IMPACT OF FIRM CHARACTERISTICS ON THE FINANCIAL PERFORMANCE OF LISTED INSURANCE COMPANIES IN NIGERIA.
ABSTRACT
Firm specific characteristics have been identified to have an immeasurable role in enhancing the financial performance of companies, but available literatures in this area are mixed and inconclusive. Owing to these mixed and inconclusive findings, the study therefore investigates the impact of firm characteristics on the financial performance of listed insurance firms in Nigeria. Financial performance is the dependent variable while, firm size, liquidity and leverage are independent variables. The population of the study consists of (47) listed insurance firms as at 31st December 2021.Eleven (11) of the listed insurance firms are selected to form the sample of the study for the period of five years (2017-2021). The study employed multiple regressions as tool for analysis. Secondary data obtained from the financial statements of the companies were analyzed. Panel data techniques (fixed and random effects model) were utilized to investigate the impact of firm characteristics on financial performance and Hausman specification confirmed that random effect model is more appropriate. The result shows that firm size ,liquidity, and leverage are the most important determinants of financial performance. Hence, firm size, and leverage are negatively related. In contrast, liquidity ratio is positively and significantly related with financial performance. Lastly, age of insurance company is not significantly related with financial performance of listed insurance firms in Nigeria. For insurance companies to achieve a greater profit and competitiveness in the market, it is therefore recommended that the companies should conduct careful evaluation and take into consideration firm specific characteristics (firm size, firm liquidity and firm leverage) that influence the financial performance of the company before making major business decision as this will go a long way in improving their financial performance.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Performance is the result of the fulfillment of the tasks assigned. Company performance describes how individuals in the company try to achieve a goal. Company performance illustrates the magnitude of the results in a process that has been achieved compared with the company’s goal. Financial performance is a determinant of an organization’s income, profits, increase in value as evidenced by the appreciation in the entity’s worthiness (Asimakopoulos, Samitas & Papadogonas, 2019).
Financial performance was measured differently by different researchers, but in a wider perspective four (4) major groups of accounting ratios were used to measure financial performance. According to Radut (2018), the most argued measures that provide an important view and complex understanding of the financial performance of a company are Profitability ratios, Leverage ratios, Liquidity ratios and Efficiency ratios.
The term 'Liquidity' refers to the ability of a firm to meet its short-term maturing obligations within one year. The Liquidity resources of a firm may be kept in various forms: cash in hand and cash at bank in current assets, reserve drawing power under a cash credit or overdraft arrangement and short term deposits. Cash balances in current account provide the highest degree of liquidity. A firm can maintain liquidity if it holds assets that could be shifted or sold quickly with minimum transaction cost and loss in value. The test of liquidity is the ability of the firm to meet its cash obligations when they are due and to exploit sudden opportunities in the market. Whenever one speaks of a firm's liquidity, one tries to measure firm's ability to meet expected and unexpected cash requirements, expand its assets, reduce its liabilities or cover any operating losses (Amengor 2017).
Brown (2020), Stated that Firm size refers to how large or small firm is measures by the firm’s market value. Therefore, firm size can be concluded as how large a company is reflected by its total asset, sales, or market capitalization. According to Vieira (2018), Size affect smaller firms (measured by total assets or total capitalization) tend to out- perform the market even when returns are adjusted for risk. According to Haugen (2015), Firm size is a picture of large or small companies that appear in the value of total assets, and it’s measured by logarithm of total assets. From the statement above, we can conclude that Firm size is describes how large or small of a company measured by its total assets or by its total capitalization.
The importance of insurance companies become more obvious for businesses and individuals as they indemnify business losses, thereby safeguarding economic activities in the society from collapse. Insurers provide economic and social benefits in the society not only by prevention of losses, but through reduction in anxiety and fear, increase employment and also through accumulated premium generated for long term investment. Thus, like any other industry, insurance companies are expected to continue improving their performance so as to sustain their role in the society.
The performance of any business firm not only plays the role to increase the market value of that specific firm but also leads toward the growth of the whole sector and the overall success of the economy (Ahmed, Naveed & Usman). In this regards, a sound financial management should be consistent with the drives to improve and increase profitability so as to meet the goal of individual firm owners. The primary desire of any firm is to earn more profit and enhance the wealth of its stakeholders (Gitman, 2017). However due to challenges in internal and external environment, most firms are unable to meet their goals. In other words, performance is a function of the ability of an organization to gain and manage its resources in several different ways so as to develop competitive advantages (Iswatia & Anshoria, 2017).
The performance of insurance companies could be affected by both internal and external factors. The internal factors are those management controllable factors which account for the inter-firm differences in profitability. On the other hand, external factors are uncontrollable factors which affect firms decision and which management have no control over. However, factors such as growth in money supply, interest rate, inflation rate and gross domestic product are macroeconomic or market-specific factors which are out of control of management. Generally, a firm‟s performance can be estimated using firm attributes as a major determinants of insurance profitability. These attributes are firm size, underwriting risk, leverage, age, growth rate of written insurance premium as well as institution and political environment which plays vital roles besides firm specific factors of organization behavior
In line with the above explanation, the internal factors which focus on insurer‟s specific characteristics are grouped into financial and non-financial variables. The financial characteristics are variables which can be derived from the financial statement and profit and loss of insurance companies. These include firm size, firm liquidity and firm leverage. On the other hand, non-financial characteristics are those variables which cannot be obtained from the financial statement and profit and loss of insurance companies. They comprise of age of the firm, management competencies, and scope of operation. Although management competencies lead to good financial performance, it is difficult if not impossible to assess management competencies directly because it is assumed that such competencies will be reflected in the operational performance of insurance firms. This study therefore combined three financial variables (firm size, firm liquidity, and firm leverage) coupled with one non-financial variable which is age of the firm as proxies for firm specific characteristics against the financial performance of listed insurance firms in Nigeria. This study therefore embarks on empirical investigation to find out those firm specific attributes that affect the financial performance of listed insurance firms in Nigeria.
