Free Cash Flow and Investment Efficiency of Listed Manufacturing Companies in Nigeria
Article Sidebar
Main Article Content
Abstract
Purpose- This study aims to determine the relationship between free cash flow and investment efficiency of quoted manufacturing companies in Nigeria.
Design- An accounting-based model developed by Richardson (2006) was employed to measure investment efficiency and free cash flow. The population of the study consist of all the listed manufacturing companies in Nigeria. Similarly, the purposive sampling technique was employed to arrive at forty-eight companies for 2008-2018.
Findings- The results of the study confirm the agency theory of free cash flow. Hence, it established that there is a positive and robust relationship between free cash flow and overinvestment.
Practical Implications- the findings of this study has practical implications to various group of users of financial information such as investors, policymakers and other stakeholders in the listed manufacturing sector in Nigeria. The study recommends that policymakers reduce the cost of debt, and likewise, managers should emphasize the facilitation of equity capital.
Originality- To the best of the researcher's knowledge, this is the first study to examine the relationship between free cash flow and investment efficiency in Nigeria.
Downloads
Article Details
Copyright (c) 2021 Aliyu Sulaiman Kantudu, Abubakar Sadiq Umar
This work is licensed under a Creative Commons Attribution 4.0 International License.
Angela, Windy, Aryancana Rilya, and Rilya Aryancana. 2017. “The Effect of Financial Reporting Quality on Financing and Investment.” Etikonomi 16(1):81–92. doi: 10.15408/etk.v16i1.4600. DOI: https://doi.org/10.15408/etk.v16i1.4600
Bhundia, Amalendu. 2012. "A Comparative Study Between Free Cash Flows and Earnings Management." Business Intelligence Journal 5(1):123–29.
Biddle, Gary C., Giles Hilary, and Rodrigo S. Verdi. 2009. "How Does Financial Reporting Quality Relate to Investment Efficiency ?" Journal of Accounting and Economics 48(2–3):112–31. doi: http://dx.doi.org/10.1016/j.jacceco.2009.09.001. DOI: https://doi.org/10.1016/j.jacceco.2009.09.001
Biddle, Gary, and Giles Hilary. 2006. "Accounting Quality and Firm-Level Capital Investment." The Accounting Review 81(5):963–82. DOI: https://doi.org/10.2308/accr.2006.81.5.963
Chen, Feng, Ole-kristian Kristian Hope, Qingyuan Li, and Xin Wang. 2011. "Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets." Accounting Review 86(4):1255–88. doi: 10.2308/accr-10040. DOI: https://doi.org/10.2308/accr-10040
Chen, Marco. 2017. "Investigating the Relationship between Firm Investment Sensitivity and Financing Constraints with a Distinctive Chinese Firm Data Set."
Chen, Xin, Yong Sun, and Xiaodong Xu. 2016. "Free Cash Flow, over-Investment and Corporate Governance in China." Pacific Basin Finance Journal 37(April 2016):81–103. doi: 10.1016/j.pacfin.2015.06.003. DOI: https://doi.org/10.1016/j.pacfin.2015.06.003
Cherkasova, Victoria, and Daryush Rasadi. 2017. "Earnings Quality and Investment Efficiency: Evidence from Eastern Europe." Review of Economic Perspectives 17(4):441–68. doi: 10.1515/revecp-2017-0023. DOI: https://doi.org/10.1515/revecp-2017-0023
Cherkasova, Victoria, and Evgeniya Zakharova. 2016. "Suboptimal Investments and M&A Deals in Emerging Capital Markets." Econmic Annals LXI(208):93–120. doi: 10.2298/EKA1608093C. DOI: https://doi.org/10.2298/EKA1608093C
Ding, Sai, Alessandra Guariglia, and John Knight. 2012. “Does China Overinvest? Evidence from Panel of Chinese Firms." Pp. 1–39 in China and the World Economy. Nottinggham: Leverhulme Centre.
Ebrahimi Rad, Seyed Sajad, Zaini Embong, Norman Mohd-Saleh, and Romlah Jaffar. 2016. "Financial Information Quality and Investment Efficiency: Evidence from Malaysia." Asian Academy of Management Journal of Accounting and Finance 12(1):129–51.
Fakhroni, Zaki, Ghozali Imam, Harto Puji, and Etna Yuyetta, Nur, Afri. 2018. "Free Cash Flow , Investment Inefficiency , and Earnings Management : Evidence from Manufacturing Firms Listed on the Indonesia Stock Exchange." Investment Management and Financial Innovations 15(1):299–310. doi: 10.21511/imfi.15(1).2018.25. DOI: https://doi.org/10.21511/imfi.15(1).2018.25
Filsaraei, Mahdi, Morteza Moradi, Javad Askari Zadeh, Masoumeh Bahadori, and Maryam Mohseni. 2016. "Investigating the Relationship between F Irm's Corporate Governance, Free Cash Flow and Overinvestment." Applied Mathematics in Engineering, Management and Technology 4(2):32–39.
Firth, Michael, Lingmin Xie, and Yuanyuan Zhang. 2016. How Do Analysts' Forecast Characteristics Relate to Investment Efficiency ? Hong Kong.
Gao, Ru, and Xin Yu. 2018. "How to Measure Capital Investment Efficiency: A Literature Synthesis." Accounting & Finance (1998):1–36. doi: 10.1111/acfi.12343. DOI: https://doi.org/10.1111/acfi.12343
Guariglia, Alessandra, and Junhong Yang. 2016. "A Balancing Act: Managing Financial Constraints and Agency Costs to Minimize Investment Inefficiency in the Chinese Market." Journal of Corporate Finance 36(Feb 2016):111–30. doi: 10.1016/j.jcorpfin.2015.10.006. DOI: https://doi.org/10.1016/j.jcorpfin.2015.10.006
Jafari, Halle. 2016. "Financial Reporting Quality , Debt Maturity Investment Efficiency." Bulletin de La Societe Des Sciences de Liege 85:1283–96.
