IMPACT OF FINANCIAL CONSTRAINTS ON FIRMS INVESTMENT DECISION MAKING IN NIGERIA

TABLE OF CONTENT

Title page

Approval page

Dedication

Acknowledgment

Abstract

Table of content

CHAPETR ONE

1.0   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

2.0   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

There are numerous factors that affect the decision making of an investment plan. The main purpose of investing is to earn a return. If the future returns from all available investments were known with certainty, an investor would certainly choose that investment which offers the highest rate of return over the required period of time but in practice the world is uncertain. The importance of Investment decisions on financial performance of firms cannot be over emphasized since many of the factors that contribute to business failure can be addressed using strategies and financial decisions that drive growth and the achievement of organizational objectives. This study investigates the impact of financial constraints on firms investment decision to be less dependent on their internal cash flow and leverage position and more responsive to the value of capital relative to its replacement cost. The results suggest that investment is driven positively by firms’ value, but is not responsive to both the firms’ internal resources and their balance sheet composition. Finally, while the development of the banking sector has a deleterious effect on firms’ investment, the impact of capital market development on firm level investment is negligible.

CHAPTER ONE

                                        INTRODUCTION

1.1 Background of the study

The current research intends to gain a deeper understanding about how financial constrain limit investment decisions, and affect the performance of firms listed in the NSE. The term ‘investing” could be associated with the different activities, but the common target in these activities is to “employ” the funds during the time period seeking to enhance the investor’s wealth. Decision making on the other hand is a process that involves a sequence of actions with the identification of an investment related problem issue or opportunity and ends in the approval of an investment project (Boonstra 2003). This study aims at investigating the process of investment decision at the company’s level as generally shown that it is a multi-criteria process taking into account numerous factors. These are economic and risk factors, but also political and social environment and government regulations (Enoma and Mustapha 2010). It also seeks to investigate the existing relationship between Investment decisions and Firm’s financial performance. There are numerous factors that affect the decision making of an investment plan. Some of the organizational factors that influence the decision making of investments include; Size of company: Buonanno et al 2005 argue the importance of this factor when adopting an investment plan; stating that a different approach should be applied on the industry the organization falls under. Furthermore, “a direct relationship between the size of organizations and the percentage of organizations where a similar investment plan has been implemented”. Top Management Support: this factor is considered one of the most important factors in the decision making; it also helps the organization in delivering a successful investment plans. According to Wang (2007), the function of top management involves developing an understanding of the capabilities and limitation of the proposed system, setting goals, and then communicating the organization Strategy to all employees which can increase the benefits of the investment plan adoption. There is growing controversy over the impact of financial development on economic growth. While some researchers (McKinnon, 1973; Shaw, 1973; Jalil and Ma, 2008) have argued that financial development deepens financial markets and thereby promotes economic growth, others (Demetriades and Lutinel, 2001) have provided empirical evidence that financial repression can have positive impacts on economic growth. The studies are however, largely based on the macroeconomic/aggregate correlations between finance and growth or on the nature of this relationship at the microeconomic level. Very few studies have been able to integrate macro and micro variables in the same analysis in order to provide evidence for a microeconomic channel through which macro-financial development influences the growth of the real economy. Asymmetric information, managerial agency problems, and transaction costs can make external finance more expensive than internal financing. Under such constraints to outside financing, firms’ investment decisions are affected by the availability of internal funds. Financial development, however, influences corporate investments by relaxing financial constraints. By using various developing country data, many studies have found some evidence that financial development positively affects the investment behavior of firms. According to the q theory of investment, in the absence of financial restriction and corporate agency problems, firm investment depends exclusively on the value of the firm relative to its replacement value (adjusting for tax effects on capital adjustment costs). The linear relationship between the investment ratio and the firm’s q value follows from the assumption that adjustment is costless until some normal level of investment is reached and then marginal adjustment costs rise linearly with investment (see Summers, 1981 and Cooper and Ejarque, 2001). Furthermore, in order to identify the shadow price of new capital (marginal q ) with the value of the firm relative to its replacement cost (average q ), we assume that the production function presents constant returns to scale and the adjustment-cost function is homogenous of degree one (see Hayashi, 1982 and Abel and Eberly, 2002). However, to the extent that the firm faces constraints on external financing, its investment will be determined by its internal resources, namely, retained earnings. Furthermore, the theoretical model was modified to include the debt-to-capital ratio. In the face of imperfect financial markets, the degree of leverage of the firm (here represented by its debt-to-capital ratio) may deter the availability of external financing even after controlling for Tobin’s q . Therefore, we consider that a firm faces a better functioning financial system when, first, its investment is more responsive to changes in q ; second, investment is less determined by the firm’s cash flow; and, third, investment is less negatively affected by the firm’s liability composition, represented by the debt-to-capital ratio.

