, some researchers favour smaller boards and are of the view that large boards are susceptible to disagreements, non-cooperation and waste of time in decision making as they are prone to suffer from social loafing. Thus, their wealth of knowledge, innovative thinking, strategic focus, competences, and skills remain unutilized (Drakos & Bekiris, 2010; Jensen, 1993; Lin, 2011). Therefore, it can be stated that board size has negative relationship with firm profitability.
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Firm size is a very critical factor for the success of a business as it might wield significant influence on profitability. According to Glancey (1998), when larger firms take advantage of economies of scale, then a positive relationship is expected between profitability and size of the firm. Large firms have the advantage of exploring the benefits of economies of scale; their average unit cost declines over a range of output. They can also benefit from economies of scope; through extra cost savings as a result of the use of separate products that share some production facilities. They can purchase raw materials in bulk at lower cost and even enjoy discounts for bulk purchase. Furthermore, large firms, comparative to small firms can easily source in the finance market using their large assets base as collateral and utilize such funds for profitable investment opportunities. Contrary to the above line of thought, large firms might tend to be inflexible; the lack of flexibility of which would affect their smooth operations and ultimately reduce profitability. This study conjectures a positive relationship between firm size and profitability.
Cash flow is anther variable of concern as far as profitability of firms is concerned. Due to the relevance of cash flow in the company‟s performance, corporate organizations need to develop a suitable cash flow mix and apply it in order to maximize profitability (Ali, Alireza & Jalal (2013). In spite of the fact that cash flows are needed for meeting daily financial obligations of any enterprise, cash flows, just as liquidity, constitute cost to the organization. A similar argument can be extended to audit committee meeting. Frequency of audit committee meeting gives management foresight on ways of improving financial reporting as well as ways of mitigating agency costs (Al-Matari, Al-Swidi, Fadzil, & Al-Matari, 2015). A contrary argument to this is that frequent audit committee meetings serve as harbor for extravagant spending on allowances to the members.
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Identification of the sources of variation in firm level profitability is an important research theme in economics, strategic management and accounting and finance (Mutuku & Kyalo, 2015). In the literature, researchers such as Jensen and Meckling (1976) have made a number of efforts to explore theoretical models which could be used to explain the relationship between variables such as leverage, liquidity, firm size, board size, cash flow and audit committee meeting on profitability. These theories, among others, include agency theory, resource based theory and structural inertia theory.
Knowledge of the internal determinants of profitability is crucial as it helps managers in developing an effective profitability strategy for their company. These factors are important because they give insights into fluctuations in profitability. Such knowledge of firm profitability determinants gives feedback to management. Management can then devise a set of strategies that should be taken to improve profitability in particular and overall performance in general. This process is also applicable to industrial goods firms.
Industrial goods firms, which constitute firms that operate in the industrial goods sector, have been reckoned, under the current administration, as having the potential to accelerate economic development. Industrial goods firms propel industrialization as they produce products which continue to be relevant to industries. Amidst dwindling fuel prices, credence is currently paid on the industrial goods sector. Since these firms exist to make profit and their survival is significantly dependent on their ability to make profit, it is necessary that internal determinants of their profitability be assessed. In view of the present administration‟s resolve to revitalize the spate of industrialization in the country, it has become imperative that the determinants of profitability of the industrial goods firms, which are fast growing due to increasing demand for their products, be examined. It is therefore necessary to carry out this study to better understand
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the key determinants of profitability of listed industrial goods firms which would provide basis for improvement of their profitability. It is against this backdrop that this study is undertaken to examine the determinants of profitability of listed industrial goods firms in Nigeria.
1.2 Statement of the Problem
Studies on the determinants of firm profitability have continued to gain momentum. These studies have established that variables such as firm size, liquidity, board size, leverage, cash flows and audit committee meeting wield significant influence on profitability of firms. This notwithstanding, some studies found that the variables have insignificant relationship with profitability (Dogan & Topal, 2014).
