LIQUIDITY MANAGEMENT AND FIRM VALUE OF LISTED INSURANCE COMPANIES IN NIGERIA

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

 CHAPTER ONE

INTRODUCTION

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1        sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1    Introductions

4.2    Data analysis

CHAPTER FIVE

5.1    Introduction

5.2    Summary

5.3    Conclusion

5.4    Recommendation

Appendix

 

 

 

 

 

 

 

 

 

Abstract

The study investigated the impact of liquidity management on financial performance of insurance companies in Nigeria between. The study made use of variables such liquid asset, equity capital, dividend, working capital, investment, under-writing risk and size of the firm in the model. Return on asset ROA is used as the dependent variable and it measures the financial performance. Regression analysis was adopted to estimate the model and the results showed that liquidity management has not been having significant impact on insurance company’s performance like equity management which affects long term stability. Again, both investment and working capital are shown to have significant positive impact on financial performance of insurance companies in Nigeria. It is recommended that insurance companies should place more priority on their equity capital which is having negative impact on their performance rather than liquidity management since they are less involved with liquid cash unlike commercial banks.

 

 

                                        CHAPTER ONE

                                        INTRODUCTION

1.1 Background of the study

Primarily, the liquidity management duty is to determine the needs for funds to meet financial obligation and ensure the availability of cash or collateral to fulfill those need as at when due, this is done by coordinating the various sources of funds available to the institution under normal and stressed conditions. It relies on the daily assessment of the liquidity conditions in the insurance system, to determine its liquidity needs and thus the volume of liquidity to allot from the market. Management of liquidity involves a daily analysis and detailed estimation of the size and timing of cash inflows and outflows over the coming days and weeks to minimize the risk that savers will be unable to access their deposits in the moment they demand them. Thus, liquidity is lifeblood of an insurance system. The problem of insufficient studies of the assessment of the relationship between liquidity management and the performance of Insurance companies in Nigeria calls for more work under the subject matter. The assessment of liquidity management in relation to performance becomes imperative as a result of Insurance Market Review in 2009. The National Insurance Commission (NAICOM) makes it important to examine the management of liquidity in Insurance companies in Nigeria. Theoretical studies and empirical evidence have shown that countries with better developed financial system enjoy faster and more stable long-run growth of which insurance companies contribute to. Well-developed financial markets have a significant positive impact on total factor productivity, which translates into higher long-run development. Based on Solow‟s (1956) work, Merton (2004) noted that due to the absence of a financial system that can provide the means of transforming technical innovation into broad implementation, technological progress will not have significant and substantial impact on the economic development and growth. Therefore, the studies on the relationship of liquidity management and performance especially in insurance companies is not conclusive and more empirical evidences are needed to establish the sources of insurance liquidity and identify the strategies adopted by insurance companies in the management of liquidity, the relationship that exists between the sources of insurance liquidity and performance.

