FIRM AGE AND PROFITABILITY: EVIDENCE FROM NIGERIA.
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FIRM AGE AND PROFITABILITY: EVIDENCE FROM NIGERIA.
Chapter one
INTRODUCTION
1.1 Background for the Study
The question of whether older organisations are more profitable than younger enterprises has prompted extensive theoretical and empirical research in economics, management, and finance.
However, theoretical postulates and empirical evidence remain ambiguous on the impact of a firm’s age on its profitability. This can be traced back to institutional difficulties that are country-specific and have not been addressed.
The question of a firm’s age in relation to firm profitability is currently of enormous importance, as studies on firm performance have become a major focus in management literature.
Industrial strategies and the implementation of legislation have undoubtedly demonstrated a clear and vital role for small private enterprises in the Nigerian economy.
To this purpose, it is necessary to analyse whether younger enterprises, which are frequently supported by government programmes, outperform older firms or not. Age is seen to be advantageous to any phenomenon.
That is, the older the unit (person, group, corporation, or government), the more experience it has and hence performs better. But the question remains: do older firms outperform younger firms? The questions were inconclusive due to the mixed nature of the answers to the questions posed.
Several studies have claimed that: Active corporations with a number of bureaucrats and political structures have defied established conventions and so achieved both economic power and huge size (Bhagwatt & Desai, 1970; Krueger, 1974; Marathe, 1989). The a priori anticipation regarding the direction of the association between firm age and profitability is likely to be equally ambiguous.
The role of private enterprises was circumscribed in Nigeria in the 1970s by policies that fostered import substitution and export pessimism. This made entry and exit to and from various sectors of the Nigerian economy highly controlled by the government, leaving private enterprises no initiative to manage their operatives (Moham & Agarwal, 1990; Nayyar, 1994).
Not until the 1980s, when the failure of state enterprises began to emerge, the government began to look inwards owing to economic difficulties, which led to the government experimenting with restrictive industrial regulations in an attempt to reform.
Several changes have been implemented since the Nigerian government recognised the importance of the private sector in driving economic and industrial progress.
Prior to this time, many firms that could not withstand the tough government regulations had folded up, with the exception of the large international corporations.
Against this context, the purpose of this study is to analyse the relationship between a firm’s age and its profitability. This is to determine whether older firms outperform younger firms.
1.2 Statement of Problem
Nigeria’s non-financial firms include both unsuccessful and successful companies. It is therefore critical to understand the impact of firm age on the profitability of the companies.
The dispute and debate in the finance and management literature over the direction of the link between a firm’s age and its profitability remains inconclusive.
This represents the key gap in the literature that prompted this study. Another gap arises from differing perspectives on the measuring of business age and profitability.
1.3 Research Questions.
The questions to consider in this study are as follows:
i. How much does firm age influence the profitability of non-financial enterprises in Nigeria?
ii. How does firm age affect the firm’s profitability?
iii. To what extent do older enterprises outperform younger firms?
1.4 Objective of the Study
Based on the research questions presented above, the specific purpose to steer the study includes:
i. Determine whether firm age affects the profitability of non-financial enterprises in Nigeria.
ii. To investigate the nature of the relationship between company age and firm profitability.
iii. To determine whether older enterprises outperform younger firms.
1.4 Statement of Hypothesis
Based on the aims of the study, the following hypotheses are developed:
Hypothesis One.
HO: There is no correlation between firm age and profitability.
HI: There is a link between firm age and profitability.
Hypothesis Two
HO: Older enterprises do not outperform younger firms.
HI: Older enterprises outperform younger firms.
Hypothesis Three
HO: Firm age has little effect on the profitability of Nigerian non-financial enterprises.
HI: The age of a firm affects the profitability of non-financial enterprises in Nigeria.
1.6 Significance of the Study
This study will be relevant to:
1. Companies have a better understanding of how firm age affects profitability.
2. It will also help to advance the present knowledge frontier.
3. It will assist businesses in improving their operations in order to increase profitability.
1.7 Scope of Study
The study investigates whether business age is a predictor of firm financial success in Nigeria. The study looks at seventy-nine (79) non-financial enterprises listed on the Nigerian Stock Exchange. The study’s time span is 2009-2014 (five years), and the geographical coverage is Edo State.
1.8 Limitations of the Study
Secondary data, such as annual financial reports, are created using different economic and management policies, accounting years, and data, therefore viewers of such reports will perceive them differently.
The nature of the variable may not allow for creation because it is not a real representative of the complete firm. Other limitations of the study include practical problems or constraints that hampered or impeded the investigation. Many obstacles and limits arose while carrying out the investigation.
· Lack of response from those under investigation.
· Some officers are reluctant to offer official information.
1.9 Definition of Terms
1. Firms: A firm is a formalised commercial entity.
2. Profitability: This refers to the ability to make money or the state of being profitable.
3. Organisation: A group of individuals or legal organisations with a clear goal and set norms.
4. Management: In terms of administration, it is the practice or process of managing and becoming the executives of an organisation in terms of implementation.
5. Employee: Someone who works for another person or an organisation.
6. Industry: This can be defined as a collection of firms or businesses of the same sort that have existed for some time.
7. Development: This is the process of growth and progress aimed at good transformation.
8. Compensation: Compensation refers to anything that serves as an equivalent or return for a loss or service.
9. Age: The whole duration of a thing from its beginning to the current period under examination.
10. Firm Age: This is the total number of years that a business has been in operation.
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