However, the challenge is, studies that have found that firm size, liquidity, board size, leverage, cash flows and audit committee meeting significantly affect firm profitability have produced mixed results. Findings of these studies have fallen into two divergent groups. On the one side of the divide is a group of studies which conclude that firm size, liquidity, board size and leverage have positive relationship with firm profitability. On the other side of the pole is another group of studies which submit that firm size, liquidity, board size, leverage, cash flows and audit committee meeting have negative relationship with firm profitability. These mixed results have made it difficult for good policy formulation in the context of emerging economies such as Nigeria.
Studies on the relationship between firm size and profitability have produced mixed findings. The vast empirical evidence on the relationship between firm size and profitability suggests variations in results as some studies such as Babalola (2013), Baloch, Ihsan, Kakakhel & Sethi (2015), Asgari, Pour, Zadeh & Pahlavan (2015) and Dogan (2013) report that firm size has significant relationship with profitability while others, including Kumar and Kaur (2016),
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Niresh & Velnampy (2014), find that firm size does not have any significant effect on profitability.
Studies on the relationship between liquidity and firm profitability have also produced inconsistent findings. Some scholars (Kidmat & Rehman, 2014; Ibe, 2013) find that liquidity has positive relationship with firm profitability. Such empirical findings hold support from the understanding that liquid funds assist an organization to settle its short term obligations and sustain operations. On the other hand, Larty, Antwi and Boadi (2013) submit that such relationship does not hold.
Still, some studies such as Adams and Mehran (2005), Oyerogba, Memba and Riro (2016) conclude that board size positively affects firm profitability. Their findings are linked to the argument that larger board sizes have more array of experienced technocrats from whose wealth of experience, profitable innovative strategies can be tapped. In contrast to this submission, the empirical studies of Pathan (2011) and Staikouras, Pasiouras and Nnadi (2007) prove that board size inversely affects firm profitability.
The conflicting findings in the context of the relationship between leverage and firm profitability remain worrisome as lack of consensus in the literature would make it difficult for good policy formulation. Works such as Syed (2013), Mohammad (2014) hold that leverage positively affects firm profitability; however, Enekwe, Agu and Eziedo (2014) found that leverage has negative relationship with firm profitability.
In the context of the preceding arguments, it is exigent that a clear relationship between liquidity, firm size, board size and leverage be examined. This is necessary as most of the recent studies that have done this are foreign based. Although there are many Nigerian studies, they are not sufficient for current reliance as they suffer from one methodological pitfall to the other,
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prominent of which include: use of primary data where secondary data would have been better, use of scope whose period of coverage lags years behind, abrupt selection of variables without use of scientific approach such as stepwise regression, and selection of very few firms from which possible generalisations might be difficult. For instance, Siyanbola, Olaoye and Olurin (2015) used primary data, based on questionnaire distributed to only 20 respondents. Consequently, findings of the study might be susceptible to subjectivity. Akinmulegun (2012), Aqsa and Ghulam (2014), Kidtmat and Rehman (2014), Marozva (2015), Johl, Kaur and Cooper (2015), Bulan, Sanyal and Yan (2009), Niresh and Velnampy (2014), Dogan (2013), among others, fail to cover current period.
Moreover, in the context of industrial goods firms, literature on the impact of firm size, liquidity, board size, and leverage are still sparse. The few available studies (Bashar & Islam, 2014; Aparna, 2015; Devi & Devi, 2014; Mutuku & Kyalo, 2015; Magaretha & Supertika, 2016) rather utilize data from foreign firms, thereby, making application of their findings to listed industrial goods firms in Nigeria untenable.
Therefore, the basic question this study seeks to answer is, to what extent do leverage, firm size, liquidity, cash flows, board size and audit committee meeting affect profitability of listed industrial goods firms in Nigeria? It is in an attempt to seek answer to the above question that this study undertakes to empirically examine internal determinants of profitability of listed industrial goods firms in Nigeria. The absence of this examination would make it difficult for good policy formulation as far as the growth of the industrial goods sector is concerned.