Jensen, C., and H. Meckling. 1976. "Theory of the Firm : Managerial Behaviour , Agency Costs and Ownership Structure." Journal of Financial Economics 3:305–60. DOI: https://doi.org/10.1016/0304-405X(76)90026-X
Jensen, Michael C. 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers." American Economic Review 76(2):323–29. doi: 10.2139/ssrn.99580. DOI: https://doi.org/10.2139/ssrn.99580
Ku, H. S. L., U. Mustapha, and S. Goh. 2010. "Literature Review of Past and Present Performance of the Nigerian Manufacturing Sector." Proceedings of the Institution of Mechanical Engineers, Part B: Journal of Engineering Manufacture 224(12):1894–1904. doi: 10.1243/09544054JEM1818. DOI: https://doi.org/10.1243/09544054JEM1818
Lai, Shu-miao, Chih-liang Liu, and Taychang Wang. 2013. "Increased Disclosure and Investment Efficiency." Asia-Pacific Journal of Accounting & Economics 1–20. doi: 10.1080/16081625.2012.741791. DOI: https://doi.org/10.1080/16081625.2012.741791
Li, Leye, Gary S. Monroe, and Jeff Coulton. 2018. Managerial Litigation Risk and Corporate Investment Efficiency : Evidence from Derivative Lawsuits. Sydney, Australia. DOI: https://doi.org/10.2139/ssrn.3147435
Majeed, Muhammad Ansar, Xianshi Zhang, and Umar Muhammad. 2017. "Impact of Investment Efficiency on Cost of Equity: Evidence from China." Journal of Asia Business Studies. doi: https://doi.org/10.1108/JABS-09-2015-0163. DOI: https://doi.org/10.1108/JABS-09-2015-0163
Mcdermott, Katie E. 2012. "Financial Reporting Quality and Investment in Corporate Social Responsibility." University of North Carolina.
McNichols, Maureen F., and Stephen R. Stubben. 2008. "Does Earnings Management Affect Firms' Investment Decisions?" The Accounting Review 83(6):1571–1603. doi: 10.2308/accr.2008.83.6.1571. DOI: https://doi.org/10.2308/accr.2008.83.6.1571
Modigliani, Franco, and Merton H. Miller. 1958. "The Cost of Capital, Corporation Finance and the Theory of Investment." The American Economic Review 48(3):261–97.
Moez, EL Gaied, and Zgarni Amina. 2018. "Overinvestment of Free Cash Flow and Manager's Overconfidence." International Business Research 11(3):48. doi: 10.5539/ibr.v11n3p48. DOI: https://doi.org/10.5539/ibr.v11n3p48
Nekhili, Mehdi, Ines Fakhfakh Ben Amar, Tawhid Chtioui, and Faten Lakhal. 2016. "Free Cash Flow and Earnings Management: The Moderating Role of Governance and Ownership." Journal of Applied Business Research 32(1):255–68. doi: 10.19030/jabr.v32i1.9536.
Nekhili, Mehdi, Ines Fakhfakh, Ben Amar, Tawhid Chtioui, and Faten Lakhal. 2016. "Free Cash Flow And Earnings Management: The Moderating Role of Governance And Ownership." The Journal of Applied Business Research 32(1):255–68. DOI: https://doi.org/10.19030/jabr.v32i1.9536
Ogunleye, E. O., P. A. Adeyemi, G. T. Asamu, and Ado- Ekiti. 2018. "The Size , Growth and Profitability of Quoted Manufacturing Companies in Nigeria : Panel Data Analysis." 45:1–7.
Rad, S. S. E., Zaini Embong, Norman Mohd-Saleh, and Romlah Jaffar. 2016. "Financial Information Quality and Investment Efficiency: Evidence from Malaysia." Asian Academy of Management Journal of Accounting and Finance 12(1):129–51.
Richardson, Scott. 2006. "Over-Investment of Free Cash Flow." Review of Accounting Studies 11(2–3):159–89. doi: 10.1007/s11142-006-9012-1. DOI: https://doi.org/10.1007/s11142-006-9012-1
Sheu, Her Jiun, and Shiou Ying Lee. 2012. "Excess Cash Holdings and Investment: The Moderating Roles of Financial Constraints and Managerial Entrenchment." Accounting and Finance 52(SUPPL.1):287–310. doi: 10.1111/j.1467-629X.2012.00500.x. DOI: https://doi.org/10.1111/j.1467-629X.2012.00500.x
Soderbom, Mans, and Francis Teal. 2002. "The Performance of Nigerian Manufacturing Firms: Report on the Nigerian Manufacturing Enterprise Survey 2006." UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION NIGERIAN FEDERAL MINISTRY OF INDUSTRY CENTRE FOR THE STUDY OF AFRICAN ECONOMIES Department of Economics, University of Oxford (May 2014):69.
Umoru, David, and Gladys A. Nwokoye. 2018. "FAVAR Analysis of Foreign Investment with Capital Market Predictors: Evidence on Nigerian and Selected African Stock Exchanges." Academic Journal of Economic Studies 4(1):12–20.
Verdi, Rodrigo S. 2006. "Financial Reporting Quality and Investment Efficiency." University of Pennsylvania. DOI: https://doi.org/10.2139/ssrn.930922
Wang, Fusheng, Zhibiao Zhu, and John Hoffmire. 2015. "Financial Reporting Quality, Free Cash Flow, and Investment Efficiency." SHS Web of Conferences 17:01027. doi: 10.1051/shsconf/20151701027. DOI: https://doi.org/10.1051/shsconf/20151701027