1.2 Statement of the Research 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 size, firm 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 size, firm leverage and firm liquidity) affect the financial performance of listed insurance firms in Nigeria. The firm specific characteristics of the insurance firms are to be assessed to provide valuable information in regards to their effects on performance.
1.3 Research Question
The research question expected to be answered by the end of this this work is whether firm characteristics have a significant impact on the financial performance of listed insurance companies in Nigeria. Firm size, firm liquidity and leverage should also be analysed as a control variable and if such an impact is significant, whether it is positive or negative. In lieu of this, this research is set to answer the following questions:
i. To what extent does firm size influence the financial performance of listed insurance companies in Nigeria?
ii. What is the relationship between firm leverage and financial performance of listed insurance companies in Nigeria?
iii. How does firm liquidity impact the financial performance of listed insurance companies in Nigeria?
1.4 Research Objectives
The study was guided by two broad research objectives, namely the general objective and specific objectives.
1.4.1 General Objective
The general objective of this study was to investigate the impact of firm characteristics on the financial performance of listed insuarance companies in Nigeria.
1.4.2 Specific Objectives
The following were the specific objectives of the study;
i. To examine the impact of firm leverage on the return on asset of the listed insurance companies in Nigeria.
ii. To examine the impact of liquidity on the return on asset of the listed insurance companies in Nigeria.
iii. To examine the impact of firm size on the return on asset of the listed insurance companies in Nigeria.
1.5 Hypotheses
To conduct this study the researcher tested the following hypotheses;
H01: Firm leverage has no significant impact on the return on asset of the listed insurance companies in Nigeria.
H02: Firm liquidity has no significant impact on the return on asset of listed insurance companies in Nigeria.
H03: Firm size has no significant impact on the return on asset of listed insurance companies in Nigeria.
1.6 The Scope of the Study
The study investigates the impact of firm characteristics on the financial performance of listed insurance companies in Nigeria. In order to evaluate this impact, the study was conducted for the period of five years that is from 2017 to 2021. The study period emerges from the fact that there were reforms aimed at increased productivity, performance and efficiency in the industry. The period is considered suitable owing to the fact that it marks the beginning of financial reforms where the insurance firms in Nigeria were required to increase their capital base. The study focused on internal factors because they can be easily measured by using data generated from financial statement of insurance firms in Nigeria and they are controllable factors that are within the control of management of listed insurance firms in Nigeria. This study covered only three characteristics as variables; the firm size, firm liquidity and firm leverage. The research was confined to 47 insurance companies operating in Nigeria for the period 2017-2021.
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction The chapter contains information on some of the literature review concerning firm characteristics that has been derived from other researchers who have conducted similar studies in the same field. The chapter will also present a ( conceptual, empirical and theoretical review ). on firm characteristics.
2.2 Conceptual Review
A conceptual framework is a brief depiction of the phenomenon under investigation characterised by a chart description of the main parameters of the study. It is a diagrammatic representation showing the relationhip between the dependent and independent variables.
2.2.1 Firm characteristics
Firm characteristics can be hypothesized differently depending on the various studies used to define it. Majority of researchers confirm that firm characteristics are related to both the firm objectives and the resources. The preceding two can undergo further analysis using the three criteria, which are the market, capital and the structure related firm characteristics. Some of the market related firm characteristics comprise variable such as the market environment, experience, industry type and the environmental uncertainty.
Zou and Stan (2020) described firm characteristics as a firm’s demographic and managerial variables which, in turn, comprise part of the firm’s internal environment. According to Kogan and Tian (2018), firm characteristics include firm size, leverage, liquidit etc.
Firm size
According to Cahyanti te al., (2021) Firm size is a picture of large or small companies that appear in the value of total assets, and it’s measured by logarithm of total assets. From the statement above, According to Fujianti and Satria, firm size is describes how large or small of a company measured by its total assets or by its total equity capitalization,The size of the firm is the most crucial trait since it determines its vertical integration and the profitability of the industry at large. Firm size has a direct correlation with the financial performance of an organization as it aids in achieving the economies of scale (Cordeiro & Tewari, 2017). Waweru & Riro (2020) argue that, bigger companies are more efficient and perform better than smaller ones.
According to Almashhadani, (2019) firm size can be define as how large a company is reflected by its total asset, sales, or market equity capitalization. The size of the firm can determine its investment opportunities. Large firms can access more Equity Capital due to their market power as compared to small companies. According to Babalola (2018), the larger a firm is, the more influence it has over its equity investors, and as a result, large firms tend to benefit from economies of scale and outperform small firms.
Finally, According to my own understanding In an industry there are firms of varying sizes. The costs of production in these firms of different sizes vary. Economists are concerned with the best size of a business unit, that is, a firm in which the average cost of production per unit is the lowest. But while taking decision about the size of a business unit or scale of operations often the various terms such as the plant or the establishment, the firm and the industry are used in a confused way. To have clear understanding of the concept of the size of a business unit it is advisable to keep in mind the differences between these terms, i.e., the plant, the firm, and the industry.
Date: 2026-08-09 00:00:00.000000