1.3 Objectives of the Study
The main objective of this study is to examine internal determinants of profitability of the listed industrial goods firms in Nigeria. The specific objectives of the study are to:
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i. Determine how leverage affects profitability of listed industrial goods firms in Nigeria.
ii. Assess whether firm size affects profitability of listed industrial goods firms in Nigeria.
iii. Examine whether liquidity affects profitability of listed industrial goods firms in Nigeria.
iv. Evaluate whether board size affects profitability of listed industrial goods firms in Nigeria.
v. Ascertain whether cash flows affect profitability of listed industrial goods firms in Nigeria.
vi. Examine whether audit committee meeting affects profitability of listed industrial goods firms in Nigeria.
1.4 Research Hypotheses
The following hypotheses are formulated to guide the study:
Ho1: Leverage does not significantly affect profitability of listed industrial goods firms in Nigeria.
Ho2: Firm size does not significantly affect profitability of listed industrial goods firms in Nigeria.
Ho3: Liquidity does not significantly affect profitability of listed industrial goods firms in Nigeria.
Ho4: Board size does not significantly affect profitability of listed industrial goods firms in Nigeria.
Ho5: There is no significant relationship between cash flows and profitability of listed industrial goods firms in Nigeria.
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Ho6: Audit committee meeting does not significantly affect profitability of listed industrial goods firms in Nigeria.
1.5 Scope of the Study
The aim of this study is to examine the determinants of profitability of listed industrial goods firms in Nigeria. The study covers a period of seven years from 2009 to 2015. This period is chosen so as to obtain most recent data that reflect current economic circumstances of the companies. As the industrial firms sector is rapidly growing, it is necessary to properly carry out this study. Also amidst dwindling oil prices in Nigeria, there is need to revitalize the industrial sector so as to stem the tide of recent economic recession which has eaten deeply into the fabric of the Nigerian economy.
1.6 Significance of the Study
This study is important as the findings would extend the frontier of knowledge in respect to the determinants of profitability. The study would be beneficial to management of organizations especially industrial goods firms in Nigeria, government and regulators as well as current and potential researchers in the following respects:
The management of organizations especially in Nigeria would benefit immensely from the study. This is because, the appropriate application of the findings of the study would result to improvement in management decision making. Understanding of the relationship between liquidity and profitability will aid management to ascertain the right proportion of liquid assets to hold. Similarly, the outcome of this investigation would provide useful information on the relationship between leverage and profitability which would aid management in assessing the optimum level of leverage. The management of industrial goods firms also stand to benefit this
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study in the context of constituting their board sizes, taking bearing from the outcome of the study. Management can also use the findings of the study to plan their sizes as the study would uncover the relationship between firm size and profitability. Depending on the direction of the relationship, management can decide the size of their organization that would not be injurious to profitability. Furthermore, knowledge of the direction of the relationship between cash flows and profitability would aid management of listed industrial goods in Nigeria to ascertain the level of cash flows to be maintained. This study is also important as management of listed industrial goods firms can leverage on the outcome of the study to ascertain the frequency of audit committee meetings that should be held which would not be counter-productive.
The findings of the study would be of immense benefits to government and regulators in Nigeria as it would provide a useful guide for the formulation of policies and decisions that would have positive impact on profitability of industrial goods sector. The empirical evidence that the study would provide could be used by regulatory authorities such as the Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN) among others, to strengthen existing regulatory policies that would enhance the profitability of industrial goods firms in Nigeria. This is considered essential as the current administration is poised to reviving the ailing industrial goods sector as heavy reliance on oil revenue is now heading the economic fortunes of the country to a crash as evidenced by the current economic recession.
The study would also contribute to the existing literature on determinants of profitability of companies in a developing economy as Nigeria. This is because, the study upon completion, could serve as a good library material for students and researchers who intend to carry out similar studies in this area. It is considered relevant as the study would serve as a research tool for further studies. It would add to theoretical knowledge on internal determinants of profitability
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and the methodology required for carrying out further studies. It is noteworthy to state that studies on internal determinants of profitability of firms in Nigeria are relatively scanty compared to foreign literature. Based on this, the study would provide a modest contribution to the existing local literature.

 

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