EXCHANGE RATE VOLATILITY AND FIRM PERFORMANCE IN NIGERIA: A DYNAMIC PANEL REGRESSION APPROACH
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This study investigated the effects of exchange rate volatility on firm performance in Nigeria,
by examining cross sectional data for the most active 20 companies listed on the Nigerian
Stock Exchange. The study developed three dynamic panel models that account for
heterogeneities among the companies and it extended recent research by allowing
international investors and corporations to base their investment decisions on the exchange
rate volatilities between the Nigerian Naira and their home country currencies. The method
used in the study is the dynamic panel data approach applying the Arrelano-Bond dynamic
panel-data and Arellano-Bover generalized method of moments (GMM) estimators. The
variables used in the study to proxy firm performance are the rate of return on assets (RRA),
asset turnover ratio (ATR), and portfolio activity & resilience (PAR) variable. While RRA
variable is obtained by simply dividing the firm’s profits by the total assets of the business,
ATR variable and the PAR variables are obtained by dividing the firm’s sales revenue by the
assets employed in the business and by dividing the percentage change in sales by the
percentage change in gross domestic product GDP. The exchange rate volatility variable is
simply obtained by taking the square of the mean adjusted relative change in the official
exchange rate. The result of the paned data estimate shows that there is no significant
difference between the Arrelano-Bond dynamic panel approach and Arellano-Bover
generalized method of moments (GMM) estimators. The result of the three estimates revealed
that exchange rate volatility has significant negative impacts on the rate of return on assets,
asset turn ratio and the portfolio activity & resilience, thus, establishing that there exist a
significant negative impact of exchange rate volatility on firm performance in Nigeria
between 2004 and 2013. Overall, the study suggests that the higher the exchange rate
volatility in an economy the less efficient will firms operating in the economy and by
implication the lower will be firms’ operating performance.
Keywords
H Social Sciences (General), HB Economic Theory