Empirical 13
Empirical 13
Empirical 13
ABSTRACT: A number of manufacturing firms in Nigeria are folding up. Although, there are several reasons why this is
happening, the study investigated the corporate financial problems: A case study of listed manufacturing firms in Nigeria because
of the crucial roles they play in the Nigerian economy. The results of the previous studies reviewed showed that equity financing
had a positive significant impact on the financial performance of listed manufacturing firms in Nigeria. However, the findings on
debt financing were not consistent. While some studies reported that debt financing had a positive significant impact on the financial
performance of listed manufacturing firms in Nigeria, some revealed that debt financing had a negative significant impact on the
financial performance of listed manufacturing firms in Nigeria. Thus, the study recommends that the listed manufacturing firms in
Nigeria should continue to use the optimal level of equity in financing their operations because by using equity, they have directly
avoided the payment of high interest that may impact negatively on their performance. In using equity to finance their activities, the
excess profits can either be paid as dividend or they can be reinvested into the business for better performance if the management
considers it that it is better do so.
KEYWORDS: Corporate, Problem, firms, performance, financial, Nigeria.
1.0 INTRODUCTION
Financing is one of the important aspects of business functions. It is a process of raising capitals for investments, making purchases
and business activities. Businesses obtain finances from financial institutions like banks in order to meet their target objectives
(Olamide & Paul, 2021). In any economic system, the utilization of financing is key because it affords firms opportunities to buy
products that are out of their immediate reach. Financing comprises equity and debt capitals which are used for making acquisitions,
carrying out capital investments and support the business generally (Dada & Ghazali, 2016)
Equity financing is one of the major means through which a company can raise capitals to grow its operations. The owner of the
business can sell a certain percentage of the shares of his company to raise capital but when this is done, the ownership is diluted.
The business likes to raise funds through the sale of equity because if the firm fails, the investor bears all the risk. An equity investor
would like to have a say in how the business is run most especially in rough times and they have the right to votes on based the
percentage of shares held. Thus, the investor receives some claim benefit on future profits for giving his money to a company in
exchange for ownership.
Debt financing is another main method of raising money for the operations of the company. It is a method that businesses commonly
use to raise capitals for different business purposes. It has to do with obtaining loans from lenders or issuing of bonds in exchange
for a promise to repay the loan amount and as well as the interest on the principal amount over an agreed period. Debt financing
affords the company the opportunities to access a large amount of money, retain ownership and control of assets and flexibility in
repayment terms. Nevertheless, the debt financing has certain risks like the obligation to make principal payment and interest, the
impact on credit ratings and potential debt burden.
The equity and debt financings of a firm are determined by the decision between equity and debt financing (CFI Team, 2020). The
ideal equity and debt financings for a company are usually considered that which results in the lowest weighted cost of capital. In
theory this is true but in practice managers of companies tend to have preferences depending on how risk averse they are.
Firms are usually but not always use the weighted average cost of capital in consideration of whether to use equity or debt financing.
The weighted average cost of capital is the costs of all kinds of financings each of which is weighted by its percentage use in a given
situation. The financial manager can determine how much interest a firm owes for each naira it funds by taking the weighted average
in this way. Companies decide the suitable combination of equity and debt financing by optimizing the weighted average cost of
capital of each category of finance while putting into consideration the risk of bankruptcy or default on one hand and the amount of
ownership owners are willing to forgo on the other.
IJSSHMR, Volume 2 Issue 08 August 2023 www.ijsshmr.com Page 764
Corporate Financial Problems: A Case Study of Listed Manufacturing Companies in Nigeria
Finance is the pillar of a business. Thus, it is almost impossible for manufacturing firms in Nigeria to survive if they cannot have
easy access to finances. Manufacturing firms in Nigeria play key roles in the Nigerian economy because they provide employment
opportunities for the people and contribute to the country’s gross domestic product (GDP). They need capitals to purchase resources
such as raw materials, machinery etc. Freshbook (2023) has reported that many businesses had failed because of poor corporate
finance. This is the reason why funds are the lifeblood of any firm. No manufacturing firm in Nigeria will function well except it
has an enough amount of money to run its operations.
Although several studies were conducted on the impact of equity financing and debt financing on the financial performance of listed
manufacturing firms in Nigeria, their findings were not consistent. The studies conducted By Chukwuma (2022), Arikekpa (2020)
found a positive correlation between debt financing and financial performance of listed manufacturing firms in Nigeria but the study
carried out by Akeem et al. (2014), showed that debt financing had a negative significant impact on the financial performance of
listed manufacturing firms in Nigeria. Adeoye and Olojede (2022), Olaoye and Adesina (2022) in their studies revealed a negative
insignificant impact of debt financing on the financial performance of listed manufacturing firms in Nigeria.
Okojie (2023) has stated that manufacturing firms in Nigeria had the potential, to take millions of individuals out of poverty via
wealth and job creation but it had been bedeviled with the high costs of borrowing that had continued to hamper industrialization in
Africa’s biggest economy. Many manufacturers had complained that they could not raise funds especially long-term, single-digit
funds because of their high costs. The increase in the monetary policy rate signifies negative consequences for the manufacturing
industry in Nigeria (Kadir, 2023). The Central Bank of Nigeria raised the monetary policy rate which is the benchmark for interest
rates in Nigeria from 17.5% to 18%, the sixth consecutive increase since May 2022. According to BusinessDay’s findings on 12
April, 2023, the commercial banks in Nigeria charge rate is now between 20% and 35%.
Eromosele (2023) has also reported on 17 May in Bussinesday that many Nigerian manufacturers were finding it difficult to obtain
the money that they needed to invest in new equipment, upgrade facilities as well as to expand their activities as a result of high cost
of borrowing and the unwillingness of banks to loan the manufacturing firms to due perceived risks. Adeola (2023) in Guardian
Newspaper says the manufacturing sector in Nigeria was faced with difficulty of accessing credit, double- digit credit facilities from
banks.
3.0 METHODOLOGY
The researchers reviewed the previous empirical studies on the impact of equity financing, debt financing known as capital structure
on the financial performance of listed manufacturing firms in Nigeria 2014-2022. The equity financing and debt financing are the
two components of financing reviewed in this study. The sources of data for the study are past studies on equity financing, debt
financing and financial performance of listed manufacturing firms in Nigeria.
6.0 RECOMMENDATIONS
In line with the findings above, the study recommends that the listed manufacturing firms in Nigeria should continue to use the
optimal level of equity in financing their operations because by using equity, they have directly avoided the payment of high interest
that may impact negatively on their performance. In using equity to finance their activities, the excess profits can either be paid as
dividend or they can be reinvested if the management considers it that it is better do so.
The listed manufacturing firms in Nigeria should avoid raising too much debt for their operations as that can result in high interest
payable to lenders. In this way the profits made can be used as dividend or they can be reinvested into the firms for better
performance instead of paying them to lenders as interest.
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