External Finance and the Growth of Firms in Nigeria (2007 – 2011)

This study examines the impact of external finance on the growth of firms in Nigeria for the period 2007 - 2011. A growing literature has used micro-data to show that external finance has a strong positive effect on firm’s growth and that this relationship provides the mechanism through which finance promotes economic growth. This study investigates these claims with respect to Nigerian firms. Focusing on non-financial firms listed on the Nigerian Stock Exchange (NSE), this study employs a sample of 105 non-financial firms, representing about 88 percent of the sample frame. With secondary data extracted from published annual reports of the sampled firms from 2007 to 2011, this study first determines the direction of causality between external finance and firm’s growth by means of the pairwise panel Granger Causality Tests. Thereafter, it uses both static panel Fixed Effects (FE) and the dynamic panel Generalized Method of Moments (GMM) estimation techniques to analyze the effect of external finance on firm’s growth in Nigeria. This study finds evidence of a unidirectional causality from external finance to firms’ growth, as against a two-way causality or feedback mechanism. In other words, external finance influences firm’s growth in Nigeria and not vice versa. Both static and dynamic panel estimations, however, show that this influence is insignificant, with confirmation coming from results of the three sources of external finance. This implies that external financing of firm’s growth is not a major channel through which finance promotes economic growth in Nigeria. Conversely, firm’s growth relies heavily on internal finance, thereby validating the postulation of the “pecking order” theory of capital structure that firms prefer internal finance to external finance. The results concerning the effects of firm size, firm age, profit, management efficiency, operating efficiency and labour on firm’s growth are, however, conflicting. Thus, the empirical test of the evolutionary principle of the “growth of the fitter” regarding the impact of profit on firm’s growth is inconclusive. In spite of the inconclusiveness of the effects of firm size on firm’s growth, this study invalidates the celebrated Gibrat’s law of proportionate effect. Consequent upon the results of this study, it is recommended that appropriate policies should be put in place to enhance the availability of and access to external finance in the country. Financial inclusion (broad access to financial services) will undoubtedly boost firm’s growth at the micro level and economic growth at the macro level.
A Thesis Submitted to the School of Postgraduate Studies, University of Lagos.
External Finance , Growth , Research Subject Categories::SOCIAL SCIENCES::Business and economics::Economics
Oke, B.O (2014), External Finance and the Growth of Firms in Nigeria (2007 – 2011). A Thesis Submitted to University of Lagos School of Postgraduate Studies Phd Thesis and Dissertation, 224pp.