The heart of corporate finance literature is based on long term investment, capital structure and various validation methods. These have been the focus of intention of many researchers in the past. In short, it concerns the long-term financial decisions. On the other hand, it is believed that financial decisions of short-term assets and short-term liabilities management also influence the stock price. These decisions are vital because they demonstrate the financial stability of the firm and the market which develop the perception about the firm accordingly (Afza and Nazir,2008). An efficient working capital management can create value for stakeholders while a deprived policy or inefficient management might affect the business in an appalling way and might cause a financial distress. Working capital management is among the four cardinal decision areas of financial management, for which every commercially oriented organization has to make (Pandey, 2005). Working capital components of a firm’s financial management deals with liquidity aspect of a firm and hence fundamental for the effective and efficient operations as well as the sustainability of its going concern status (Enyi 2006). Working capital and liquidity could mean one and the same thing and relate to the management of current assets and current liabilities of an enterprise. This synonymy is based on the observation that working capital ratios are the most common measures of liquidity (Lamberg and Valming,2009). Liquidity management determines to a large extent the quantity of profit that results as well as the value of shareholders’ wealth (Ben-Caleb,2008). For a firm to survive, it must remain liquid as failure to meet its obligations in due time, results in bad credit rating by the short-term creditors, reduction in the value of goodwill in the market and ultimately lead to liquidation(Bhavet 2011). Hence, a good and firm financial management policy seeks to maintain adequate liquidity as to meet its short-term maturing obligations without impairing profitability. Short term signifies obligations which mature within one accounting year. It also reflects the operating cycle: buying, manufacturing, selling and collecting cash. A firm that is unable to pay its creditors on time and continue to fail its obligations to suppliers of credit , services, and goods can be sick or bankrupt. Inability to meet the short-term liabilities may affect the company’s operation and reputation also. Lack of cash or liquid assets on hand may force a company to miss the incentives given by suppliers of credit, services, and goods which result in higher cost of goods and in turn affect the profitability of the business. So there is always a need for the company to maintain certain degree of liquidity. However, there is no standard norm for liquidity. It depends on the nature of the business, scale of operations, location of the business and many other factors. Every stakeholder has interest in the liquidity position of a company. Suppliers of goods will check the liquidity of the company before selling goods on credit. Employees also have interest in the liquidity as to know whether a company can meet its employees’ related obligations in terms of salary, pension, provident fund, etc. Shareholders are interested in understanding the liquidity due to its huge impact on the profitability. They may not like high liquidity as profitability and liquidity are inversely related. However, they are also aware that non-liquidity will deprive the company from getting incentives from suppliers, creditors, and bankers. Liquidity management is a concept that is receiving serious attention globally mostly with the current financial situations and the state of the world economy. The concern of business owners and managers all over the world is how to devise a better strategy of managing their day to day operations as to meet their obligations as they fall due and increase profitability and shareholders’ wealth. Liquidity plays a significant role in the successful functioning of a business firm. Its study is of a major importance to both internal and external analysts due to its close relationship with day-to-day operation of business (Bhunia,2010). Dilemma in liquidity management is to achieve desired trade-off between liquidity and profitability(Rahemen et.al.,2007). Unfortunately, the principal focus of most organizations is profitability maximization while the need for efficient management of liquid assets is ignored. This approach is justified by the belief that profitability and liquidity are conflicting goals. Hence, a firm can only pursue one at the expense of the other, in consonance with the theory of liquidity and profitability trade-off. On the contrary, Padachi(2006) advised that a firm is required to maintain a balance between liquidity and profitability while conducting its daily operations. This is because both inadequate liquidity and surplus liquidity directly affect profitability (Ogundipe , Idowu and Ogundipe (2012). On the other hand, an insufficient working capital, results in a liquidity crises which is life threatening , and can force a firm into bankruptcy, often with little notice. This also affects the returns of the firm. Liquidity requirement of a firm depends on the peculiar nature of the firm and there is no specific rule on determining the optimal level of liquidity that a firm can maintain as to ensure positive impact on its profitability. Certain measures of corporate profitability include Return on Investment(ROI), Return on Equity(ROE) and Return on Assets(ROA). Hence this paper is to investigate the impact of liquidity on return on assets on selected Nigerian firms listed on Nigerian Stock Exchange. Return on assets will all through be used as a measure of profitability. Secondly, the study aims at directing the attention to the importance of active management of liquidity