1.2 STATEMENT OF THE PROBLEM

Investors be it person or body corporate are faced with the challenges or problems of making decision because of several factors ranging from finance or in terms of determining when to invest, whether to invest or not. Financial information enables an investor to minimize the risk involved in decision making. Financing decisions result in a given capital structure and suboptimal financing decisions can lead to corporate failure. A great dilemma for management and investors alike is whether there exists an optimal capital structure. It is in view of the above that the study becomes pertinent.

1.3 OBJECTIVE OF THE STUDY

This study has two objectives, the broad and the specific objective, the broad objective is to examine the impact of financial constrain on firms investment decision making in Nigeria, the specific objectives are;

1. i) To examine the effect of finance on a firms investment decision in Nigeria
2. ii) To examines a firm’s capital structure and suboptimal financing decisions on a firms choice of investment

iii) To examine the impact of firms liquidity on a firms investment decision in Nigeria

1. iv) To proffer suggested solution to the identified problem

1.4 RESEARCH QUESTIONS

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

1. i) Does finance has any effect on a firm’s investment decision in Nigeria?
2. ii) Does a firm’s capital structure and suboptimal financing decisions has any effect on a firms choice of investment?

iii) Is there any impact of a firm’s liquidity on investment decision?

1.5 RESEARCH HYPOTHESES

The following research hypotheses was formulated to aid the completion of the study;

H₀: financial constrain does not have any significant impact on firms investment decision making in Nigeria

H₁: financial constrain does have a significant impact on firms investment decision making in Nigeria

1.6 SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance to the management of organizations who are saddle with the responsibility of investment decision in an organization as the study seek to explore avenues to effectively utilized the scarce resources (finance) which is the red blood cell of business. The study will also be useful to investors and potential investors as the study examine the impact of financial constrain on investment decision of an organization. The study will also be useful to researchers who intend to embark on a study in a similar topic as the study will serve as a guide to further research. Finally, the study will be useful to academia’s, student, teachers, lecturers and the general public as the study will contribute to the pool of existing literature on the subject matter and also contribute to knowledge.

1.7 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the impact of financial constraints on firms investment decision making in Nigeria, but in the course of the study, there are some factors that limited the scope of the study;

Staff Reluctance: In most cases the staff of the used study often feels reluctance over providing required information required by the researcher. This result in finding information where the structured questionnaires could not point out.

Researcher’s Commitment: The researcher, being of part time student spent most of her time on business and  other engagement such as test, class work, assignment, examination etc which takes average focus from this study.

Inadequate Materials: Scarcity of material is also another hindrance. The researcher finds it difficult to long hands in several required material which could contribute immensely to the success of this research work.

1.8 OPERATIONAL DEFINITION OF TERM

Finance

Finance is a field that is concerned with the allocation (investment) of assets and liabilities over space and time, often under conditions of risk or uncertainty. Finance can also be defined as the art of money management.

Financial constraint

A financial constraint is a lack of money because of which you cannot buy something, or do something. When you act under constraint, you are forced to do something which you do not like.

Firm

A firm is a for-profit business organization—such as a corporation, limited liability company (LLC), or partnership—that provides professional services.

Investment

To invest is to allocate money in the expectation of some benefit in the future. In finance, the benefit from an investment is called a return

Decision making

Decision-making (also spelled decision making and decision making) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several alternative possibilities.

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 (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study. Chapter two highlight the theoretical framework on which the study its based, thus the review of related literature. Chapter three deals on the research design and methodology 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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