Impact Of Financial Constraints On Firms Investment Decision Making In Nigeria

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Impact Of Financial Constraints On Firms Investment Decision Making In Nigeria


Abstract


Several investment decisions are made by organizations and firms without due analyses and end up causing such organizations or firms investment not to return its due benefits or rewards to the investor(s). To this end, the study is on the impact of financial constraints on firms investment decision making in Nigeria was carried out. Data were collected from one hundred and fifty (150) respondents being our sampling size to whom questionnaire were distributed for the study. Out of this a total of one hundred and twenty (120) were completed and returned which formed the total respondents with which our analysis were conducted and inferences arrived at. The findings of the study revealed that there is the need for finance, capital structure and liquidity of firms or organizations in making investment decisions as not to incur losses resulting from poor returns. Based on the findings the study recommended among others that the risks and return characteristics of any investment be put into consideration in making investment decision.


Chapter One


Introduction

1.1 Background to the Study

The study is focused in examining financial constraint and investment decision of firms in Nigeria. The study seeks to reveal various financial constraints that are having effect on firms’ investment decision. The data have been taken from the balance sheet of nine (9) manufacturing firms listed in the Nigerian Stock Exchange for the time period 2008 to 2012. Multiple regression analysis has been done to examine the relationship among firm’s size, dividend payout ratio, firm’s age, capital stock, debt and cash flows and investment.

The empirical findings show their investments are much affected by fluctuations in their cash flows or retained earnings as it has a positive influence on investment and that there is positive relationship between the firms’ size and investment as well as debt while a negative relationship exists between firms’ age, capital stock, and investment. It also reports that there is negative relationship between dividend payout ratio and the investment as well as.

The study, thus, concluded that financial constraints are present in the market, which indicates that the firms are unable to access to external forms of financing. In addition, the presence also signifies the presence of asymmetric information problem, agency cost, tax exhaustion cost e.t.c. between the firm and its financer.

It thus, recommended that an optimal dividend decision with less effect on the firms’ investment decision should be embraced upon by the firms. In addition, firms should opt for a strategy of using modest levels of debt and overinvesting as a way of increasing debt capacity.

Investment being a sacrifice made now for benefits in the future is associated with the different activities, having a common target that the employed funds during the time period is seeking to enhance the investor’s wealth. In order to achieving that wealth enhancement, decision making a process that involves a sequence of actions with the identification of an investment related problem, issue or opportunity and ends in the approval of an investment project is essential (Boonstra 2003).


1.2 Statement of the Problem

The process of investment decision at the company level is a multi-criteria process taking into account numerous factors such as economic and risk factors, but also political, social environment and government regulations (Enoma and Mustapha 2000). Buonanno et al 2005 argues as important as these factors, different approach need be applied on industry and organization basis.

Also of note is top management support considered one of the most important factor in the decision making; as it helps the organization in delivering successful investment plans. Wang, (2007). There is growing controversy over the impact of financial development on economic growth, some researchers (McKinnon, 1973; Shaw, 1973; Dash & Hamman 2009) have argued that financial development deepens financial markets and thereby promotes economic growth, while (De Bondt, 1998 and Lintner, 1983) have provided empirical evidence that financial repression can have positive impacts on economic growth. The studies are however, largely based on the macroeconomic/aggregate correlations between finance and growth or on the nature of this relationship at the microeconomic level. Very few studies have been able to integrate macro and micro variables in the same analysis in order to provide evidence for a microeconomic channel through which macro-financial development influences the growth of the real economy.

Asymmetric information, managerial agency problems, and transaction costs can make external finance more expensive than internal financing. Investors be it individual or corporate are faced with the challenges of making decision because of several factors ranging from finance to terms of determining when to invest or not (Carpenter & Guariglia (2008). Financial information enables an investor to minimize the risk involved in investment decision making. A financing decision results in a given capital structure that is suboptimal can lead to corporate failure and individual losses. A great dilemma for management and investors is whether their decisions through the financial information available will result in efficiency and optimal returns on investment which is the over-riding motive of any investment decision. It is therefore intended to conduct this study to view the effect of financial constraints on investment decision making (Carr, James, & Keith, 2001; Memba & Nyanumba, 2013).