1.2 STATEMENT OF THE PROBLEM

Insurance industry plays a crucial role in fostering commercial and infrastructural businesses. From the latter perspective, it promotes financial and social stability; mobilizes and channels savings; supports trade, commerce and entrepreneurial activity and improves the quality of the lives of individuals and the overall wellbeing in a country (Malik, 2011). To achieve this role, insurance companies are expected to be financially strong and solvent enough through profitability in their operations. The poor performance of insurance firms in Nigeria as noted by Agabi (2009) stemmed from several years of non-payment of claims by underwriting firms. This tradition of defaulting in claims by insurance firms in Nigeria resulted in reduction of their goodwill which translated to poor image of the sector and as a result, confidence in the sector seems to have eroded significantly. As such, Nigerians no longer consider insuring their valuables due to confidence crisis in the sector. In Nigeria today, there are evidence of performance of several industries such as banking and other financial institutions, however, the insurance sector is not responding appropriately to economic growth due to confidence crises in the sector. This implies that the overall financial performance of insurance firms in Nigeria is weak except for those who have diverse sources of investment. Measuring the financial performance of insurance companies has therefore gained significant attention in the developed and some developing countries in the area of business and corporate finance literature. As underwriters, these companies are not only providing good mechanism for transferring risk but also help to boost entrepreneurial confidence in appropriate way so as to support investment growth and general economic activities. Profitability is a vital concern to all groups who have a direct or indirect interest in the firm. In spite of these vital roles that profit plays in the going concern of insurance firms, the profitability status of most insurance firms operating in Nigeria in relation to firm age, firm size, premium growth, loss ratio, liquidity and leverage of the firm have not attracted much attention of researchers in area of finance. This may be attributed to lack of thorough evaluation of factors that play critical role in profit realization of insurance firms in Nigeria. Therefore, it is of interest to know the extent to which firm specific characteristics (firm age, firm size, premium growth, loss ratio, liquidity and leverage) affect the financial performance of listed insurance firms in Nigeria.

1.3 OBJECTIVE OF THE STUDY

The main objective of this study is to examine liquidity management and firm value of listed insurance companies in Nigeria. But for the purpose of the study, the following specific objectives are put forward by the researcher;

1. i) To examine the impact of liquidity management on the performance of listed insurance firms in Nigeria.
2. ii) To ascertain the impact of premium growth rate on the performance of listed insurance firms in Nigeria.

iii) To examine if there is any relationship between liquidity management and firm’s value of listed insurance companies

1. iv) To evaluate the contribution of firm size to the performance of listed insurance firms in Nigeria

1.4 RESEARCH QUESTIONS

The following research questions were formulated by the researcher to aid the completion of the study;

1. i) Does liquidity management have any significant impact on the performance of listed insurance firms in Nigeria?
2. ii) Does premium growth rate influence the performance of listed insurance firms in Nigeria?

iii) Is there any significant relationship between liquidity management and firm’s value of listed insurance companies?

1. iv) Does firm size contribute to the performance of listed insurance firms in Nigeria?

1.5 RESEARCH HYPOTHESES

The following research hypotheses were formulated by the researcher to aid the completion of the study;

H₀: there is no significant relationship between liquidity management and firm’s value of listed insurance companies

H₁: there is a significant relationship between liquidity management and firm’s value of listed insurance companies.

H₀: firm size does not contribute to the performance of listed insurance firms in Nigeria

H₂: firm size does contribute to the performance of listed insurance firms in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

This study is based on the fact that most empirical literatures on the firm liquidity management and firm value and are mostly focused on the insurance sector. By implication, researchers have not paid enough attention to this area in the insurance sector in Nigeria. That is, most empirical literatures are directed towards the sector and not banking sector. To the best of our knowledge, no or little is known about the insurance industry as far as the study under consideration is concerned, most especially from the perspective of an emerging market like Nigeria. This study therefore expected to provide empirical evidence on the firm value and liquidity management affecting the financial performance of listed insurance firms in Nigeria.

1.7 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers liquidity management and firm value of listed insurance companies in Nigeria, but in the cause of the study, there are some factors beyond the researchers control that limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Finance: the finance at the disposal of the researcher is a major constrain to the scope of the study, as the researcher could not cover more grounds for the study.

1.8 OPERATIONAL DEFINITION OF TERMS

Insurance

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured

Liquidity

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.

Firms value

A firm’s value, also known as Firm Value (FV), Enterprise Value (EV) is an economic concept that reflects the value of a business. It is the value that a business is worthy of at a particular date.

Liquidity management

Liquidity management is a concept broadly describing a company’s ability to meet financial obligations through cash flow1, funding activities, and capital management.

1.9 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 (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc. Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter.     Chapter three is a research methodology covers deals on the research design and methods 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.

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