Firm Age And Profitability; Evidence From Nigeria

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Firm Age And Profitability; Evidence From Nigeria


Abstract


This study sought to investigate firm Age and Profitability: Evidence from Nigeria. The main objective of this study is to determine if firm age affect the profitability of non-financial companies in Nigeria and also to know if older firms out performs younger firms. Age can have adverse effects on performance also because of the organizational rigidities and inertia it brings about and because it impairs the ability affirm to perceive valuable signals.

Descriptive statistic and correlation analysis which tests for normality and association among the data in the variables in the model specified and a cross sectional analysis was carried out by way of panel data regression technique. The study concluded that young firms are better but the higher the age, the more profit the firm is expected to generate. The study recommends that firms whether old or young should better align their business activities to be able to withstand both internal and external factors that could hinder performance in future.


Chapter One


Introduction

1.1 Background to the Study

The issue whether older firms are superior in profitability than younger firms, have generated large amount of theoretical and empirical research in the economics, management and finance disciplines. Yet, the theoretical postulates and empirical evidence have remained inconclusive on the debate, upon the impact of the age of the firm on its profitability. This is traceable to institutional issues, which necessarily are country-specific have not been taken into account.

The issue of the age of a firm as it relates to firm performance in terms of profitability is currently of great importance since studies on firm performance has become a big issue in management literature. Industrial policies and follow-up from the legislation, no doubt has shown a clear, and important role for small private firms in the Nigerian economy. To this end, it therefore, becomes an imperative to investigate whether younger firms who are often favoured by government policies, perform better than older firm or otherwise. Age is believed to be an advantage to any phenomenon That is, the older the unit (individual, group, firm or government) the more experience, and then better performance. But the pertinent question remains: Does older firms perform better than younger firms? The questions have been inconclusive as a result of the mixed nature of answer(s) to the questions raised.

Several studies have argued that: Active Corporation with a number of bureaucrats and political structures have flaunted established norms and consequently, attain both economic power and achieve large size (Bhagwatt & Desai, 1970, Krueger, 1974, Marathe, 1989). The apriori expectation with respect to the direction of the relationship between firm age and profitability are likely to be equally fuzzy.

The role of private enterprises was circumscribed in Nigeria in the 1970s by policies which fostered an import – substitution, export pessimistic this made entry and exit to and fro various sectors of the Nigerian economy highly controlled by government, leaving private enterprises no initiative to manage their operatives (Moham & Agarwal, 1990, Nayyar, 1994) Not until the 1980s, when the failure of the public enterprises started to manifest, government then started to look inwards due to economic hardship led to the government tinkering with restrictive industrial policies in an attempt to reform Various reforms were introduced since the Nigerian government realized that the private sector has a very important role to play in fueling the economic and industrial growth of the economy. Before this time, many firms who could not survive the harsh government policies, had folded up except for the giant multinational companies.

It is against this backdrop that this study seeks to investigate the relationship between the age of a firm and its performance in terms of profitability. That is, to determine whether older firms perform better than younger firms.


1.2 Statement of Problem

The non-financial companies in Nigeria is inclusive of both companies that have failed or succeeded. It is therefore of great importance to know the effect of firm age on the profitability of the companies. There is inconclusive state of the argument and debate in the finance and management literature on account of the direction of relationship between the age of firm and its profitability. This forms our major gap in the literature which has prompted this study. Another gap emanates from the divergent views on the measurement of firm age and profitability.


1.3 Research Questions

The following are the questions to be considered in this study:

  1. To what extent does firm age affect the profitability of non-financial companies in Nigeria?
  2. What is the nature of the effect of firm age on the profitability of the firm?
  3. To what extent does older firms out performs younger firm?

1.4 Objective of the Study

From the research questions raised above, the specific objective to guide the study includes:

  1. To determine if firm age affect the profitability of non-financial companies in Nigeria.
  2. To examine the nature of the effect of firm age on the profitability of the firm.
  3. To know if older firms out performs younger firm.

1.4 Statement of Hypothesis

Based on the objectives of the study, the following hypotheses are formulated;

Hypothesis One
  • HO: There is no relationship between firm age and profitability.
  • HI: There is relationship between firm age and profitability.
Hypothesis Two
  • HO: Older firms does not perform better than younger firms.
  • HI: Older firms perform better than younger firms.
Hypothesis Three
  • HO: Firm’s age does not affect the profitability of non-financial companies in Nigeria.
  • HI: Firm’s age affect the profitability of non-financial companies in Nigeria.

1.6 Significance of the Study

This study will be of relevance to:

  1. Companies with better understanding of the dynamics of the effect of firm age and its profitability.
  2. It will also contribute to the existing frontiers of knowledge.
  3. It will help firms to better improve their working in other to be more profitable.

1.7 Scope of the Study

The study examines if firms age is a determine of firm financial performance in Nigeria. The study investigates about seventy-nine (79) non-financial companies listed on the Nigerian Stock Exchange. The time frame for this study is between 2009 – 2014 (i.e. 5 years) and the geographical coverage is Edo State.


1.8 Limitations of the Study

Secondary data such as annual financial reports are prepared using different economic and management policies accounting years and different data thus, there are accorded different interpretation by users of such reports. The nature of variable, may not allow for generation as it not true representative of the entire company. Other limitations of the study are those practical problem hindrance or constraint that limited against the study. In the process of carryout the study, many difficulties and constraints were encountered.

  • Lack of response from the people who are under investigation.
  • Reluctance on the part of some officer to provide official information

1.9 Definition of Terms

1. Firms:

A firm is an organized business enterprise.

2. Profitability:

This is the capacity to make money or the quality or state of being profitable.

3. Organization:

A group of people or other legal entities with an explicit purpose and written rules.

4. Management:

In terms of administration, it is practice or process or process of managing and are executives of an organization in terms of execution.

5. Employee:

An individual who provide labour to a company or another person.

6. Industry:

This can be collection of firms or businesses of the same type, considered as a while.

7. Development:

This is the process of growth, improvement directed toward positive change.

8. Compensation:

Compensation is that which constitutes or is regarded as an equivalent or a reward on some loss or service.

9. Age:

The whole duration of a thing which is between its beginning to the present period under review.

10. Firm Age:

This is the whole duration or life period that a business enterprise has existed.


Chapter Five


Conclusion and Recommendation

This paper examined the determinants of profitability by applying system GMM to data on 114 non-financial firms in Nigeria from 1998-2012. The study revealed that lagged profitability exerted positively and significantly on contemporaneous profitability of firms in Nigeria. It was also found that short-term leverage, inflation rate, interest rate and financial risk have significant negative effects on firm profitability during the sampled period.

However, long-term leverage ratio, age of firm, size, asset tangibility and growth potentials or opportunities were not significant in determining profitability of firms in Nigeria. Findings from this study only support the structure-conduct-performance (SCP) model or the resource based approach to firm profitability partially as it is evident from the current study that the prevailing macroeconomic environment also plays a very vital role in driving profitability.
Owing to these findings, it is very necessary to reduce cost of borrowing to the real sector of the economy in order to reduce costs of production, enhance productivity and profitability.

Additionally, necessary macroeconomic policies should be put in place by the government to curb inflationary pressure in the economy. Firms should also seek long-term financial leverage rather than short-term financial leverage that tend to pose more adverse effects of the latter on profitability. Young firms are better but the higher the age, the more profit the firm is expected to generate. The study recommends that firms whether old or young should better align their business activities to be able to withstand both internal and external factors that could hinder performance in future.


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