Cash Flow and Profit Impact on Capital Account Liberalization-Investment Growth Nexus in Nigeria: An Aggregated Firm Case

Abstract

The article examines the firm’s investment growth effect following capital liberalization and financial constraints. It employs firm-level aggregated data of 80 firms for the period of 2006 to 2016. Employing the differenced dynamic panel regression technique, the analysis has revealed among others that investment growth appears to be significantly determined by cash flow (internal), thereby indicating the presence of profound financial constraint among firms in all industries. Second, the capital account liberalization appears to drive investment more through the indirect channel (capital/credit availability channel proxied by cash flow). Third, capital account liberalization-investment growth nexus appears to be less sensitive and significant with high profitability. This could be attributed to “profit flight” or repatriation of profit by foreign investors who may not necessarily prefer ploughing back of profit, which has implication for further expansion of investment among firms. This suggests that the level of capital openness is still low; hence, there is a need for further liberalization of the capital account with some mandate of profit ploughing back.

Cash Flow and Capital Account Liberalization on some Nigerian Firms’ Investment Growth: The Sequel (Disaggregated Approach)

“…Sequel to the dissimilarities that may occur among firms in terms of their level of capital openness and financial constraint or ability to attract external funds, this study differs from the earlier study Okungbowa (2021) by examining this topic of discourse from the disaggregated approach to check the firm type that impacts firm investment the most or possess the highest financial constraint. This study also differs by adopting only the cash flow channel.…”

“…From the foregoing, it is evident that the debate is on-going, much focus has been on cross-country and macroeconomic based studies while country-specifics and firm level studies with recourse to stock exchange market liberalization have been ignored. A hand few of studies which went through the micro route also merged the firms and examined it from the aggregated perspective like the case of Okungbowa (2021). This study therefore contributes to knowledge by examining CAL-investment nexus from the direct and indirect channels using a disaggregated firm-level data of non-financial firms in the Nigeria stock exchange market.…”

“…Thereby leading to the production of weak or inconclusive results. This study by way of overcoming that shortcoming just like Okungbowa (2021) tilted towards the microeconomicbased analysis. Following the suggestion that investment related issues should be approached from the firm perspective (Eichengreen, 2001;Henry, 2007;Chang, 2012).…”

“…The study hinges on the extended version of the traditional Tobin's-q model as advanced by Chari and Henry (2003) and a further extension by Okungbowa (2021).…”

“…𝐷𝐶𝑂𝑉 ( -this term shows the firm-specific change in investment that occur following liberalization is inversely related to the change in the equity premium.𝐷𝐶𝑂𝑉 ( = 𝜃 − 𝜃 * 𝑔 * ( -g -this term shows that a change in an investment of a firm after liberalization will depend positively on the change in its expected future growth rate of earnings. Okungbowa (2021) further extended the above model by replacing 𝑟 − 𝑟 * 𝑤𝑖𝑡ℎ 𝐶𝐴𝐿 𝑡ℎ𝑒𝑟𝑒𝑏𝑦 employing the use of the actual inflow of capital following openness rather than its cost of capital outcome on investment and included the investment growth rather than investment level.…”