1.3 Objective of the Study

The broad objective of this study is to establish the effect of financial constraints on firms investment decision making in Nigeria but the specific objectives are to:

  1. Identify the effect of finance on a firm’s investment decision in Nigeria.
  2. Establish a firm’s capital structure and suboptimal financing decisions on a firms choice of investment.
  3. Determine the impact of firms liquidity on a firm’s investment decision in Nigeria. The study formulated and tested the following hypotheses in the null form

1.4 Research Question

  1. Does finance have any effect on a firm’s investment decision making in Nigeria?
  2. Does a firm’s capital structure and suboptimal financing decision have any effect on a firms’ choice of investment?
  3. Is there any impact of liquidity on investment decision of firms?

1.5 Significance of the Study

It is believed that at the completion of the study, the findings will be of great importance to the management of organizations who are saddle with the responsibility of investment decision in an organization as the study seek to explore avenues to effectively utilized the scarce resources (finance) which is the red blood cell of business. The study will also be useful to investors and potential investors as the study examine the impact of financial constrain on investment decision of an organization. The study will also be useful to researchers who intend to embark on a study in a similar topic as the study will serve as a guide to further research. Finally, the study will be useful to academia’s, student, teachers, lecturers and the general public as the study will contribute to the pool of existing literature on the subject matter and also contribute to knowledge.


1.6 Scope and Limitation of the Study

The scope of the study covers the impact of financial constraints on firms investment decision making in Nigeria, but in the course of the study, there are some factors that limited the scope of the study;

Staff Reluctance:

In most cases the staff of the used study often feels reluctance over providing required information required by the researcher. This result in finding information where the structured questionnaires could not point out.

Researcher’s Commitment:

The researcher, being of part time student spent most of her time on business and other engagement such as test, class work, assignment, examination etc which takes average focus from this study.

Inadequate Materials:

Scarcity of material is also another hindrance. The researcher finds it difficult to long hands in several required material which could contribute immensely to the success of this research work.


1.7 Operational Definition of Term

Finance

Finance is a field that is concerned with the allocation (investment) of assets and liabilities over space and time, often under conditions of risk or uncertainty. Finance can also be defined as the art of money management.

Financial constraint

A financial constraint is a lack of money because of which you cannot buy something, or do something. When you act under constraint, you are forced to do something which you do not like.

Firm

A firm is a for-profit business organization—such as a corporation, limited liability company (LLC), or partnership—that provides professional services.

Investment

To invest is to allocate money in the expectation of some benefit in the future. In finance, the benefit from an investment is called a return

Decision making

Decision-making (also spelled decision making and decision making) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several alternative possibilities.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  • Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five


Conclusion and Recommendations

5.1 Conclusion

The conclusions of the study are:

  1. The investment making decision of organizations or firms is dependent on the availability of finance and the potentials of its return on investment as firms or organizations invest to get a return.
  2. The capital structure and optimality of financing is a determinant to the choices of investment made by firms and organizations.
  3. New investments significantly require liquid finance and this to a large extent determines the firm’s financial performance and by extension the decision to invest.

5.2 Recommendations

Based on the conclusion, the study recommend among others that:

  1. Firms or organizations needing to embark upon any investment take into cognizance the return alongside the risks associated and ensure there is sufficient finance to be ploughed into the project or investment project as to avoid shipwreck of any planned project.
  2. Consideration has to be given to the capital structure and optimality of finance in the organization or firm in investment decision making.
  3. Organizations and or firms need as a matter of priority ensure liquidity of the organization as illiquidity can stifle options of diversification on any investment.

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