COMPLETE SCHOOL PROJECT TOPICS & MATERIALS :
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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The firm financial performance has been the focus in the literature and often emphasized in policy debate with many researchers associating it to entrepreneurship. Significantly, financial performance of a firm, which translates into liquid assets whether generated by the corporate cash flow from operations or by the attraction of new shareholders is considered the most important source of business continuance in the long-run. It has been one of the indicators most commonly used to define the success and failure of management. Financial performance is a measure of profitability that should be sustained, since firms can not invest or expand without profit. Markman (2002) remarked that growth used as a measure of financial performance is based on the belief that growth is a precursor to the attainment of sustainability, competitive advantage and profitability. This indicator has been a concern to shareholders who invested in the business and a worry to directors of the firm because the result reflects their capacity to keep the business moving. A firm’s rate of growth is a function of the rate of profit and the rate of interest when the firm is constrained in either the labour market or the output market. The most widely emphasized goal of a firm is to maximize the value of the firm to its owners which is the driving force that makes a firm to succeed (Kannadhasan, 2002). The investment the government and private sponsors are expected to make in an organization will depend on their social returns and profitability potentials. Moreso, in a capitalist economy, there is one and only one responsibility of a firm – to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game, which is to say engage in an open and free competition without deception or fraud.

The financial performance of firms in the 1980s under the military era did not spur profitability of firms. The economic environment was characterized by inconsistency of policy formulation and implementation, multiple taxation and a crop of civil servants that had no sense of duty, and who frustrated any would be investor, local or foreign. This led to the closure of many local firms and withdrawal of many foreign investors. On assumption of office in May, 1999 by a democratically elected government, there were economic transformations which created enabling environment for investors. For instance, in 2005, the twenty most capitalized firms on the Nigerian stock exchange generated more than N900 billion and paid a total sum of N40 billion as tax on profit (Okereke, 2006).

With the promulgation of the Nigeria Enterprises promotion Decree 1977, there was over 200 percent increase in the number of registered firms in Nigeria. They increased from 10,997 in 1972 to 33, 949 in June 1980, an increase of 22, 952 in a period of eight years (industrial directory, 1982). Investigations have shown that despite the large number of firms in Nigeria, only few are listed on the Nigeria stock exchange and fifteen on the second tier securities market. However, business financing in Nigeria reveals the existence of two groups of firms, the large experienced firms (quoted firms) and the small and medium inexperienced firms (unquoted firms) (Ezike, 1985).

The undeveloped economies are characterized by firms with limited access to the financial market. The reason being that either such markets do not exist or there are factors which prevent transactions between them. The experience here is that most newly established businesses do not go beyond an average life span of five years. For every five businesses established in Nigeria, only one survives and the others cease operation or change ownership within one year. For instance, Econet telecommunication that has changed ownership from Econet- Vmobile- Celtel and Zain within the periods 2001 to 2008. A similar thing was experienced in Britain in 1963 and 1970 where twenty three (23) percent of small firms in manufacturing and construction sectors went into liquidation, ceased trading or were taken over by large firms. In Nigeria, the mortality rate has been attributed to lack of finance and hostile environment.

Firms that have access to the financial markets have the advantage of obtaining long-term capital for growth and development. The steady growth in the concentration of industries have been a feature of most advanced economies. Economic theory attempts to establish this process in terms of technical, managerial, marketing and financial factors affecting existing firms. However, official statistics reveal very little about the financial performance of small firms in the country. The process of growth and performance both financially and otherwise has been analyzed at the macro economic level to the detriment of smaller firms. Therefore, the comparison of the financial profile of firms with access to and those without access to the financial market is necessary.